Commentary

It's Magic!

July 13, 2004

I fondly remember my wife’s “Grampy”, Stoughton Atwood, as a WWII hero, patriarch of a large family, storyteller and erstwhile magician. While I am in awe of people of the greatest generation like “Stought” for their heroism and selfless demeanor, it is those darn magic tricks that I keep thinking about. At the last Atwood family reunion I attended, there was Grampy, doing his tricks, linking and unlinking rings and doing funny things with string. He was a little slower than in years past, but I still scratched my head wondering “how’d he do that?” In two weeks, we leave for North Carolina and the latest Atwood reunion. Grampy will not be there. He is now pulling quarters out of God’s ear. He will be remembered and celebrated by all in attendance.

Leading up to this much needed break, I find myself thinking more and more about another magician; thinking about how he came to orchestrate the most prolific, far-reaching display of financial magic in history. Alan Greenspan has presided over our economy and markets for the better part of two decades and in so doing, garnered the reputation as “the maestro”. His power and ability to manage the system has been beyond question by most. Rabbits came popping out of hats, beautiful women were sawed in half and reassembled, and the ace of spades turned up every time as we faced the Russian meltdown, Asian contagion, LTCM and a host of other challenges to our financial safety.

But now, like Grampy in his latter years, Mr. Greenspan is beginning to slow down a bit. The tricks are the same, but they just don’t have the same snap and pop to them as they once did, and some in the audience would swear they’ve seen the beautiful woman sneak out the back of the saw box. But is it really the magician who is failing, or is it something else? Maybe the environment is just not right anymore for the same old tricks of days gone by.

The bond market is one trick that I don’t expect will continue working, current counter-trend rally aside. A reduction in the massive Asian vendor-financing scheme will see to that. How about the relatively tame CPI and PPI numbers? That trick has always worked well in the past. But again, the audience already knows something is not quite right there. Gold is reasonably under control. Maybe he can point to that and say “See dear friends, nothing to worry about. We won’t need additional rate increases after all. In fact, just to make sure our recovery stays on track, we have balanced our bias evenly between inflation and deflation going forward.”

That’s it, the oldest trick in the book! DIVERSION! “Get ‘em looking that way at our stance on fighting inflation, but in reality we’ll pull off a feat of liquidity the likes of which the world has never before seen! Now, how to do this? Monetize government debt? Buy the stock market so all those insiders can sell to us (and by “us” I mean US as in the ever dependable taxpayer)?"

Inflation can be delivered in many ways, including Dr. Ben Bernanke’s helicopters. Frankenmarket is staggering now, making grotesque sounds and starting to get downright mean after having been mostly benevolent for 1.5 years. The monster needs more of the juice that created and sustained it. The trick will be to figure out how to justify it.

At this moment, I am trying to figure out which way to look, other than the obvious.

Gary Tanashian

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