Y2K Paranoia Or Greenspan's Irrational Exuberance?http://biz.yahoo.com/rf/991210/xd.html

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Y2K paranoia or Greenspan's irrational exuberance? By Pierre Belec

NEW YORK, Dec 10 (Reuters) - The stock market just keeps on climbing and Federal Reserve Chairman Alan Greenspan is making a massive amount money available for the economy. Is it irrational exuberance or Y2K paranoia? Or Both?

Greenspan has engineered the biggest expansion of money supply in the Fed's history in the weeks leading up to the end of the year, when the so-called Y2K computer bug could disrupt financial systems.

The Fed's move has been explosive on Wall Street because a free flowing money faucet at the Fed is the stuff that makes bull markets get fatter.

M3, the Fed's broad definition of money, which includes currency, travelers' checks, bank deposits and money market mutual funds, has climbed an incredible $194 billion over the past 13 weeks -- the biggest increase ever. The money supply increased at an annualized rate of 15 percent, which is well above the Fed's target growth rate of only 5 percent.

Just a week ago, M3 went up a whopping $36 billion, which would seem to indicate that the central bank is buying insurance against some possible disruptions as the calendar changes from 1999 to 2000, analysts said.

``All the signs suggest Greenspan is scared to death about Y2K and he thinks that this is a cataclysmic thing that could bring the world economy down,'' said Don Hays, president of The Hays Market Focus Advisory Group, an investment consulting firm.

``But again, it may reflect Greenspan's thinking that the stock market is on a very unstable foundation because of valuations and Y2K might be the trigger that could keep it from coming down softly,'' he said.

Greenspan's goal over the last four years of extraordinary gains in stocks has been to ``talk'' the market down or to set the mood for the market to come down from its lofty levels in a gradual way and to avoid a panic on the Street, which would demoralize business confidence. But the market's soft landing has still not happened.

And the Fed fears that Y2K could be the thing that could punch a big hole in the market bubble.

For Greenspan, it may be a ``do as I say and not as I do,'' sort of thing.

Three years ago, in December 1996, Greenspan sent global stock market reeling with a comment about investors' ``irrational exuberance,'' and Wall Streeters now say the Fed head is not practicing what he preaches.

``The money supply has gone through the roof and the increase, adjusted for inflation, is the biggest in the nation's history,'' Hays said.

``The Fed may be flooding the nation with cash because of jitters among central bankers that the Y2K computer bug could do more damage to the financial system than most people expect,'' he said.

``I just don't have another excuse other than Y2K to imagine why the Fed would flood the system, unless there is something that's happening behind the scenes that we don't know about,'' Hays said.

``This huge liquidity is the reason for the big rally in stocks since October,'' Hays said. ``It's a replay of the market's run-up exactly one year ago, when the Fed rushed to flood the system after the panic from the Russian loan default and the Long Term Capital Management hedge fund disaster.''

The Fed came to the rescue of the LTC fund, which teetered last year on the brink of bankruptcy due to the global market turmoil. The fund's losses threatened to slam the financial system, which in turn could have hurt the economy.

The Fed can make the economy grow faster by making more money available, which eventually leads to cheaper loans.

It can also discourage lending when the economy grows at a fast clip, and threatens to fuel inflation, by withdrawing money from the banking system or by raising short-term interest rates.

There are few signs of panic in the run-up to the new year, when computers may confuse the year 2000 with 1900, messing up date-sensitive functions.

Corporate America says it is confident that it has fixed the Y2K problem, but the Fed is apparently not taking any chances.

The concern is that disruption on a large scale could stun corporate earnings, slam the stock market and drive the economy into recession.

``We don't have the slightest idea how Y2K is going to play out,'' Hays said. ``From listening to all the 'informed' sources, I have to come to the conclusion that no one else does either.''

Paul Kasriel, chief U.S. economist for Northern Trust Co. in Chicago, said there is no doubt that the cash from the Fed has been the elixir for the market's rally.

``People are not borrowing just to stuff the money in their mattresses,'' he said. ``They borrow to spend and it ain't a coincidence that the stock market has picked up as the money supply has exploded.''

Kasriel said the money supply growth was revved up in October, which is about the time that stocks began their recovery from a selloff that threw the Dow Jones industrial average for a loss of 1,300 points -- a classic correction of 10 percent -- between September and mid-October.

The other major market gauges were also battered, with the Standard & Poor's 500 index slumping 12 percent and the Nasdaq Composite index skidding more than 6 percent.

Since then, the Nasdaq has been rewriting the record books, making highs on an almost daily basis. In addition, the S&P last week hit a new high while the Dow Jones industrial average came within less than 50 points of beating its Aug. 25 record of 11,326.04.

``Without the money supply growth, I am convinced that the market would be in much weaker shape at this time,'' Hays said.

Kasriel said that things could get hairy for the market next year as a result of the Fed's action.

``The Fed may choose to ignore the rapid growth in credit and money that it has a hand in creating,'' he said. ``But investors ignore it at their own peril.''

Kasriel said that, unless the Fed can rope in credit demand, it will have to raise interest rates more than the half percentage point that he has been expecting in the year 2000. The Fed this year has already boosted interest rates by three quarters of a point.

``It is beyond me how the stock market could continue to be immune to further increases in both short-term and long-term interest rates,'' he said.

So the big question is: Will the 73-year old Greenspan leave his job the same way he came in, in 1987, with a stock market crisis?

http://biz.yahoo.com/rf/991210/xd.html

-- LOON (blooney10@aol.com), December 10, 1999

Answers

IMPORTANT - This link will tell you all you need to know about the current stock market!

Link

-- John (jh@NotReal.ca), December 10, 1999.


Thanks Loon,

Great article. It points out the extremes of the Fed actions, market reactions and money supply expansions. Obviously we are traveling through uncharted and dangerous waters.

-- snooze button (alarmclock_2000@yahoo.com), December 10, 1999.


an analyst actually said this:

``All the signs suggest Greenspan is scared to death about Y2K and he thinks that this is a cataclysmic thing that could bring the world economy down,'' said Don Hays, president of The Hays Market Focus Advisory Group,

-- d----- (dciinc@aol.com), December 10, 1999.


Do NOT----I repeat----DO NOT---miss Johns LINK above.

OH my gawd!!!!! rotflmaolnvbeisltknlsmlss

-- d----- (dciinc@aol.com), December 10, 1999.


"talk the market down". Yup. That sure worked. I'm inspired. I'm going to yahoo to make sure the market hasn't tanked and then buy some more Prudent Bear Fund.

-- Dave (aaa@aaa.com), December 10, 1999.


John... GREAT link you just quietly slipped in there.

It'll make your day. click.

-- Linda (lwmb@psln.com), December 10, 1999.


Moderation questions? read the FAQ