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March 16, 2001
Bond market belief in a slow-but-steady overall economy held this week, and low-fee mortgage rates remained above the 7.00% barrier.
However, the still-bursting stock market bubble must be pushing the economy closer to recession, and mortgage rates closer to the sixes.
The most current economic data describe two economies: one fine, the other, awful. The still-strong center: housing starts are very strong; auto sales have rebounded to health; retail sales are growing at a solid, .5% per month; and consumer confidence has stabilized.
The other, sick economy: industrial production fell .6% in January and now, February; industrial capacity utilization fell to 79.4% for the first time since 1992.
Expectations for Fed action next week are ooching up from a .50% cut in Fed funds to .75%, reinforced by the total absence of inflation in today's producer price report. The Fed can get as easy as it wants to support the economy with little inflation risk.
However, many serious people are asking two questions. Should the Fed try to put a floor under the stock market? If so, does the Fed have the ability to accomplish the feat?
With apologies to Randy Newman, and his paean to the Cuyahoga River,
The Lord can make you tumble,
The Lord can make you turn,
The Lord can make you overflow your banks,
But the Lord cain't make you burn.
Alan Greenspan can cut the cost of short-term money, which will cut the cost of business borrowing, which will help earnings, and ultimately, maybe, stock prices.
Mr. Greenspan's cuts will reduce investors' return from cash, which may make stock market risks seem worthwhile, and cause stock prices to rise. Maybe.
The Chairman's reductions in short-term rates will do wonderful things to discounted present value models of future corporate earnings, and perhaps help stocks.
And, Mr. Greenspan's easing moves should goose the overall economy, which should help stock prices. Could.
However, there is not one single thing the Great Man can do to transform a failed business concept into a successful one. He cannot restore fantasies at Amazon, CMGI, or Yahoo. He cannot repair certain pyramid aspects at the web plumbers, notably Cisco. He cannot reverse the overcapacity in telecom and broadband: Nokia, AT&T, Ericsson, Level 3... you are on your own.
Nor can he restore faith in the ladies and gentlemen of Wall Street who so exuberantly stuffed this bubble into all the retirement accounts in the land.
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