Friday, March 15, 2013

Greenspan on "Squawk Box"

Greenspan said in a " Squawk Box " interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.
Yeah, well, I don't really know how Mr. Greenspan arrived at the idea that stocks are "significantly undervalued."  And, I always like to hear comments like "the payroll tax increase didn't dent spending because of rising asset prices."  Okay... so, disposable income declined, but consumers spent more because of rising asset prices.  But, you can't just go out and spend assets, so you either have to sell them, which would make asset prices decline, or you have to borrow on the value of those assets.  Since asset prices are rising, I would say people are taking equity out of their assets through debt.  Sounds a lot like what got us in this mess in the first place.  But then, I'm not a former chairman of the Fed, so what do I know?  Probably not enough.  But, why do people care what Mr. Greenspan thinks?  From Calculated Risk, here are some things the former Fed chairman said in 1990 (a recession began in July 1990):

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“... the economy has not yet slipped into recession.”
Greenspan, October 1990
 So, I guess we should all take comfort in Mr. Greenspan's comments.  For what it's worth, I wouldn't characterize this market rally as "irrational exuberance" either.  Of course, I also wouldn't characterize stocks as being "significantly undervalued."  Maybe Mr. Greenspan has some stock he'd like the public to buy from him.  Not because he thinks stock are overvalued, mind you; he just needs the cash to pay his tax bill.

No comments: