David Gaffen Chatted on TSC Wednesday, Feb. 28 at 1 p.m. EST. Due to technical difficulties, the event was cut short.
Hey everyone. Thanks for chatting today -- I'm ready for your questions.
What's your take on Greenspan's meeting before the House Financial Services Committee?
Well, Greenspan was careful to sound more concerned about the loss in consumer confidence and ongoing economic weakness.
But it seems more clear that the Fed probably isn't going to cut rates prior to the March 20 meeting. And the markets have responded to that, as you can see.
Fed funds futures have downgraded chances of a rate cut; stocks are down as well.
Hasn't fed now painted itself into a corner? If they cut rates and nothing happens, then what?
Well, by "nothing happens," what are you referring to? I think if anything, it was the stock market that painted itself into a corner.
By clamoring for a cut it now has to get used to the notion that the Fed isn't going anywhere until March 20. And the Fed really can't make its changes based on short-term moves in the confidence data or especially stocks. Greenspan said that much today.
So I think they're hardly in a corner -- they'll probably cut rates by 50 basis points on the 20th.
Have the markets bottomed out? Is it time to buy?
Well, I can't recommend to you whether to buy or not. Certainly, looking over things historically, the market's in a better position as far as valuation in a long, long time, especially in tech stocks.
But the market, for the short-term, still seems too tech-focused; and it may have lower to go in the short-term. The last tech bubble of this type was in 1983; it took years to unwind.
That may not be the case this time, but I'm not sure we've seen the bottom -- esp. if people are reassuring themselves by calling the bottom.
Why does the market rely so heavily on what Uncle Elmer says? Aren't there other indicators for the market to follow?
Certainly there are other indicators to follow -- right now it seems like the only positive is coming from rate reductions.
So the market is pinning itself to expectations for more cuts, because the economic data, the earnings picture and the spending data are all going the wrong direction.
Are we still recession bound?
Tough call. As you can see, GDP in the fourth quarter was 1.1%. Some economists would argue we're currently in a recession...
Greenspan's point is valid. This inventory correction will take some time, although for now, household spending has held up. It may take more time to work off inventories; we could be looking at a quarter somewhere around 0.5% of growth and not much more after that.
I think we're likely to skirt very close to a recession, or end up in a brief one. But it appears to so far be managed reasonably well. So, that's a longwinded way of saying yes, I think so.
What did Greenspan say today that was so different than before?
Greenspan made a couple of key revisions in his testimony regarding consumer confidence and the economic growth, such as, at the beginning, he said "the economy appears to be on a track well below the productivity-enhanced rate of growth of its potential."
He was referring to the improvements mentioned in Jan. and Feb., and this was a new addition.
He also said they would have to watch consumer confidence closely, but was careful to point out that auto... and home sales hadn't weakened like stocks have, despite consumers' expectations that the future isn't going to be so bright. That's important -- that's something Roger Ferguson also alluded to yesterday.
Several writers for
have pointed this out in recent days, including
Aren't fed funds futures a trailing indicator now? Greenspan already spoke!
Well, you always need to keep an eye on those. They'll change in the coming days when it becomes more clear what the Fed is going to do.
It's funny -- people say the Fed has to follow the market, but the market also follows the Fed, and the Fed's intentions. Right now, 50 basis points seems most likely... although the market is still putting decent chances on 75 basis points.
Per the last question, I should clarify that Roger Ferguson is Fed Vice Chairman.
With consumer confidence the lowest since 1996 -- what do you think that will do to the markets?
Well, I think we see what it's doing to the markets. They're going nowhere. Money flows are going into the money market funds, and I think Greenspan's worried about confidence falling to a point where people retrench completely -- so they don't spend AT ALL.
That's a worry -- and the market is likely to stay entrenched in a range that deteriorates slightly until there appears to be some rebound in confidence or in business spending. We're not there yet.
Dave, what's with all the bond traders saying there's definitely going to be an inter-meeting cut.....now they're all retracting...what gives?
They're all wrong. Whoops. What happens sometimes, I think, is that market psychology starts to feed on itself.
People talk to each other, become convinced everything stinks, and their only outside source is the TV, which agrees that the world is collapsing. They get more and more panicked, etc.
The cycle goes on and on. Until they're jolted out of it. So the calls for an intermeeting cut were mostly motivated by people looking at the markets, and because the Fed cut rates Jan. 3 in a surprise move.
What do you think of
Nasdaq 1500 theory? Sounds pretty plausible the way we're heading right now.
Peter's been quite bearish for quite a time; and he sees fundamentals heading in the wrong direction.
I haven't done the kind of work he's done in valuing the Nasdaq, but it's clear there was quite a bit of overvaluation. Generally in times like this, growth stocks like tech don't become attractive until they start to look like value stocks, which they're starting to do.
The value managers I've spoken to in recent weeks are the ones nibbling in the semiconductor capital equipment stocks. If you look at those names, they're starting to show signs of bottoming, at least that's how some technicians are seeing it.
Anyway, the picture still looks bleak. 1500 might be tough, but it's certainly not out of the realm of possibility.
Is it likely still that the Fed will cut rates? It seems that GW is doing all that he can to get things rolling.
Yes, they're going to cut rates. Probably by 50, and then from there they'll probably wait and see, but another quarter point is also a likely possibility.
We have to be careful to combine effects of fiscal and monetary policy. GW Bush wants to get the tax cut rolling, but as Greenspan has pointed out, his experience from 1975 is instructive.
By the time the gov't cut taxes to respond to the recession, the recession was already over. Alan also may have been too careful in 1990-1991, waiting for fiscal policy to respond. He's not going to do that again for sure. So they're two different issues.
If they cut rates, how long will it take to get things rolling? Nothing changes over night.
The initial effects are felt in terms of confidence. Of course, they can be short-lived (see January).
After that, you see banks start to get a bit more confident and they increase lending. Also, the capital markets -- that's the bond markets -- generally respond with lower interest rates, and companies can sell bonds there to raise money. Mortgage rates are already quite low.
All of these things realize greater borrowing activity and greater spending, and that takes several months.
However, tech spending is a slightly different story -- because there's a very heavy retrenchment going on due to excessive spending in 1999 and 2000. That unwind may take longer and the Fed can't really do much about that.
Consumer confidence numbers went right down the crapper this week, what do you expect from Friday's U Michigan sentiment report?
That number sort of followed the Michigan number, actually. The Michigan number is expected to fall to 88.1 from 94.7 in January. It would be a slight upward revision from 87.8, actually. So it's still not good.
That's largely affected by the stock market and perception of a weakening labor market. The media play a role here, although that's easy to overstate.
If you're right about 50 that means 150bp in three months. That's huge. Won't the old economy go through the roof on that?
Hard call. It may very well -- then Greenspan could potentially be worried about inflation and all the good stuff that brings. And that's why they probably don't cut intermeeting.
The manufacturing sector is clearly struggling, however, and the liquidity would be welcome for the market. The Fed seemed to have hit a sweet spot from mid-1997 to late 1998 at around 5.5% on the Fed funds rate.
Ultimately, they might like to get back to that, but right now at 5.5%, it still strikes them, and most observers, as a bit too tight.
When the Fed pumped up the money supply in 1998 and in the Y2K run-up, the money found its way into the equity markets. If they pump now where will it go? Surely not into stocks this time?
I'm not sure I agree, but it's possible. The money, and the increased borrowing went heavily into technology, as you well know. And it came at a time when the economy was still on a strong track.
Mortgage refinancings helped people put more money in their pocket and their investments. And people in times like this tend to save excess money -- and that's what they'll probably do. So that does mean more money for stocks.
There's still a sense among the growing investor class that stocks are the place to be, despite all this.
But it will take time -- because fundamentals are so poor.
If it's not going to have a long-term effect what is the cure to the market's downtrend? Isn't this rate cut stuff just a remedy? Where's the cure?!
Well, the rate cuts have basic effects of increasing liquidity and enhancing sentiment, and providing conditions that'll help people borrow, spend more, and do the same for companies.
But the Fed can't fix a company's problems. And the Fed can't fix the stock market.
So what's the cure? The cure may be a brief recession that gets rid of excess spending.
The cure is companies that were funded at the top of the market proving themselves, or going out of business, or merging.
As for the markets, once earnings start to improve and demand increases, then the market will also respond. There are positive signs here and there, such as in the bond market, where the yield curve, that is, the spread between 2-year notes and 30-year bonds, has increased recently.
That shows greater confidence in growth down the road. But that's very tentative, so it's not much to hang onto.
Can we call it a recession now? Or is it still a "downturn"?
Morgan Stanley Dean Witter economists have done some really nice work talking about how recession doesn't mean falling below a certain threshold, but falling to a level of sales far below what the peak was.
Which is a really interesting point. And by that measure, yes, we're in a recession. The simplified way of stating it is to say two consecutive quarters with no growth. We're not there yet but we may be soon.
It's hard to say -- again, it appears we'll get next to no growth in this quarter, if we didn't contract slightly. And this inventory correction, largely responsible for the downturn in the GDP revision today, may go on for some time.
Do you think the market is reacting appropriately or are they going overboard so as to change Greenspan's mind about an early rate cut?
There's a lot of gamesmanship in the market right now, which is why Greenspan can't really pay attention to it at any given moment.
The market is probably efficient over a long period of time, but at any given moment, it's panicky and hard-headed, and so it's convinced itself that Greenspan is going to cut, essentially because "we say so."
But what if Greenspan came out and said, "Yeah, I'm going to cut rates." What then? Then the market RALLIES, and then maybe Greenspan changes his mind, right? Which is why he just can't pay terribly close attention to it -- a daily monitor, that is. Otherwise, he'd go nuts as the market has already done.
He's gotten in trouble for seemingly reacting to stocks before -- and it probably went into the decision to cut on Jan. 3.
Why hasn't everyone moved away from tech and into more "stable" areas like energy and gold?
I think there actually has been a nice push into energy stocks. They've been getting a lot of press, and they've been consistently kicking butt for a long long time. But many people think nontech is really boring.
You guys seems to have the best coverage of the Fed on the Web....so what is your prediction on how many basis points it will take to reverse this slowdown/recession whatever you want to call it? -- oh BTW love the economic databank!
First, I'm humbled by your praise. Thanks. I believe the Fed is going cut rates 50 basis points March 20, and is likely to go another 25 basis points at the following meeting. Following that, it's a tough one to call. I imagine another 25 basis points will do it, putting us at 4.5%. After that, I see another cut, but then we're at 4.25%, and it doesn't seem likely that they'll go much further.
We have lost our guest and hope he'll be able to rejoin us in just a moment.
Thanks for your patience.