Here is a prediction: the market's response to the departure of Alan Greenspan is going to be quite different than the muted reaction we experienced when Bob Rubin resigned. It's hard to describe just how much of an institution Greenspan's face and the monotony of his speeches have become in America. Investors for almost two decades have grown accustomed to the financial media dissecting every word uttered by the Federal Reserve chairman. Whether you think Greenspan is a brilliant "maestro" or a bubble-blowing politician, it is safe to conclude that his presence has served to comfort the investing public. We're not talking about "comfort from familiarity" such as Walter Cronkite giving Americans the news and tucking a generation into bed every night. We're talking about something far more powerful where one man's presence has lulled millions of investors to sleep and all but wiped out the risk premium in the stock market.
Greenspan's solution to every economic crisis has been to print more money - often by cutting rates which has the effect of increasing credit. The Fed cut interest rates in 1998 partly due to the blowup of hedge fund Long Term Capital Management. When fears of Y2K hit the American populace in 1999, the chairman put his foot on the monetary pedal and increased liquidity to extreme levels. A significant amount of that newly created money found its way into internet and other technology stocks fueling the greatest stock market bubble in history. As the NASDAQ bubble deflated in 2000-2002, Greenspan should have let the detoxification process take its course. Instead, he poured Americans another drink and cut rates again to the lowest levels since the Eisenhower administration. Such a low rate monetary policy has spawned a hazardous credit and housing bubble which still exists today.
It will be interesting to see if Greenspan spends his last several months in office trying to keep the party going, so that he goes out on top. Then, when he leaves and Ben "Printing Press" Bernanke (or someone else) takes over, the house of cards will tumble. We expect the Republicans to take major heat in the 2006 or 2008 elections for appointing Greenspan's successor, whoever it is. (Remember how former SEC chief Harvey Pitt took the blame for corporate shenanigans that occurred years before he came into office?) Furthermore, we expect confidence in the U.S. Dollar, the U.S. equity markets and the U.S. fixed income markets to plunge. This should be a great time to own gold andsilver.