Beyond the Briefcase Indicator

There's more to Fed tea leaf-reading than the size of Greenspan's briefcase, fixed-income strategist Jim Sweeney says.
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Editor's Note: Jim Griffin is on vacation this week. In his absence, enjoy this piece from his colleague Jim Sweeney. We welcome your feedback at

Perhaps a few too many years in this business has left me somewhat jaded, but I'm constantly amazed at the depths to which we as an investing public will sink in search of that quark of information that might make us an extra few bucks. Sure, information plays a large role in our desire to invest well, but so does something called judgment. The higher the market goes, the more absurd the quest for data becomes and, conversely, the further we move away from common sense.

I thought I'd seen it all this week when a respected Wall Street investment strategist released the following gem: "I believe stocks are overvalued by about 35%, and I am increasing the stock allocation in my portfolio by 5%." Being from Boston, home of the Ponzi scheme, I translated the advice to "Sure it's too high, but better get in before it goes higher." If I've learned one thing in this business, it's that the only thing that always goes higher is the compensation of the investment pro.

But I digress. For those of you not glued to


every minute of every day, the Briefcase Indicator is an empirically tested method for determining the direction of


interest rate policy. On those Fed meeting days when the investing world holds its collective breath,


stations a reporter at the meeting site to videotape the arrival of Chairman


. You don't actually see the chairman's face, as the camera is focused on his briefcase. Why?

Here's the theory: fat briefcase, change in rates; thin briefcase, no change. As "the Brain," "the Kahuna" and the other


luminaries debate the degree of thickness, I weep for the future of capitalism. I'm sure the original piece was done somewhat tongue in cheek, but with each successive meeting, the seriousness of the indicator seems to grow. Bombing in Chechnya? Saber rattling in North Korea? Don't bother me with the small stuff, how thick is the briefcase?

Now, I know to market bulls, Alan Greenspan is the architect of the longest peacetime expansion in our nation's history. The resulting bull market has made many wealthy people much wealthier, which makes the socialist in me cringe. History will judge the chairman's performance, so at present, I like to think of him as just like the rest of us. Perhaps I'm just a wee bit jealous of his clout: He speaks and the markets listen. (I tell my dog to sit and he rolls over.)

Well, with this week's feel-good releases on top of last week's delirium, the markets have concluded that a fat briefcase in November just means that Alan brought his own lunch. Less than two weeks ago, the market assumed there was a 70% chance of a move in November. Today, it's around 30%. I hate to rain on the

Dow 12,000

parade, but perhaps all we've done is delay the inevitable. True, inflation, which appeared to be raging two weeks ago now appears dormant. In all likelihood, some eagerly awaited number in the next few weeks will whipsaw the current glee, but stepping back from the manic swings in sentiment, I would recommend that investors consider one variable in assessing future Fed actions.

The generous funding we've received from overseas investors over the past few years as they were mired in an economic malaise may start to find their way back home. If the world is recovering, capital investment will rebound and the funds to pay for it will set sail from U.S. shores. When they do, the value of the dollar will sink faster than the


in this year's Fall Classic. To stem the tide, we'll have to maintain higher rates of interest. Maybe no one cares right now, but the worldwide easing cycle is over. This week alone, Australia, the U.K., the

European Central Bank

and Denmark all raised short-term interest rates. Maybe we've bought a little time, but I'm willing to bet that Fed angst will start in earnest in early 2000.

Jim Sweeney is the head of fixed-income investments 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 Sweeney cannot provide investment advice or recommendations, he invites you to comment on his column at