Greenspan's Still Got It and Beware The China Bubble
As you might now, last week saw the Dow Jones Industrial Average tumble 416 points on Tuesday, recover a bit on Wednesday, and then get slammed again to the tune of 200 points on Thursday. What's behind this volatility? Is it a signal of the next big stock market crash? Probably not. What's behind it is one man; Alan Greenspan, former Federal Reserve Chairman.
In a speech last Sunday, the man simply uttered the word "recession" in relation to the U.S. economy, and all hell broke loose in the world markets. First the Chinese stock market plunged about 10%, and then the U.S. market tanked later in the day. Did Greenspan singlehandedly cause the Chinese market--and thereby the U.S. market--to crumble? The offending speech was, after all, made to an investor group in China. Maybe the fact that he was there, in China, talking about the U.S. economy, to which China is closely linked, caused skittishness that culminated in a sell-off. There's no way it can be a coincidence. Furthermore, Greenspan spoke a few days later, in Japan, and uttered the "r" word yet again, causing the Dow to plunge, again.
What's wrong with this picture?
Well, first off, it would be nice if ol' Greeny would fade into the background. The man retired last year after almost two decades as FED Chairman, but he's 81 years old and still traveling the world dispensing his thoughts on the market like a butcher tossing scraps of raw meat to crazed, starving dogs. Eh, pal...it's time to hang up.
But I can't really blame Greenspan for staying on the lecture circuit. The market is his life, or has been for the past fifty years or so. He was the equivalent of a movie star, and arguably was the most powerful man in the country, if not the world. Seriously, the man held the keys the U.S.'s money supply for twenty years, and since the U.S. pretty much moves the world when it comes to finance (London and Tokyo, you're important too), he had significant influence over the global economy as well. You don't just give up that kind of power in one day, just like you can't expect a heroin addict to go clean in one day. Furthermore, I bet the heroin habit is easier to kick...
The fact that Greenspan can still move markets to the degree he did last week says more about the state of the markets than of Greenspan's power or his unwillingness to fade from the limelight. Admittedly, his comments were quite tame, and he hedged them pretty well with words like could, possibly, maybe, etc. (more or less). Now, it is reasonable to expect the market to have some reaction to his statements, for the reasons I stated above, but a healthy market should not have reacted like it did.
What this shows is that there are a lot of people in China (not to mention the U.S.) who are fearful that the Chinese economy is expanding too fast, and may already have expanded too far. These people are eager to pull their money out of the market at the drop of a hat, and they did last week. It also suggests that the U.S. has too much money invested in China. That country has been the foreign investment hotspot since at least the millennium. I don't know if I've ever referred to it as a "bubble" per se, but that seems to be what this past week's events showed. If our market can collapse like it did because of something that happened in China, then we have too much money tied up over there.
Maybe this was a warning shot to tell everybody to play it a safer, and to quit betting quite so heavily on China; a signal to put on the brakes a little. If so, we got off pretty easily. But if market history shows us anything, it's that people don't learn. There's simply no way people are going to stop investing in China. Not because of last week, not until we have a repeat of the Tech Bubble bursting in 2000. Who knows, it could be another five years out, but it's coming, baby...
In a speech last Sunday, the man simply uttered the word "recession" in relation to the U.S. economy, and all hell broke loose in the world markets. First the Chinese stock market plunged about 10%, and then the U.S. market tanked later in the day. Did Greenspan singlehandedly cause the Chinese market--and thereby the U.S. market--to crumble? The offending speech was, after all, made to an investor group in China. Maybe the fact that he was there, in China, talking about the U.S. economy, to which China is closely linked, caused skittishness that culminated in a sell-off. There's no way it can be a coincidence. Furthermore, Greenspan spoke a few days later, in Japan, and uttered the "r" word yet again, causing the Dow to plunge, again.
What's wrong with this picture?
Well, first off, it would be nice if ol' Greeny would fade into the background. The man retired last year after almost two decades as FED Chairman, but he's 81 years old and still traveling the world dispensing his thoughts on the market like a butcher tossing scraps of raw meat to crazed, starving dogs. Eh, pal...it's time to hang up.
But I can't really blame Greenspan for staying on the lecture circuit. The market is his life, or has been for the past fifty years or so. He was the equivalent of a movie star, and arguably was the most powerful man in the country, if not the world. Seriously, the man held the keys the U.S.'s money supply for twenty years, and since the U.S. pretty much moves the world when it comes to finance (London and Tokyo, you're important too), he had significant influence over the global economy as well. You don't just give up that kind of power in one day, just like you can't expect a heroin addict to go clean in one day. Furthermore, I bet the heroin habit is easier to kick...
The fact that Greenspan can still move markets to the degree he did last week says more about the state of the markets than of Greenspan's power or his unwillingness to fade from the limelight. Admittedly, his comments were quite tame, and he hedged them pretty well with words like could, possibly, maybe, etc. (more or less). Now, it is reasonable to expect the market to have some reaction to his statements, for the reasons I stated above, but a healthy market should not have reacted like it did.
What this shows is that there are a lot of people in China (not to mention the U.S.) who are fearful that the Chinese economy is expanding too fast, and may already have expanded too far. These people are eager to pull their money out of the market at the drop of a hat, and they did last week. It also suggests that the U.S. has too much money invested in China. That country has been the foreign investment hotspot since at least the millennium. I don't know if I've ever referred to it as a "bubble" per se, but that seems to be what this past week's events showed. If our market can collapse like it did because of something that happened in China, then we have too much money tied up over there.
Maybe this was a warning shot to tell everybody to play it a safer, and to quit betting quite so heavily on China; a signal to put on the brakes a little. If so, we got off pretty easily. But if market history shows us anything, it's that people don't learn. There's simply no way people are going to stop investing in China. Not because of last week, not until we have a repeat of the Tech Bubble bursting in 2000. Who knows, it could be another five years out, but it's coming, baby...
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