Greenspan Speaks, Stocks Rocket

In a New York speech, Federal Reserve Chairman Alan Greenspan said he is convinced that the torrid pace of economic growth fueled by access to easy money has slowed. Greenspan remarked on the fact that technology advancements have given the country nearly unprecedented ability to gain efficiency -- but many players in the high-tech market got to the game too late. Should the economy slow too much, the Fed may just drop rates next year. For now, though, the tightening bias is a thing of the past.

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By Bill Mann (TMF Otter)
December 5, 2000

In a speech before the America's Community Bankers Conference in New York this morning, Federal Reserve Chairman Alan Greenspan let it be known that he felt that the "unsustainable" levels of growth the economy has seen in the past two years have slowed considerably. This news spurred a massive rise in the American stock markets, particularly the Nasdaq Composite -- which rose as much as eight percent during the day.

Greenspan said the inflationary pressures he was so concerned about during the six consecutive interest rate hikes over the past year-and-a-half have abated. With an economy that is growing slower, he noted, we must now be vigilant against excess caution or softening in asset values which "could signal or precipitate an excessive softening in household and business spending."

Why Greenspan may have been right
One of the major culprits for the massive and unsustainable gains in the stock market was the easy access and low cost of capital to which many companies of marginal quality had access. Over the past six months, there has been a dramatic deterioration in the pricing for sub-investment grade corporate bonds. On the equity market, it is easy to point out venture capitalists, investment banks, and even wildly enthusiastic investors who were overly optimistic about the returns they could expect on invested capital.

But what is also true is that the lending institutions were in some ways placing millions in capital in loans to companies and individuals with relatively low chance for repayment. The fact that consumer confidence did not lose much steam until very recently speaks to the inflationary pressures that could have accompanied continued explosive growth.

Greenspan made some concession to those who got into the markets, both equity and corporate, at the height of enthusiasm, recognizing that for those "aspiring entrepreneurs [who] entered the tail end of a short-term boomlet, there was bound to be some disappointment."

Today the markets rocket
The Motley Fool, as we often note, does not pay much attention to the daily fluctuations of the stock market. Still, what we have today is not a market phenomenon ("I'm depressed, let's drop a couple hundred points"), but rather a macroeconomic one. Just as it is nearly impossible to imagine a poorly performing stock market when times are good, it is important to retain balance when the markets are dropping. Greenspan's announcement that the Fed is paying more attention to recessionary pressures than inflationary ones means that he is convinced that the "soft landing" that the Fed has tried to engineer by tightening credit has had a positive effect.

While some companies, particularly the financials and the capital-intensive heavy industries, will benefit from a stable or loosening capital standard, the runup today is just a bit too euphoric. Certainly there are other things going on, including what seems to be a light at the end of the political tunnel that has been our presidential election. But a Nasdaq that still is valued, in aggregate, at 100 times earnings will need more than just a stationary interest rate environment to give its companies a chance to grow into their multiples. But for just a day, it's nice to see people happy again.

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