Alan Greenspan’s New Warning

Alan Greenspan

Investors are already nervous about the worst December on record since the Great Recession of 2008. A headline from yesterday at CNN showed corporate America doing over $1 trillion in buybacks, with investors hoping that these companies would instead do something about debt levels.

“For the first time since the Great Recession, investors want companies to prioritize paying down debt rather than investing in the future or share buybacks and dividends, according to a Bank of America Merrill Lynch survey of global fund managers,” writes Matt Egan at CNN today. “Forty-six percent of fund managers surveyed think corporate balance sheets are overleveraged, Bank of America said. That’s a record high for the survey.”

Now, those who are concerned about the over leveraging have an additional thing to worry about.

Alan Greenspan presided over the Federal Reserve Bank for almost 20 years, from 1987 to as recently as 2006. Although you can’t find the reference very easily online anymore, back in those days, awed analysts called Greenspan “the wizard of Wall Street” and his was the economic voice to hear.

Now, this week, Greenspan is “coming out of retirement” at least in word, to talk about some of the current difficulties we’re facing.

“It’s not a surprise,” Greenspan said of recent market downturns in an interview with CNN’s Julia Chatterley. “Human nature is not a surprise … the volatility is a function of how we speak, think and feel – and it is variable. You put that together with a financial market – and it moves.”

Greenspan suggested we are not in a bull market anymore, also warning about stock weakness on high interest rates.

“It would be very surprising to see it stabilize and then take off again,” Greenspan said of more positive index behaviors. If the market rises, he said, smart investors will pull their money out at the end of that run, because the correction, in his mind, will be significant.

Higher interest rates, Greenspan said, are depressing stocks, and that cycle is going to continue.

“Long term (interest) rates are going to rise,” Greenspan said. “We’re not through the cycle.”

The old wizard also warned about stagflation, a scenario where inflation coincides with a weakening economy.

None of that sounds rosy, as despite the rain dance continually being done by a White House that wants to take credit for a “great economy,” we’re really facing some quite serious economic problems. Smart investors will see through the hype and act accordingly.