December 10, 1996

The Chairman Speaks

by Gary Krist

World markets roiled last week after a few offhand remarks by Alan Greenspan, reminding us of a simple but undeniable fact--namely, that when the Chairman of the Federal Reserve Bank speaks, the markets listen. Major institutional investors have learned to read the subtext behind the Chairman's most innocuous-seeming comments and to respond accordingly. But until now the small investor has just had to endure the resulting market turmoil without a clue.

Here, then, as a public service, is a listener's guide to Mr. Greenspan's next speech. Listen carefully, because the Chairman always means a lot more than he actually says:

"Good evening."
A clear sell signal. By characterizing the evening as "good," the Chairman is immediately signaling his belief that, because the economy is doing well (i.e., perhaps too well), rising consumer demand and its resultant upward pressure on prices will probably force the Fed to nudge interest rates higher in the near future.

"Thank you for that most flattering introduction, which I will certainly try to live up to."
Ambiguous, but probably a buy signal. By "trying to live up to" a "flattering" characterization of himself, the Chairman is hinting that he plans to act in a way that will endear him to the markets--i.e., refrain from any immediate tightening of credit, allowing businesses to borrow more easily and cheaply.

"I'd like to thank the hard-working people who planned this event and made it run so smoothly..."
Bearish for stocks. Indicative of a pro-labor shift in stance on the part of the Fed. Resulting upward pressure on labor costs (larger raises, increased benefits, etc.) could cut into corporate earnings and decrease stock dividends.

"There are too many people to thank individually, but you know who you are."
The opposite: definitely bullish for both stocks and bonds. A sign that the labor market has grown to its upper limit ("too many people to thank"). Probable multi-industry downsizing and higher unemployment ahead, producing a downward pressure on prices and wages, allowing Fed to lower interest rates without fear of igniting inflation.

"I promise not to go on too long, since everyone is eager to sit back and enjoy this wonderful-looking dessert."
Buy bonds, sell stocks. Mr. Greenspan's comment indicates an awareness that the public's priorities may be changing. Small investors and institutions alike may be tiring of Fed- watching and the roller-coaster ride of the recent bull market and will soon be turning to traditionally more conservative investments such as bonds.

"These are interesting times for the U.S. economy..."
Sell domestic equities, buy foreign equities and bonds. By drawing attention to the "interesting" quality of current U.S. economic activity (vis--vis, by implication, other economies), the Chairman is hinting that there is a danger of the domestic economy overheating in the near future, forcing the Fed to tighten credit. Higher U.S. interest rates will strengthen the U.S. dollar, making foreign goods cheaper for Americans to buy and providing a boon to foreign manufacturers--and, by extension, foreign equity prices.

"But I've learned that it is best for the Fed Chairman to say as little as possible on this or any other topic."
Strong bearish indication for all types of investment. Mr. Greenspan is here telegraphing an acute dissatisfaction with the current volatility of world markets. Tantamount to an admission of the irrationality rampant in the current situation. Begin gradual but systematic selling of stocks and bonds.

"So let me conclude by expressing my gratitude to you for coming tonight."
More unrelenting bearishness. Convert all holdings to gold and other precious metals. Consider early liquidation of all IRAs and 401(k)s.

"Thank you, good-night, and Happy New Year to you all."
Sell! Sell! Sell! Hoard gasoline and canned goods. Head to the storm cellar and lock the door behind you.

Gary Krist's most recent book is "Bad Chemistry."