Flashback To 2005 Jackson Hole

Stayed up way too late last night going through a bunch of data recovered from an old computer.  Lots of old short stories and crazy poetry and old photographs.

Ironically, I also found Greenspan's 2005 Jackson Hole speech.

I seem to recall it was popular at that time to refer to him as Osama Bin Greenspan because his policies made him the most dangerous man in the world. Yet reading it now, I'm amazed at how clearly he was spelling out what would happen, and how it applies to the current juncture more than ever.


Osama Bin Greenspan, Jackson Hole, WY, August 26, 2005:

"The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes.

The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher. The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions. The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."


The speech makes some amazing admissions:


Fed forecasts and hence policy are driven by asset price changes.

Such an increase in market value is too often viewed by market participants as structural and permanent. 

Investors are projecting stability and commit over an ever more extended time horizon.

The vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. (low interest rates)

Debt supports higher asset prices. 


That last one is my favorite.  He admitted that debt has made asset prices high.  Not fundamentals. Debt.  This is why I refer to myself as a structural bear.  The market is structured on debt.  Therefore, at its core, it is unsound, yet in can merrily go higher as long as confidence allows.

Greenspan also refers to asset claims.  This is something I harp about a lot (though not lately).  Notice they're not true assets, per se, but claims on asset values.  This is the chairman of the Federal Reserve publicly admitting that what we think of as "our money" is only a claim on its current value.  Because of the black magic of fractional reserve banking, there are far more claims than actual assets to back them.

That's why they're called FEDERAL RESERVE NOTES.

Markets rise and fall in an ever changing response to social mood.  Markets reach lows when investors are most fearful and reach highs when investors are most greedy.  This is why over time, it pays me to buy low and sell high. In the purest sense, I'm trading other people's emotions while trying to keep mine neutral.

Today the futures are up big.  It looks like 1420 is the target should 1413.95 get exceeded.  Yesterday everything fell in line: ticks, A/Ds, and price, however, volume did not expand.  So overall it was a dud.

The 61.8% retracement level is 1419.68.  I'll be looking at shorts there.