Alan Greenspan, Market Timer?

Floyd Norris's piece in the New York Times "A 10-Year Stretch That's Worse Than It Looks" is well worth reading.

Click to read article

According to Norris, the 10-year stretch ended January 31, 2009 represents the worst 10-year return (in real terms, including dividends) since the S&P 500 index was created. The compound annual loss in purchasing power was 5.1%.

Further says Norris, "Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started."

Here Norris misses the opportunity to trot out Alan Greenspan's infamous "irrational exuberance" quote. Over the years, I have asked many sophisticated investors and financial professionals if they remember when Greenspan made the comment. Most give answers between 1998 and 2000, corresponding to the Nasdaq bubble.

In actuality, Greenspan made the comment on December 5, 1996. Closing prices of the major US indices that day (and on Jan 30) are shown here.

It's worth remembering Greenspan's quote more fully. The Fed chairman was addressing the American Enterprise Institute for Public Policy Research on the topic "The Challenge of Central Banking in a Democratic Society." In a wide-ranging speech that briefly covers the history of the central bank, Greenspan raises the issue whether the Fed's goal of price stability should include not just the prices of those goods and services that make up the inflation indices, but of financial assets as well.

"But where do we draw the line on what prices matter? Certainly prices of goods and services now being produced--our basic measure of inflation--matter. But what about futures prices or more importantly prices of claims on future goods and services, like equities, real estate, or other earning assets? Are stability of these prices essential to the stability of the economy?"

"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

How do we know when? When the Fed chairman starts talking -- however obliquely -- about overheated equity markets, that's when.

Ironically, Greenspan finishes up with the following thoughts:

"Along with our other central bank colleagues, we are always looking for ways to reduce the risks that the failure of a single institution will ricochet around the world, shutting down much of the world payments system, and significantly undermining the world's economies. Accordingly, we are endeavoring to get as close to a real time transaction, clearing, and settlement system as possible. This would sharply reduce financial float and the risk of breakdown."

Oops.

For the full text of Greenspan's speech, click here.

Well, duh...

"Hands criticises 'pass the parcel' inflation effect" - FT.com


"Guy Hands, one of Europe's top private equity bosses, has criticised "pass the parcel" deals, in which buy-out groups sold companies to each other for ever increasing prices, for inflating the bubble that left investors facing big losses."

"'We saw an increasing number of pass-the-parcel transactions between general partners [in private equity firms], where limited partners [investors] essentially retained the same asset while paying fees and carry each time it changed hands,' he said."


What is most puzzling is why the largest, and presumably most influential, limited partners in private equity funds permitted this to happen. As noted by the esteemed Mr. Hands, many LPs -- who had investments in both the selling and the buying PE firms -- were essentially paying 20% carry for the privilege of moving their investment from their left pocket to their right. Surely there must be some cases where an LP investor actually increased his net investment in a particular company and paid a carry on the step-up in value.

If anyone has an example, please let me know.

Did TARP 1.0 Get it Right?

Some good comments from Robert Baird (and follow the links to Yves Smith) regarding the emerging view that TARP 1.0 was the right solution.

For those (like Joe Nocera, NYT) "First Bailout Formula Had It Right" who believe that the intent of the original TARP program was nationalization of bad banks -- or at least bad bank loans -- I say let's deconstruct the words. Someone spent more than a few minutes picking "TARP" among the various pronounceable acronyms that could've been created so there must be some subtext worth examining.

"TARP" stands for "Troubled Asset Relief Program". At the time, these assets were thought to be merely "troubled". Not distressed, not underwater; just a little anxious or, like teenage boys, a bit undisciplined and prone to mischief. The thought was that the government could take them into its custody, perhaps let them spend some time at the spa or in rehab and maybe in a few years they would be restored to perfect health with nary a care in the world.

Now, the growing consensus is that maybe some of these assets are more than a little "troubled" and let's face it, "impaired".

If, as widely expected, the Obama administration comes out with a new program next week, they'll need a new acronym. I suggest "Commercial bank Recapitalization and Assistance Program" or CRAP. The assets acquired by the taxpayers will be known, quite sensibly, as the CRAP assets. That should be easy to remember.


****

BTW, Can anyone shed some light on "TARP"?

Was it meant to suggest a tarpaulin, perhaps in the sense of a being spread UNDER the assets as a sort of safety net? Dictionary.com defines "tarpaulin" as "a protective covering of canvas or other material waterproofed with tar, paint, or wax", which reminds me more of the sheet they pull OVER dead bodies at a crime scene.

Maybe the acronym was more apt than its creators intended.

(Comments on) What the Facebook is Going On Here?

Hilarious article on Facebook by Peter Madden over at AdAge (subscription may be required.)

"What the Facebook is Going on Here? - AdAge.com"

Is there really a fan page for Lysol?

Mostly, I'm surprised by the "Peter, you just don't get it" comments in the subsequent thread. I think Peter gets it perfectly.

Yes, Facebook has proven to be a mobilizing force for good causes. And, holy cow, consumers are out there providing all sorts of information about themselves that may *someday* be useful for marketing purposes. (As an aside, I find the current advertising on Facebook amusing. I am listed as having an MBA degree, yet one-third of the advertising presented to me seems predicated on the notion that I might want to get a second one... I click on them to ensure that stupidity is penalized. Another ad that appears incessantly is an invitation to buy a Spinal Tap-themed tee shirt since that is listed among my favorite movies. Note to 6dollarshirts.com: Thanks, but I have plenty of tee shirts already.)

Facebook, like any form of social interaction, faces the risk that the overall tone of the conversation is dominated by the lowest form of discourse. A steady news feed from your 600 closest "friends" is pretty random and (I imagine) quickly becomes tiresome. An endless stream of requests to join various noble causes is about as welcome as a telephone solicitor at dinner-time. And a conversation consisting of "Peter is getting on a plane in Las Vegas... Brittany is having french toast for breakfast... Gary has the sniffles" is a bore in ANY medium.

We need a neologism for this latter phenomenon. I submit "blackberrhea" but I'm sure the creatives who read AdAge can do better.

Ceci Reading Nursery Rhymes at 2 Years, 10 Months