Ignore the Cheerleader-in-Chief

In a speech at the National Italian American Foundation in Washington, D.C., Friday, Federal Reserve Chairman Alan Greenspan said he's not worried by the rise of crude oil prices to a record $55 a barrel.

"The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s," he said.

Once the cheerleading crossed the tape, equity markets rallied while Treasuries slumped.

Forgive me for not being similarly inclined to genuflect toward the chairman's pronouncements. Despite Greenspan's sanguine attitude toward oil prices, I remain long-term bullish on the sector. I have longstanding long positions in BP (BP - commentary - Cramer's Take) and ConocoPhillips (COP - commentary - Cramer's Take), and recently added Interoil (IOC - commentary - Cramer's Take).

I find traders' knee-jerk responses to Greenie's views on oil endlessly amusing. I guess they already forgot that on July 20, Greenspan testified before Congress that rising energy prices "should prove short-lived"; crude prices have risen nearly 15% since. Then there was Greenspan's amazingly bad call on natural gas in May 2003, when he warned of potential shortages; natural gas prices tumbled shortly thereafter. And let's not forget his advice to would-be home owners this summer, praising the virtues of adjustable-rate mortgages when fixed-rate loans were near half-century lows.

If you're thinking there's a pattern here, you're right. Consider the Road Runner routine the Fed chief pulled last year on fixed-income traders, which parallels what he did to equities traders in the '90s. I guess oil would complete the hat trick.

A quick review of the handiwork of this master bridge salesman: In a now infamous 1996 speech, Greenspan said, "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?"

That was widely perceived as a warning that stocks had gotten too pricey for the Fed chief's taste. But only a year later, he started waxing eloquent on the majesty of productivity gains. Thereafter, the "productivity miracle" became a fixture in Fed speeches, white papers and FOMC meetings. It culminated in the massive 1999 liquidity infusion by the Fed in (erroneous) anticipation of a Y2K run on the banks. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I assume you recall how that ended.

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At the time of publication, Ritholtz was long BP, ConocoPhillips and Interoil, although holdings can change at any time.

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].