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I want to personally thank Mr. Alan Greenspan for all the good he has done me. This is not a sarcastic statement (above title notwithstanding), nor a poor humor one. Too many attack the poor man’s policies. Most of the criticisms have been misguided. He has bailed me out of financial disaster by giving the most precious gift I can think of. He have given me time. His critics come from two directions. The first is the Wall Street crowd who thinks that he is behind the power curve on inflation. Typically, these folks are economists who work for the big brokerages and investment firms. They focus on US consumer and producer prices, and they use "econobabble" such as PPI, CPI, core CPI, YOY, GDP price deflator. However, fighting consumer inflation is fighting the last war. The battle reminds me of the French generals of the late 1930's who wanted to prevent static trench warfare with Germany. We in the US still ride the downtrend of consumer and producer inflation that began in the early 1980's. Back, back commodity lovers, I haven't bought 1000 kilograms of soy beans lately. Inflation is having its last post-1970's flare up before dipping below zero. Huge Indian and Chinese labor forces, excess industrial capacity in the northern hemisphere, weak international labor unions, and a series of global recessions that sap consumer purchasing power and idle factories everywhere will generate outright deflation. I don't care how much money the Federal Reserve can print--money in the broad sense will be destroyed faster than can be created, for a short while anyway. But that's another article. Bottom line, the US is producing many more macroeconomic statistics like 1990s deflationary Japan than quite a few analysts want to admit. The second direction of Mr. Greenspan’s critics comes from the alternative economics crowd. Most of these folks do not work for a Wall Street firm or a traditional investment company elsewhere. I associate with this loosely allied federation via my writings. We are the folks that recognize that we are in the current bust period in global equities. This "secular bear market”, what I call the "Great Recession", began in 2000 and could easily last 15 years. Many of us criticize him for too low interest rates/too high money supply growth that helped cause, in order, the mid-90s emerging Asian equity bubble, late 90s tech stock bubble, the early 2000s global bond bubble, and the mid-2000s US real estate and global commodity bubbles. So vociferous are some of those critics, that they have called him "Bubbles" Greenspan. Their arguments, while having logical cause and effect, miss the point. They miss the point because these serial market bubbles are at the exact center of the reason he has helped me. So what IS the point? The point is time. I have been given time to recover financially. Like millions of middle Americans, I have a 401k plan with my employer, plus a couple of IRAs from previous 401k accounts. My balances plummeted like everyone else's in 2000, 01, and especially 02. I added to my moderate growth stock mutual fund holdings in 01 and early 02. Recession over, so take the plunge, right? I got clobbered by the across the board declines in 2002 to the point where I did not open my quarterly statements. I did not want to unload the pie piece I had allocated to high quality bond funds. I had no idea how low the global market indexes could go. It wasn't until the middle of 2002 that I began to realize that not only had the boom in stocks starting in 1982 ended in March 2000, but also a long-term bust had begun. The previous boom years, after all, spanned 24 years from 1942 to 1966. In other words, a "secular bull market" in global equity indexes had ended. A "secular bear market" had begun two years earlier. I heard the timeout buzzer late and also earlier than expected. I got caught with little cash left. I was along for the roller coaster ride. As Mr. Greenspan dropped short term interest rates to 1%, a "cyclical bull market" in US equities began in October 2002. There was a cause and effect, not a coincidence. While the Great Recession overpowers any one institution or man, one man can (and did) tweak the timeline. And timing is everything. Cyclical markets--lasting a few months or a few years--are one magnitude shorter than secular ones. Whether a misguided attempt at reflation, an "echo bubble", or a cyclical bull market given steroids, a label on the current stock market run is irrelevant to me. After a cyclical bear market that lasted two and a half years to October 2002, my retirement portfolio recovered nicely into 2003 and 2004. I have used this opportunity to sell mutual funds: technology, growth, index, international, and selected industry sectors. My 70/30 stock/fixed income asset allocation in early 2000 reversed. The cash portion has soared. I will sell more on rallies. Now being aware about the current secular bear, I can bide my time and pick my spots to buy treasury bond funds, inflation protected securities, oil funds, international bond funds, gold funds, or just sit on cash. I plan to reduce my principal risk in this way for another 5 to 15 years. After all, the previous two secular bear markets lasted 16 and 13 years. If I can endure all that time even with the same constant dollar value that I have now, I will be well positioned to take advantage of the secular bull market that will inevitably follow. It has been two years since I have come to the realization (along with others scattered around the country) that we are in a secular bear market. I have reduced my contributions to my 401k to the amount that can be matched. Besides readjusting my retirement portfolio, I have also been paying down mortgage debt, not taking on credit card debt or auto financing, and hanging on to my old car. I use savings to add to cash and cash equivalents like treasury money market funds, savings bonds, and savings accounts. I plan to buy gold bullion coins on upcoming dips. All these actions amount to personal fiscal prudence in case the Great Recession sends the economy from shaky to ugly. What? I hear a Devil's advocate voice from amongst the readership. What, my house, part of the real estate bubble caused by my favorite central banker? I will be sad when the home values in my neighborhood drop 20% to 50%, you say? I keep hearing about real estate bubbles everywhere. I wish I were in one. One hundred thousand or two hundred thousand dollars tax free? SOLD!!!! I'd take the money and run (to a rental house). But no bubbles where I live in suburban Houston. I guess we missed that financial storm. When a disaster occurs, time to recover is everything. This rule applies to all aspects of life. The human body needs time to heal an injury. A family needs time to recover from a flood or a tornado that destroyed their house. New York City needs time to bounce back from the 9-11 attacks. A country needs time to recover from a war. An economy needs time to revive itself after a recession. The Great Depression of the 1930's is a classic example of no time to recover. After the 1929 stock market crash, a coincidence of calamities destroyed the world economy: plummeting global trade, widespread bank failures in the US, the rise of Hitler and Imperial Japan, the Midwestern dust bowl ecological disaster, etc. The global economy could not withstand the virtually simultaneous body blows. By July 1932, the Dow Jones Industrial Average had plummeted by 90%. It took less than three years to go from healthy to comatose! The bursting of the technology stock bubble in 2000 could have been compounded by overly strict monetary policy, but Mr. Greenspan gave the economy, and me, time to recover by dropping short term interest rates to below the inflation rate. As to whether or not the economy is prepared to withstand the next crisis or burst bubble, I guess that only a smattering of families, corporations, and governments have gotten in robust financial shape. I know for a fact that I am far better prepared to withstand the economy's next crisis. Alan Greenspan gave me two years of financial life. I have put the time to good use. I have reoriented my thinking. In my retirement portfolio, risk is down and capital preservation is paramount. I have been slowly but surely de-leveraging and diversifying my household finances. Thus, when the Great Recession hits my street full force like the eye of a hurricane, I hopefully will not be forced to liquidate my family’s retirement funds. I have figured out what is really going on in the global marketplace. I have taken action in the most practical ways. If I can do it, millions of other middle class Americans can do it as well. Too many well-educated and intelligent people overlook how the Federal Reserve chairman’s good work has helped those who “get it.” To Mr. Greenspan’s gift of time, I respond with thanks and praise. © 2004 Chuck DiFalco CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
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