He Is At It Again

Jerry Welch, Commodity Insite!
Call me at 406 -682 -5010
Ennis, Montana 59729

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Below is a chapter from my book, Haunted By Markets entitled, "He Is At It Again! : that I wrote on August 26, 2005. It is about former Fed Chair Alan Greenspan and some of his forecasts and outlooks. It was not my intent to poke fun at Mr. Greenspan but to show that even the most expert of experts can be woefully wrong with forecast and predictions.


August 26, 2005:

He Is At It Again!

At the annual Jackson Hole gathering of the worlds top central bankers and economists Fed Chairman Greenspan said, history has not dealt kindly with the aftermath of protracted periods of low risk premiums. It was his bluntest warning yet about the rise in equity and home prices seen over the past few years. His comments were pointed directly at those overly confident investors that believe the rip roaring good times in stocks, bonds, and housing will go on indefinitely.

Mr. Greenspan, scheduled to retire in January has been Fed Chairman for the past 18 years and presided over the longest U.S. economic expansion since the end of World War II. His abilities, judgments and hunches made him an exceptional policy maker. He is regarded as the greatest central banker in history.

However, Mr. Greenspan does not have a great track record on forecasting markets. In fact, when he does offer a forecast, many in the brokerage industry are quick to say, Oh, oh. He is at it again! For example;

**In the 70s he went on record as saying there was no reason for gold to trade over $32 an ounce. Gold subsequently rose to $800 an ounce and today, is nearly $450 an ounce.

**In Oct. 90, he said, I see no recession on the horizon. Actually, a recession had begun three months earlier and it turned out to be a rough one at that for the U.S. economy.

** In March 00, only four days before the all-time peak in the Nasdaq index and the subsequent meltdown, Mr. Greenspan was praising the new era in technology. The Nasdaq remains 75 percent below its all-time high.

**In the summer of 03, he praised the advantages of adjustable rate mortgages when fixed rate loans were near their lowest levels in 50 years. Since then, rates have modestly improved.

** In May 03 he warned of soaring natural gas prices. Instead, prices plunged shortly thereafter.

**In July 04 he said that rising energy prices should prove short lived. At the time, crude was less than $44 a barrel while this week it rose to more than $69 a barrel.

**Mr. Greenspans most famous forecasting blunder was in speech he gave on December 5, 1996, when he used the phrase irrational exuberance to describe rising stock prices. His phrase set off panic selling around the world with stock markets plunging sharply. The Dow Jones for example, fell to approximately 6300. Today, the Dow is well over 10,000 and not once has it been back to the levels of December, 96!

There is no doubt Mr. Greenspan is regarded as an exceptional policy maker and most likely will be viewed as the greatest central banker in history. But as a market forecaster his track record is cloudy at best. And he is the Fed Chairman, a man in position to know all there is to know about markets and their direction.

Over the years I have stated what I believe to be the Number One Rule when it comes to following investing and trading advice. The rule is simple; No one knows for sure. Despite what anyone says or writes, the bottom line is, No one knows for sure. Not even if that someone is the Fed Chairman. Generally, if a forecast is off base, not close to being accurate it is because there was a mistake in measuring demand.

The most difficult fundamental force to measure and predict is demand because it can surface or disappear in a flash. When demand suddenly surfaces, bear markets quickly turn north. When it evaporates, bull markets turn south in a hurry and things tend to get ugly for a long, long time.

When Mr. G stated, history has not dealt kindly with the aftermath of protracted periods of low risk premiums he was implying that when the era of low rates ends, when cheap money becomes dear, stocks, bonds and housing prices are likely to tumble in an unkind fashion. It was a sobering forecast.

Then again, when Mr. Gs comments were circulated, many in the brokerage industry were quick to respond, Oh, oh. He is at it again. He has been wrong in the past and he will be wrong again!

If interest rates continue to rise and cheap money becomes dear, rest assured that Mr. G will be right. The key to stock, bond and housing prices rests with the availability of credit. Once rates rise high enough, the bull markets for stocks, bonds and housing will end ugly. They will end ugly.


Take time to check out Haunted By Markets at commodityinsite.com. And always keep in mind my two main rules when it comes to trading or investing. The first rule is, No one knows for sure. The second rule comes from an old Chinese saying and I quote. Zng sh tng xili

The second rule for those that forgot Mandarin Chinese from high school simply means, always use a stop. After all, if, no one knows for sure than it is best to use a stop.

Drop me a line at commodityinsite1@gmail.com if I can be of help. Or, call me at 406 682 5010.

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