At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 07.20.04
The Downfall of the Dollar

Things just aren't the way the used to be. Market historians are digging deep with research to try and find some good explanation that would allow them to be in the right place at the right time. Good luck. I am not really writing this to you.

The average investor is not anymore on the sidelines anymore than a fan sitting in the stands. In fact, from your vantage point, you should be able to see the whole game unfold before you, allowing yourself a unique prospective of a truly unique time.

Is it any wonder that Greenspan's visit to Congress for his semi-annual "state of the economy" address will find him speaking to the folks on the Hill who have even less of an idea of what's going on than the players do. The Fed chairman will paint a rosy picture of how interest rates, while needing to rise, will continue to escalate in a slow, meaningful way. This will, he will tell everyone who cares to remain awake as he drolls on, that the economy is indeed in good shape and his stewardship with the support of the White House is the reason.

While his speech will be beamed to all parts of the investment world I am reminded of that commercial, done tongue in cheek that puts a demure young girl on the sidelines of a pro football game as the team's coach. Toward the end of the spot she banters with the referee standing nearby. "Pretty good game we have here" she says without turning towards the official, "you should think about watching it". Mr. Greenspan may have the world of facts and figures, charts and information not available to mere mortals such as us or any other economist and it appears he is not paying attention.

With inflation presumably under control and because it is conveniently omitted from the core CPI because of the volatility of food and energy, the available information might reveal exactly how much more it costs to live in this great land these days. But then the real worry is that, in some sort of parallel universe, deflation, or lack of pricing power stills exists. This is starting to weaken the much-touted profits this quarter, with the blame falling erroneously on poor sales in June.

Mr. Greenspan will not suggest that the highly leveraged American public might just be having a bout of lucidity. Lucidity is basically a clear and rational vision, something many of us have been accused of lacking. It's true. The average American lacked the ability to see, if not understand the long-term ramifications of the debt they have exposed themselves to in the last four years. This debt, much of it short term adjustable rate mortgages, often as the second to allow the purchase of a home are going to come home to roost and Mr. Greenspan, much to his credit, will try to downplay this notion.

And with good reason. Should the consumer decide that the political state of affairs warrants their attention, they will not spend. If the consumer begins to feel the crunch of shorter workweeks and decides to reel in their purchase to adjust for the lack of borrowing and the lack of real cash to pay for their current debt, the carpet will be pulled form any real meaningful recovery.

In fact, Mr. Greenspan might just be asked to shed some light on short-term investor ennui. He won't because of his long standing belief that markets are not tools of speculation, but rather wealth building even if that has turned into a game of short term speculation.

He will however be hoping that lucidity doesn't catch on in the bond markets. If is does and foreign investor, who keep their eyes on money supply as well as interest rates decides that there is no more room to maneuver, the whole of the economy would unravel.

There is a growing feeling of no control. If this thinking takes hold, nothing Mr. Greenspan can say or do would correct the ensuing events. There is too much money in the supply chain and none of it can be removed. As Joseph McNay of Essex Investment Management was recently quoted as saying: "It is no longer in our control."

At Arm's Length: 07.19.04
More Non-Events

So really, what are we supposed to do? Martha Stewart gets off with a short stint in a federal prison/country club followed by confinement on her palatial estate in New Bedford. No doubt that this could be turned into the ultimate reality show, sort of a Chicago type play about the legendary homemaker. Even as they walked her to the mic after the verdict, she almost burst into song, "I didn't do it!"

But the perversity of it is, she did. A lie is a lie and it is a crime to do it when you know you are talking to the government. The legal system turned it into a non-event at the risk of being too harsh on the first woman CEO to get caught doing something they knew better than do.

Watch for the hype this week as Alan Greenspan heads to Capitol Hill for his semi-annual testimony before both congressional arms. And why should we care?

Two reasons. Mr. Greenspan has decided that there is no inflation worries on the horizon and perhaps only the unexpected blip in the monthly reports. But other than that, the Fed chairman has little to add that will reassure the market that everything is okay. To say that would be noteworthy but uncharacteristic of the nation's top banker. With this sort of testimony no longer required - it done so more because of sentimentality than anything with a small side visit to some of his favorite elected cronies - the chance of anything coming from it worth noting about interest rates is unlikely.

The second reason is much more divisive, especially among Republicans. Mr. Greenspan has let it be known that he does not support the S.E.C. chairman William Donaldson's efforts at requiring hedge funds, the last bastion of true wealth with an asset base closing in on a trillion dollars, to register with the agency. If he does decide to comment on the subject, it will be interesting to see if he still feels that way when the next hedge fund takes a million pensioners down with it.

And those poor markets without a wind! While these kinds of markets are not unheard of and you will be able to find as many people who will tell you that there is upside after the doldrums as not, it is worth noting that all of the major investments have caught a proverbial summer's cold.

The only thing to do in a period of non-events such as this is vacation. If you are investing methodically, there is no reason not to continue - although I believe that the 500 index might be the hardest pressed to garner any real gains over the next year. But if you are looking for the next ten percent pop in the short term, you might be wishing, much like Martha, that "you hadn't done it!"

The previous week's articles.

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