Goodbye to the Greenspan Index

by | Aug 23, 2001

Earlier this year, I wrote a column in which I argued that the only index that mattered was the Greenspan Index , that is, Alan Greenspan’s personal unannounced targets for the Dow, S&P, and Nasdaq indexes. Today I’m here to tell you that the Greenspan Index doesn’t matter any more. And I’m going offer my […]

Earlier this year, I wrote a column in which I argued that the only index that mattered was the Greenspan Index , that is, Alan Greenspan’s personal unannounced targets for the Dow, S&P, and Nasdaq indexes.

Today I’m here to tell you that the Greenspan Index doesn’t matter any more. And I’m going offer my opinion on what does matter.

I’ve read a number of extremely bearish articles lately, predicting that the worst is yet to come and that we are just in the beginning of a post-bubble bear market that will last for many years. My favorite bear is Peter Eavis, who forecasts a downside of 672 for the Nasdaq.

It doesn’t matter that Eavis does not even consider the remote possibility that the E in the P / E ratio might actually increase at some point in the future. The only thing that matters today is that the bears are out there in record numbers.

I use this ultra-bearishness as a contrarian indicator. It tells me that the bears, like the bulls 18 months ago, are getting ultra-greedy. It tells me that the bear market is about to explode in their faces. All it will take is the first whiff of good news from a technology bellwether. It may not happen this quarter or next. But it will happen, and not many years from now as the bears would have everyone believe. And the move to the upside, when it comes, will be explosive and sustained.

That’s not to say that stocks will explode to all the way to new highs. Many tech stocks could triple in value from their present levels and still be 80% off their highs.

But explode it will, for the following reasons:

  • Contrary to what the bears would have you believe, tech stocks are not immune to the benefits of rate cuts, any more than they were immune to rate hikes. The entire supply chain benefits from rate cuts, and the cumulative impact of seven rate cuts (eight or nine by the end of the year) will be felt sooner, rather than later.

  • Energy prices will continue to decline, even after the economy starts to re-accelerate. Energy prices have an inertia all their own. OPEC can cut production, but it will take months for cuts to have an impact on the energy supply chain. That, coupled with the fact that demand for energy continues to plummet in the face of a slower economy and a generally mild summer, augers well for continued low energy prices.

  • The imaginary devil, inflation, has been banished. In fact, the concern has already switched among economists from inflation to deflation. If the bears have two hind legs to stand on, it is the possibility, however remote, that the U.S. economy will slip into a prolonged deflationary recession in which cash is king and the only worthwhile investment is a money market fund.

It’s difficult not to be negatively affected by the bad news bears. Unless you see it for the foolish bear bravado that it really is.

On Friday, I will reveal how to determine when the recovery is at hand. Specifically, I will offer up my opinion of the one technology company to watch for evidence of a broad recovery in the economy and the markets. The answer will surprise you.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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