Don't Confuse Brains With a Bull Market

Greenspan, Rubin and Summers deserve some credit, but many people have helped create today's wondrous economic conditions.
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I doubt

Larry Summers'

intellectual abilities.

There. I said it -- although I don't mean it. It is a gut reaction to having ingested an excess of analysis about what is in store for us when

Robert Rubin

turns over the keys of the U.S.

Treasury Department

to his second-in-command. "Nobody doubts Larry Summers intellectual abilities, but..." was in the second paragraph of virtually every bit of news analysis that I encountered. "He is always the smartest person in the room" was another oft-repeated insight into the new secretary-designate.

If he's so smart, how come Rubin is the one who is rich?

The outgoing Treasury secretary has achieved a kind of totemic status in bull-market America.

Alan Greenspan

is even more exalted. And last week Larry Summers got media-hyped in preparation for a similar sort of demigod standing. It is worth a moment to think about what these cults of personality may signify.

I have a deep admiration for Rubin's performance in

Alexander Hamilton's

old job. He was an effective advocate within the administration for eminently sensible policies, including a sound dollar, budget restraint, and market-sensitive relations with

the Federal Reserve

. His bold leadership in the circumstances that surrounded the Mexican peso crisis in 1995 might fairly be described as heroic. Throughout his time in Washington, he proved himself adept at playing the cards dealt to him.

But for the most part, he saw a run of very good cards. It is not a favor to over-praise an individual; it sets a standard that few can meet consistently without failure. Greenspan's pedestal is set even higher; the Fed chairman gets an even larger share of personal credit for the brilliant performance of the U.S. economy in the 1990s. But to overemphasize the contributions of any one individual is to risk overlooking the highly complex causes of the effects we now celebrate. Greenspan, Rubin, and Summers deserve a lot of credit for their work, but others can claim a share of the parentage of these wondrous current conditions. How about

Andy Grove

and

Bill Gates

? Or

Mikhail Gorbachev

?

Clinton-Bush-Reagan

? Or Reagan-Bush-Clinton, if you prefer to run it forward in time. My vote goes to the tens of millions of Americans who, when the wheels came off their previous careers, pulled up their socks and found another way to make a living. But please, let's not erect tens of millions of statues.

Don't confuse brains with a bull market. Larry Summers may be always the smartest person in the room, by whatever narrow margin over a Rubin or a Greenspan, but he and the others have been the beneficiaries of a blessed tenure. They deserve credit for contributing to, and especially for not messing up, a particularly fortuitous set of circumstances. But they are not solely responsible for today's low inflation and unemployment, strong dollar and low interest rates, high profits and stock prices, and the attendant complacency of the public mood.

That mood is likely to change when these blessed circumstances do, and whoever happens to be around at the time will come in for a disproportionate share of blame, in a mirror image of the credit now heaped on Rubin and Greenspan.

Are those circumstances in the process of changing? Last week's unexpected surge in core

Consumer Price Index

shocked the bond and equity markets and may come in for some careful discussion at this week's

Federal Open Market Committee

meeting. But whenever you see a number that "exceeds expectations," the first thing you ought to consider is that expectations were wrong. A one-month blip in inflation does not a trend make. Much of the upward pressure came in the form of a recovery of core-goods prices that had fallen in prior months. A 15% surge in gasoline prices pushed up the total CPI in April by 0.7%, the fastest rate since October 1990. The issue now is whether this report signifies the beginning of the long-anticipated upturn in inflation, or is just an outlier on a still-intact sideways trend.

If the evidence of global economic recovery continues to come in as it has so far this year, the answer is likely to be that the best of times is behind us on inflation. That is not to say that it will flare like a backyard barbecue overdosed with petroleum spirits, but that possibility exists -- and bond markets will be sensitive to it. Current U.S. conditions to the contrary, it is seldom that strong growth and declining inflation go hand in hand. (The historical record says more growth means more inflation. Recent U.S. evidence, and New Era theorizing, suggest that the future relationship between growth and inflation will differ from that of the past -- but the bond market is conservative and may be slow to adopt this conviction.)

And what have Rubin, Summers, and Greenspan been trying to do lately? Whatever it takes to encourage, provoke, or jump-start higher global growth.

If their exertions in 1998 begin to bear fruit in 1999, as is indicated by tightening credit spreads and rebounding currency and asset values in emerging markets, as well as by the U.S. equity market rotation toward cyclicals and small caps, then the dynamic trio is likely to be celebrated in precincts other than Wall Street. Stronger and more widely shared economic growth will short circuit deflationary and disinflationary trends and put an end to the easy money policies that have powered our long-lived bull market.

In those circumstances, I won't be the only one to question, however insincerely in my case, the intellectual abilities of Larry Summers. His IQ may be off the chart, but in a bear market, he'll be taken for a dunce.

Rubin, by reputation, always knew when to sell. Maybe that's why he's the one who is rich.

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

GriffinJ@aeltus.com.