The slugfest rages on between Old and New, as championed by the
Nasdaq Composite Index
. A brief late round rally by Old Economy stocks may now be fading. The Nasdaq shows staying power and a granite chin. The third man in the ring, referee
, claims impartiality but is suspected of harboring a desire to see the new champ bloodied enough to require at least a standing eight count. In fact, last week the ref got in a shot of his own at the champ when the
Federal Open Market Committee
hiked its Fed funds target to 6%. New Economy stocks walked right through it. For that matter, so did Old.
It's not a good omen when the other guy takes your best shot without blinking. Still, the outcome is not a foregone conclusion: all involved know well that 25 basis points is by no means the Fed's best shot.
What is not known or well understood is just what exactly the Fed chairman is trying to accomplish. He says his purpose is to preserve price stability and extend the longevity of the economic expansion. He is suspected of wanting to show the Nasdaq, his rival as contemporary culture hero, which of them is boss.
Such motives are not mutually exclusive. Dr. Greenspan may be reading from
book, the essence of which, as I understand it, is "a lean horse for the long race." If longevity is your objective, lose the saddle bags, don't carry weight.
Greenspan has been couching his comments on the stock market within the context of what it means for the economy -- the market is, for him, an intermediate variable and not a target or objective variable. He sees market excesses as dangerous to the long-run health of the economy. After all, what is a high wealth-to-income ratio -- his chosen metric -- but stored fat? If you're wealthy enough, you can live agreeably, even in hard times when income collapses, by drawing on such stores.
Think about it. Why are you saving, investing, accumulating assets and trying to build wealth? No, don't give me the financial planning drill -- house, tuition, retirement -- but a deeper psychological response. The answer, I'll bet, is financial independence. Freedom of action. And freedom in today's world requires a fat brokerage account. "God bless the child that's got his own."
What does a high wealth-to-income ratio at the aggregate level mean to Fed policy? It means that a higher proportion of the population is now able to disassociate its spending plans from current income or current access to credit. Spending is, at least initially, less sensitive to monetary restraint. Without traction, the Fed's brakes don't affect the vehicle's course -- until those brakes effectively delimit wealth and the expectation of more wealth to come. (That bullish expectation has a behavioral effect today similar to that of the "inflationary psychology" 20 years ago.) When that optimism is deflated, spending is likely to display a renewed sensitivity to credit conditions and Fed intentions.
It seems a bit unreal to suggest, as Greenspan apparently does, that more wealth is bad for our economic health. Some apologists for the bull market argue that the very notion is preposterous, that the Fed should instead be taking credit for soaring valuations and doing all it can to preserve and extend them. But that sort of idol worship supplants the Fed's traditional focus on growth and inflation, a focus directed by statute, with one that sees a bull market as the purpose of life.
The premise of the Pritikin Plan may not immediately seem applicable to the issue of economic longevity, but I think it can be made to apply without excessive logical contortion. Adaptations that lead to enhanced prospects for survival under hardship conditions may prove maladaptive in times of abundance. An unusually high rate of coronary disease among some native peoples of the American Southwest has been attributed to a metabolism that is adapted to efficient storage of calories; the Sonoran Desert doesn't yield many high calorie diet opportunities, apparently. When times changed and high fat foods became easily available at the local grocery, a low metabolic rate, previously a survival strength, became a dangerous weakness.
The metaphor may be a stretch, but it isn't an egregious one. Rich people can spend lots of money, whether they earned it today as wages or drew it from previously stored wealth, on high calorie lifestyles. Medical science today says that high living of that sort is indicated in cancers and coronary disease and other culprits in shortened life spans. Rich people can also choose not to follow that lifestyle -- but such forbearance requires willpower that not all are able to exercise. What's the difference between rich and poor? Poor people need less willpower to resist the high life.
The minutes of the February FOMC meeting make it clear that the members are of one mind about the skewness of risk around their policy judgments. They seem to be coming into alignment about tactics. "As long as inflation and inflation expectations remained damped, these members saw little risk in a gradual approach to policy tightening and considerable advantage to preserving the possibility of calibrating those actions to the emerging situation. A few members expressed a preference for an increase of 50 basis points in the federal funds rate in order to provide greater assurance against a buildup of inflationary expectations and inflation over coming months. Other members acknowledged that the Committee might need to move more aggressively at a later meeting should imbalances continue to build and inflation and inflation expectations clearly begin to pick up."
Dr. Pritikin, nee Greenspan, sees rich people living the high life in a manner that he perceives to be against their own long-run best interests. He is committed to progressively severe methods, if necessary, to substitute austerity for willpower in the interest of the patient's longevity.
Jim Griffin is the chief strategist at Hartford, Connecticut-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at