April 2005 Newsletter
Issue Four, Volume Six

ALAN GREENSPAN IS P***ED OFF

By Mike Gasior

While I may agree that the title I chose for this edition is somewhat abrupt and perhaps even startling, I will try very hard to make the case that my statement is accurate and also that people should care that the Federal Reserve Chairman is upset. It was also a very easy topic for me to address since I share many of the same viewpoints as Mr. Greenspan. Although some people may wonder why I feel as though I should speak for him rather than let him speak his own mind, the fact of the matter is that he simply doesn't. He has not spoken openly to the press since shortly after he was first appointed to the Fed Chairmanship in 1987 and most of what he says publicly in recent years is gibberish and nonsense by his own admission. It has been reported that he often goes back to his office after testifying to Congress and watches his performance on videotape only to marvel "what does that mean?" regarding his comments.

It has been my experience when presenting my seminar sessions that my audiences, both American and offshore, have an inadequate understanding of who Alan Greenspan is, what the role of the Federal Reserve and central bankers is, and why do the financial markets literally hang on every utterance that comes out of Mr. Greenspan's mouth. So besides simply trying to explain why so many circumstances that currently exist in the U.S. economy are upsetting to him (and me), I will also tell you of the 38 years Alan Greenspan has spent in Washington D.C. in the service of six different U.S. presidents. I will share with you his early viewpoints and writings, as a young economist in New York. Finally, I will show you how he has taken a post that has historically held very little political power and shaped his tenure so that he has become one of the most powerful figures in Washington for the past 15 years. And why he now feels abandoned by his own party, which may make his final 200 days in office very interesting to watch.

THE MAY VIDEO CLIP IS UP

As I have been progressing through the various investment markets that I had promised to cover with my video commentaries in 2005, I have been looking forward to arriving at one of my favorite topics: the bond market. Years ago as my daughter was about to be born, people in my seminars would inquire whether I was going to be like many parents and allow her to collect Beanie Babies, Pokeman, or other such nonsense. I would always quickly assure my audiences "that the only thing my daughter is going to be collecting is AAA rated, insured bonds."

Since I was in Washington D.C. visiting a client I thought I would take advantage of the scenery and film with one of the more majestic backdrops the city has to offer. Clearly, since 9/11, law enforcement is always immediately suspicious whenever people are taking pictures or video of important Federal buildings and I was no exception. I wish I had been thinking on my feet better, and not taped over the scene where I got rousted by the Capital Hill Police for trying to film on government property without a permit. The officer was very polite and told me that the procedure for obtaining a permit was no big deal, and pointed out the office for me to visit to apply for one. Obviously, it seemed to me that any sentence that includes the words "Federal Government" and "permit" was never going to be as easy as this kind officer was making it sound so I began to pack up my equipment to leave. It was then that he commented that the problem for me was that my camera was on a tripod and that was what made a permit necessary. Then I asked him if I were to take the camera off the tripod and put it on the hood of the BMW that was parked right there on the street beside me, would that be okay? He said yes, and away I went. I hope you all appreciate the effort I make to get these video commentaries produced for your enjoyment since I thought I was close to waking up in Guantanamo Bay Cuba with a bag over my head for a few seconds there.

You can view both high-speed and low-speed versions of the clip by visiting the homepage at the following link:

http://www.afs-seminars.com

GRAND CAYMAN HEDGE FUND SESSION

The Grand Cayman "Providing Services to the Hedge Fund Industry" program being held at the Hyatt Regency Grand Cayman Resort on May 18th, 19th and 20th has been completely sold out for some time now and I look forward to seeing everyone there shortly. Since there were many people who asked to be added to our waiting list, we have decided to present the session once more on October 11th, 12th and 13th, also at the Hyatt Regency Grand Cayman Resort. Please call our offices at (860)347-6568 to inquire, or you can reach by email.

Information on the session can be viewed at:

http://www.afs-seminars.com/cayman.html

UPCOMING NEW YORK SESSIONS

I will be presenting two of our most popular programs in New York during June and there is still room in both sessions if you, or your colleagues, would like to attend. Both of these seminars cover some of the most complex and sophisticated securities held by institutional investors and given recent activity in the markets, the timing of these could not be better.

Our "Mortgage & Asset Backed Securities Seminar" will be held on June 13th and 14th, and you can view the details of the program at:

http://www.afs-seminars.com/mortgage.html

The "Derivatives Seminar" will be presented on June 15th and 16th and the details of this extremely popular can be viewed at:

http://www.afs-seminars.com/derivatives.html

I look forward to seeing you there.

WHAT IS ALAN GREENSPAN SO UPSET ABOUT

For those of you who have not been keeping close track of Alan Greenspan's Chairmanship of the Federal Reserve, term limits will require him to retire on January 31st of 2006. Many people, including myself, consider him to be the most powerful Fed Chair there has ever been; and he has extended his power far beyond what has typically been the mandate for the central bank. When looked at simply, the Federal Reserve actually seems quite limited in power with their influence simply expressed through their administration of two benign overnight interest rates. The Discount Rate, which is the rate at which member banks can borrow directly from the Federal Reserve, and the Fed Funds Rate at which member banks lend each other money. What is impressive to consider is how Alan Greenspan has leveraged his reputation and agenda to become one of the most influential forces in government for much of the past two decades. What drives him crazy is the direction the U.S. economy is heading as he nears the end of his very long run and how badly his own party has let him down.

After 18 years, five months and 21 days in office he will gather his things from his office for the final time and walk away with whatever legacy history has in store for him. And how do things looks as his final day approaches:

--The U.S. Federal budget deficit is exploding and the government's debt is increasing at over a billion dollars every single day.

--The dollar is falling in value.

--The future burden of Social Security and Medicare is something Greenspan has referred to privately as "a crisis on wings" and only grows more serious daily.

Had he chosen to retire just five years ago things, consider how different the economic landscape looked back then and potentially how his legacy might have looked different as well. But before we do that, let's take a look back at the events and experiences that have shaped the opinions and viewpoints that drive him today.

Back in the 1950's and 1960's Alan Greenspan was spending much of his time with the author and philosopher Ayn Rand. While I don't feel compelled this month to educate you in the writings and principles of Ms. Rand, I will tell you that she was among the most ardent "free market" advocates there has ever been and there are plenty of people who find her beliefs controversial to say the least. She didn't think that the government regulation of the markets was simply inefficient, she felt that any governmental involvement in the free market system was just plain wrong. Many of Alan Greenspan's advocates would like to downplay his years spent with Rand, as well as the many views he shared with her since even conservatives view her as an extremist, but that is difficult to do. It is also hard to chalk up his linkage to her as a youthful indiscretion since a 40 year-old Alan Greenspan published an essay in one of Ms. Rand's journals titled "Gold and Economic Freedom" in which he argued for the elimination of all taxation and for the Federal Reserve as we know it to be abolished. He also denounced governmental regulation and called for the end of the "welfare state" in the following comment:

"Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive member of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation."

Barely two years after writing that essay, Alan Greenspan found himself working for Richard Nixon in the 1968 election campaign. Within a few weeks of meeting Nixon, Greenspan found himself serving as Nixon's domestic-policy advisor offering a wide array of suggestions to the candidate on matters of any, and every aspect of the campaign. More than anything, Greenspan tried very hard to infuse the campaign with as many of his own conservative beliefs and ideals as possible. The most impactful and controversial suggestion was for Nixon to endorse the idea of an all-volunteer army. After Nixon endorsed this policy proposal, his poll numbers immediately went up since this was the height of the Vietnam War after all. When Nixon was finally elected president, he called Greenspan and offered him any job in government that he desired because the president-elect felt that the all-volunteer army had proved to be the margin of victory. Unfortunately, Greenspan felt that Nixon felt intimidated by him and politely declined and went back to his economic consultancy in New York for the next six years.

As Nixon's presidency was about to collapse in 1974, Greenspan got himself to Washington and showed up in Gerald Ford's office uninvited and unannounced. Greenspan told the Vice President that he would likely become President in a matter of days and that he would like to be a member of Ford's team. Although Gerald Ford had never met Greenspan prior to that day, he knew him very well by reputation and told him he would like to have him on his team should he ever become President. Just days later Nixon would resign and Alan Greenspan would be named to Ford's Council of Economic Advisors. When he put his hand on the bible to be sworn in, his mother stood right by his side. Ayn Rand stood on his other side.

For the next two years Greenspan would enjoy his access to literally every member of the Ford White House, spending considerable time hanging around with Ford's Chief of Staff, Dick Cheney, and Cheney's assistant, David Gergen. When it was time for Cabinet meetings, Greenspan could often be found sitting next to the Office of Management and Budget, Paul O'Neill or the Secretary of Defense, Donald Rumsfeld. Although Greenspan was technically Ford's economist, he found that his opinions were accepted on literally any subject at all, and Greenspan never hesitated to share his views on anything he felt strongly about. When Ford began the 1976 campaign, Greenspan was one of the leaders of the organization with Dick Cheney and Jim Baker. Although Ford was behind Jimmy Carter by 30 percent at one point, he rallied to make the race the second closest presidential election of the 20th century, with much of the credit due to Alan Greenspan.

After the 1976 election, Greenspan once again went back to his practice in New York where he would remain until he once again sensed an opportunity in 1980. With Ronald Reagan as the apparent Republican nominee, Greenspan became an informal economic advisor to Reagan. Many of you may remember that during the 1980 Republican convention in Detroit, there was a movement that tried to get Reagan to name Gerald Ford as the Vice Presidential candidate so that if the ticket were to win, the two would serve as almost "co-Presidents". What you may not be aware of is that the two people spearheading that movement were Henry Kissinger and Alan Greenspan. If the deal was accepted, Ford would have powers never before allotted to a vice president and the ability to name several Cabinet positions. Two of those Cabinet positions would have been Henry Kissinger as Secretary of State and Alan Greenspan as Treasury Secretary, with the Treasury Secretary having new and expanded powers over the setting entire scope of domestic policy. As far-fetched as this possible union might have seemed, the deal was brokered late into the night and Reagan was open to almost all of Ford's requests. What ultimately broke the deal was Reagan having to add Kissinger and Greenspan to the Cabinet, and Reagan would then ask George H.W. Bush to join the ticket. Greenspan once more returned to New York.

Ronald Reagan had inherited Paul Volker as his Fed Chairman after Jimmy Carter nominated him in 1979. Although Reagan was far from thrilled with the actions taken by Volker at the beginning of his term, it was Volker who deserved the credit for finally taming the runaway inflation of the 1970's and Reagan rewarded him with re-nomination in 1983. By the time 1987 rolled around it was the feeling around the White House that Reagan deserved his own selection at the Federal Reserve and the phone rang in Alan Greenspan's office.

Until the arrival of Alan Greenspan, if there was any bullying that occurred between the White House and the Federal Reserve, it was the White House who would turn the screws. Back during the JFK administration, if the White House felt that interest rates were too high, one of the president's economists would simply call the Fed Chair and schedule a meeting. As the date for the meeting would draw close, interest rates would suddenly come down. The meeting never even had to take place, but simply be scheduled to affect policy. Greenspan not only completely changed the landscape, he is the one who now dictates policy and has the upper hand over the White House.

When first appointed Fed Chairman Alan Greenspan did not at all like the view of the economic landscape left to him by Reaganomics. The national debt had nearly tripled from under a trillion dollars to over $2.6 trillion. The Federal Budget had been bleeding red for the previous eight years, and while there are some economists who are known for their support of deficit spending, Alan Greenspan has never been one of them. As far as he is concerned, spending more than you bring in is a bad policy, and that includes the government. As he was settling into his new job as Chairman, Reagan was in the final months of his presidency and Greenspan figured it was too late for radical changes. That would not be the case any longer when George H.W. Bush became the 41st President in January of 1981.

Bush #41 brought many familiar faces with him into the White House including some friends of Greenspan in Dick Cheney and Jim Baker. Greenspan wasted no time using his influence to correct what he thought was a huge mismanagement of the economy during the previous administration. What one has to remember, however, is that the issues of the deficit, the debt, taxes and fiscal policy are actually none of his business. He can certainly have his own opinions on these matters as a private citizen and even take them into consideration when setting interest rates at the Federal Reserve. Technically though, he has no actual voice in setting these policies.

It has been reported in many publications and discussed by many members of the Bush #41 Cabinet that Greenspan approached Bush with a deal. If Bush would break his "no new taxes" pledge that he'd made at the convention and try and persuade the Congress to raise taxes to ease the deficit, Greenspan would lower interest rates to stimulate the economy for the 1992 election. Greenspan has denied there was ever such a deal, and it has been difficult to get anyone to speak on the record about it. Just recently Nicholas Brady admitted that the deal was quoted saying with regard to the agreement; "He's a smart guy. Was it signed in blood? No. Was it discussed thoroughly? Absolutely."

For whatever reason, Alan Greenspan chose not to honor the deal he struck with the elder Bush, and the elder Bush has never forgiven him for what he feels is the reason he lost to Bill Clinton. As the "New Democrat" arrived in Washington in 1993 he would quickly find Alan Greenspan looking to once again negotiate fiscal policy.

After being in office only a few months, Bill Clinton proposed that the federal tax rates should be altered to become more progressive, with higher income workers paying a greater share of the burden. His plan was to increase the tax rate for those Americans earning more than $200,000 from 31% to 38%. While this idea seemed perfectly fine to Clinton and many Democrats, it was precisely the kind of action Greenspan had written about back in 1966 about how governments want to "confiscate the wealth of the productive members of society to support a variety of welfare schemes" and that this proposed tax increase would only be another step toward Greenspan's "welfare state".

Clinton's former advisor Dick Morris has spoken openly that Clinton and Greenspan struck an explicit deal. The deal was that Clinton would raise revenue through some other form of tax that would have effect everyone equally and Greenspan would lower interest rates. Morris has said it was Clinton's viewpoint that one of his top priorities would be to do whatever he had to do to get interest rates lower, and that would probably not happen unless Clinton was willing to incur political harm. Morris claims that Clinton told him "You figure out what Greenspan wants, and then you get it to him."

After eight years of the Clinton presidency, the economy and the deficit were in outstanding shape, and Greenspan was more powerful than anytime in his career. As George W. Bush came into Washington, he knew of Greenspan's influence and he also knew of the deal that was broken with his father. The fact that Bush #43 would chose an old friend of Greenspan's from the Ford administration in Paul O'Neill. After seeing his father lose re-election in 1992 thanks to the quid quo pro not being honored by Greenspan, Bush #43 knew that a strong relationship with the Fed could be a political asset and the hope was that O'Neill would broker that relationship.

It was Bush's hope that he could convince Greenspan to sign onto the promise he had made during the campaign to return the budget surplus to tax payers through radical tax cutting. Before O'Neill had even passed confirmation before the Senate he was meeting often with Greenspan and selling him on the idea. In the political sense, Greenspan agreed with Bush that returning the money to the people was a better alternative than the government increasing spending. But the issue that Greenspan wanted to be clear about was that there could only be the cutting of taxes if the budget remained in surplus. If the surplus were to disappear, so would the tax cuts since there would be no money to return.

So the deal was made, and while testifying to Congress during January of 2001 Greenspan made the comment that "tax reduction appears required."

No doubt there were many people from the Clinton administration who couldn't believe their ears when these words passed Greenspan's lips since this seemed to go against the heart of Greenspan's own principles. Sure, the budget was in surplus, but the national debt was still huge.

The problems began as it appeared that the budget was slipping from surplus to deficit and Paul O'Neill tried to hold the new president Bush to the deal he had struck with Greenspan. Bush simply thwarted every attempt that O'Neill would make to have the administration keep its word and ultimately an angry O'Neill would quit as Treasury Secretary. O'Neill told the author Ron Suskind in the book "The Price of Loyalty" that Bush has said, "I won't negotiate with myself."

So far Greenspan has made only the most subtle comments in public that may show how he feels about Bush abandoning their deal, but for the most part he has remained quiet.

At first glance, it might seems as though Greenspan has simply been beaten at his own brand of back-room deal making, but that observation would be too simple.

Although one might think that Greenspan dislikes politicians, a more accurate assessment is that it might be more accurately described as disdain. He has simply been around them too closely and for too long and knows all too well how they distort the truth with twisted facts and statistics. I suspect that watching this most recent presidential election was agony for Chairman Greenspan as both candidates grossly misrepresented the economy and policy with partial truths and glowing assessments of the future. This was agony because Greenspan knows the actual facts and figures and these facts and figures seldom flesh out the campaign rhetoric spewed by politicians. I also suspect Greenspan might hold the most disdain for the current president more than the other five he has served, and his term is not over yet.

For this first time since 1987 Alan Greenspan does not have to worry about being re-nominated and re-confirmed as Federal Reserve Chairman and I expect that he will use his final months to change the course of policy in as abrupt a nature as possible. The Fed just raised rates for the eighth consecutive time and has shown no indication that that trend will end anytime soon.

I wrote last month that I though that "Real Estate is Over" and I explained to my readers that my feelings were based on the fact that the long cycle of low interest rates was officially over and that the Fed had decided that the housing bubble needed to be popped. I maintain those feelings with the utmost of conviction.

What I suggest to you now is that Alan Greenspan is very angry at the state of the current economy and will use his remaining time in office to hold the current administration's feet to the fire in the most uncomfortable way possible. If the government won't take steps to tame the runaway deficit, falling dollar and lurking disasters of Social Security and Medicare, then Greenspan will make the situation increasingly perilous for the politicians to navigate. No more cheap money sloshing around the system and no more consumers spending like drunken sailors using their home equity and margin loans as some sort of trust fund. You can count on the Fed increasing rates for the foreseeable future and the creation of an economic situation the politicians will be forced to address.

In the middle of this most recent FOMC (Fed Open Market Committee) meeting I suggested to the audience of my seminar that I wouldn't be surprised if they raised rates 50 basis points, rather than the expected 25 that everyone was expecting as a message to the White House that the Federal Reserve still has some power left. While he might never admit it publicly, I can assure you that Bush #43 is squirming right now over what Greenspan might do to him before January. And if I were George W. Bush and the American public, I'd be afraid. Very afraid.

BRAINTEASER

This month I have decided to make the brainteaser question extremely simply, but I believe fairly difficult. And no advanced degrees in mathematics are required either. One must just remain calm and think this one through.

"To the best of my knowledge only one other word can be made from ALL the letters in the word shattering. Can you figure out what it is?"

When you can't stand it anymore, just click the following link for the answer:

http://www.afs-seminars.com/brainteaser_Apr2005.html

And the answer to LAST month's brainteaser is:

Michael Milken who earned $550,000,000 in 1987 working for Drexel Burnham Lambert. I learned many years later that his salary while working at Drexel was always a very level $1,000 per week, or $52,000 per year. Everything he earned above that salary was performance bonus based on the profits of his operation.

http://www.afs-seminars.com

Copyright 2005, Michael Gasior. All Rights Reserved.

PREVIOUS | NEXT