I’m beginning to feel like Cassandra. You may remember that Apollo gave her the gift of prophesy, in return for favors of kind not met with in boardrooms since sexual harassment suits became common. When she didn’t deliver, the god added some devious small print. No-one would ever believe her. Not even when she told them that the Trojan horse was not a winner – for the Trojans.
Apollo has been even more sadistic with me. I’ve been seeing ruin in the runes for so long, I’m beginning to doubt my own prophecies about the ever-soaring Dow. To keep my self-respect, I still naively cling to the laws of physics. What goes up, will eventually have to come down, not least when there is no visible means of support.
A few years ago I speculated on the airmiles we get for flying, phoning, staying in hotels, hiring cars and then again for paying the bills for all of the above. Even with my frugal yet peripatetic lifestyle – methode champenoise and lumpfish roe rather than champagne and caviar – I’ve amassed enough points to fly around the globe several times. Of course if we all decided to cash them in at the same time, then we would be profoundly disappointed. The small print is there to see: subject to availability as assessed by the airline. And similarly, if everyone were to try to take their profits on stock options and the stock markets, most shares would soon be worth the equivalent of pre-war Albanian leks with King Zog’s head on the front. Nice to frame and hang on the wall, but of little value otherwise.
A serious interest rate rise could make that happen, but how likely is it? If one thing spooks Alan Greenspan it is the possibility that all those employees whose work is fueling the present economic growth may get higher salaries for it. Sadly for them, but miraculously for the Fed’s economic models, most wage and salary earners have been treading water for a long time. Median family income in the US has risen only 2 percent in real terms over the last decade, for most of which time option earners have been getting indisputably inflationary rewards – billions of dollars – at the expense, one could say, of both shareholders and employees. Those options have been based not on productivity, nor even profitability, but on an ever-expanding equity market. However, the Fed does not count this as income.
On the one hand, this spares us all the sight of the Fed raising interest rates, forcing companies to lay off loads of staff – and the CEOs getting the usual berserker slasher options for their contributions to reduced costs. On the other hand, stock prices and options are undoubtedly inflated and should be really inflationary if they meant anything at all to the real economy.
That has not happened so far, partly because inflation is what inflation indices measure, and no-one factors in stock price rises the way price and wage hikes are factored in to the indice calculations. The equity markets seem to be serving the function of something like a rug, under which we’ve been brushing the inflationary dust for quite some time. But there comes a time when the molehill under the rug assumes mountainously unmistakable proportions. The dust has to come out, and people have to begin sneezing.
When will that be? In June Greenspan’s third term will end. There are no calls for term limits for the Fed, it seems. We have speculated before on the folly of replacing the invisible hand of the market, or the quasi-accountable hands of politics, with the whims and judgements of one person. The spectacle of investors rushing to buy or sell on the basis of second-guessing the world’s most prominent Ayn Rand fan is not necessarily the most rational way to order ones affairs. Of course the spectacle of hundreds of congresspersons cannibalistically rooting in the trough for the pork almost justifies a dictatorship, but why should it be restricted to the economic sector?
It is assumed that the Fed chairman’s motives are the purest, but he likes his job, and almost certainly wants a fourth term as brakeman for the world economy. One can imagine the chain of reasoning: The best thing for the US economy is me, therefore I need to be reappointed. The president won’t reappoint me if I spoil Al Gore’s election party, so nix on high interest rates: at least until I’m safely in office. And then we’ll see.
Of course, it is possible that the old gold bug has gone a little bit soft in his seniority, but it’s much more likely that sooner or later he’ll slam on those brakes in the Fed’s caboose and bring the whole thing screaming to a halt. When he does, it will be interesting to see who squeals. The stock market has raced so far ahead of the actual economy, one can only suspect that at some point the coupling between them has broken. But if the market goes into reverse it is difficult to see how the economy can avoid crashing into it.
There is one consolation. Before the airlines downsize to meet the drastically reduced business demand, we’ll be able to cash in our frequent flier miles, which by then may form the most valuable part of our portfolios. I’d fly away with Cassandra to some Aegean island – and get slaughtered by Clytemnestra.
The Speculator
