Wednesday, May 23, 2007

Greenspan Talks Off Rally With China Drop

Just when you thought everything was going swimmingly, somebody is sure to come along and throw salt into the pool. Today it was the old curmudgeon himself, former Fed Chairman Alan Greenspan, saying that there was trouble in China's stock markets, which have risen by as much as 90% in the past year.

The last time Mr. Mumbles muttered about China, it sparked a global selloff in stocks and a more than 400 point decline on the Dow. That was back on February 27. Today's mouthings sparked a spate of selling, wiping out gains made in the morning. The Dow had been up 70 points and the S&P was poised to set a record closing high, but after 1:30, the selling became vigorous and both indices ended in the red.

Dow 13,525.65 -14.30; NASDAQ 2,577.05 -10.97; S&P 500 1,522.28 -1.84; NYSE Composite 9,913.66 +12.70

What's troubling about Greenspan's comments are that they are coming from the mouth of a person with no official standing. Greenspan is retired and in his 80s, a time normally reserved for people to relax and enjoy what remains of their lives. Maybe he takes pleasure in moving markets - a likely explanation, since he did it so readily as Fed Chairman for so long.

The other problem is that China's markets have nothing to do with US markets. One can make a slew of arguments that they are somehow intertwined with the rest of the global economy, but they're not. Stock market exchanges are places where people are investing and betting on movements of individual issues.

The rise and fall of markets has something to do with the economic health of host nations, but barely. They have more to do with the perceived value of stocks and indices. Markets are moved by economic forces, not the other way around. Greenspan, and anyone who pays attention to his screed, make the mistake that stock markets are essential mechanisms of economies. They are not.
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China's stock markets are, by most measures, overvalued, much as ours were in 2000. The markets will make the corrections on their own. The economy of China - and certainly that of the US - will not collapse if the market drops 20%. Some rich people will lose money, likely to some other rich people who will take it.

Greenspan should just keep his comments to himself. Even better, people would be well advised to ignore what he says. In his lifetime, he's been dead wrong on issues often enough to make doubting his word a wise choice.

Whatever effect Greenspan had on the markets, they weren't widespread. Declining issues beat advancers by roughly a 3-2 margin. New highs numbered 483 to a mere 71 new lows. Obviously, not everyone was listening, though the after-effect, tomorrow and Friday, made be more severe.

What probably made traders shudder even more was the continued rise in the price of oil. The new July contracts came out today and even though US stockpiles continued to build steadily into the summer driving season. Despite rising stockpiles of gas and improved delivery from refineries, the price of crude still shook higher by 27 cents to $65.51 per barrel.

In other commodities, gold and silver both gained marginally, but remain stuck in a year-long rut.

Thursday's markets ought to be interesting, if only to see if Greenspan's mouth can move China's markets. If there's a selloff in China tomorrow or Friday, be prepared for a broad decline in European and US markets as well. It's uncalled for, but nobody ever made money by not paying attention, either.

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