'As I Was Saying... ' - TheStreet

'As I Was Saying... '

A little (more) repetition goes a long way, especially when it comes from the Fed chairman and includes key words like 'panic.'
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The market literally disappeared on an annualized basis on Friday. One of my screens revealed that the

S&P 500

closed down 2.806% on the day, which it annualized to -99.997%. On Friday, that felt about right. Still, that same screen showed the index up 1.5% year-to-date, 19% on trailing 12 months, and 165% over five years. But who needs longer-term perspective when you're elbowing for space on the ledge?

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There was plenty to catch one's eye during Friday's closing session. One headline noted that

Martha Stewart

and the

World Wrestling Federation

are each coming to market on Monday with their initial public offerings. I figure she'll whip the lot of them, but I can't say about the IPOs. Maybe they'll announce a merger on Tuesday -- the WWF could benefit from more flowered prints in their wardrobes.



spiked higher by 1.1%, the highest rate in nine years. Several analysts noted, constructively or complacently, that if you strip out tobacco prices and the seasonal adjustment effect on new car prices, the core wholesale inflation rate was a mere 0.1% in September. Likewise, if you strip out the issues that tanked on Friday, the market had an up day. But innocents and cynics can agree on this: It's dangerous to smoke and drive.

As to driving, the September retail sales report shows that consumer spending continues to exceed the posted speed limit. The


may disregard the message of the PPI, as the bond market managed to do after its initial shock, but it will have trouble discounting the information burden of store sales. Last month's numbers, together with upward revisions to those of prior months, suggest that third-quarter consumption spending may once again exceed 5% annualized, and real GDP may once again top 4%.

Speed kills, and it is that kind of speed that is killing this market. Pointy-headed analysis that peels the onion-skin layers of each economic report out of




or the Fed misses the blunt point that too much economic pace is bad for market returns: Noisy parties attract the cops. The


has already circled the block twice this year and the economy nevertheless continues to whoop it up. It won't slow down of its own accord, so the Fed is progressively screwing its courage to the point of sticking it to this unbridled U.S. uptake of goods and services that so exceeds the U.S. ability to produce -- even with productivity miracles taken at face value.

The market had already had a hard week before it had to deal with

Alan Greenspan's

Thursday evening reiteration of his Jackson Hole speech. Here are some of the comments that caught my eye: "But as I have noted previously... "; "As I have indicated on previous occasions... "; "As I noted earlier... ." I was taught that it is not mannerly to quote oneself, but as I was saying

three weeks ago, repetition may be the key to getting one's point across. This market may have a thick head, but Greenspan seems determined to punch some of his sense into it. He reiterated, with emphasis, the same portfolio theory and risk modeling themes he had raised in opening the Kansas City Fed's annual policy retreat in the Wyoming mountains in August.

"Probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of panic. Furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics... . Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account."

As I, ahem, wrote at the time, panic is not the sort of word we expect to hear repeatedly from a Fed chairman. He is clearly trying to get a point across. Whack! "You get my point?" Whack! "Now do you get it?"

It is possible to read Greenspan's words as a clarion call for overweighting cash in portfolio allocations, but he pulls that punch by admitting that, though the panic process can be readily described, "economists have been unable to


sharp reversals in confidence." Still, he is not just any economist; he has the tools to precipitate panic if he so chooses. The consensus regarding the likelihood of further Fed tightening moves almost surely shifted on Friday, although there are some who are less suggestible, i.e. thicker, than others. Repeated rounds of progressively increasing restraint by the FOMC will eventually have the effect of producing the sort of "collapsing confidence ... generally described as a bursting bubble, an event incontrovertibly evident only in retrospect."

The bond market bolted in the direction of hat-size yields as the import of these words sank in, but then was partially rescued by an inflow of funds from asset allocators who were fleeing equities. But progressive Fed restraint, plus the evidence of inflation that now faces smokers and drivers, as well as those rare individuals who purchase food and/or heat their homes -- not to mention the "underestimated correlation" with equities -- should offset Friday's brief relief.

The dollar did badly in the circumstances that developed last week. Too much American import demand and too much need for foreign financing. Too much evidence of inflation risk and too much danger that further Fed policy action will adversely affect the value of the primary American export, stocks and bonds. Too much opportunity still to practice American management techniques at home in Europe and Japan.

Greenspan's words may have been centered on the market, but policy deliberations will remain focused on the overall pace of economic activity, on striving for the maximum noninflationary pace that can be sustained. The evidence of economic improvement in other parts of the world, together with the lack of any indication that U.S. domestic demand is slowing of its own volition, compels the Fed -- as it compels the bond market, and the foreign exchange markets -- to the conclusion that the maximum noninflationary pace is being exceeded. That sort of speed kills market returns. The stock market, with a little gentle coaching -- whack! -- has begun to catch on.

Jim Griffin is the chief strategist at Aeltus Investment Management in Hartford, Conn. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. Aeltus manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at