US stocks: 'Lather, rinse, repeat'

Now there's a reliable sell signal, says James Saft on Reuters.com: Alan Greenspan is bullish on US stocks.

The former Federal Reserve chairman Greenspan has been "discredited" after presiding over the expanding credit bubble and failing to foresee the carnage caused when it burst.

His new book doesn't help. It tells us that "it didn't happen, wasn't his fault and anyway he predicted it all at the time".

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He certainly has no regrets, as Randall W Forsyth notes in Barron's. The focus on the latest crisis, however, obscures the bigger picture. The Greenspan Fed laid the foundations for today's dysfunctional mess in America's economy and stockmarkets years ago.

Starting after the 1987 market crash, the Fed provided liquidity for the markets or cut interest rates whenever there was a wobble or a potential crisis, such as the collapse of the LTCM hedge fund in 1998, or the dotcom crash in 2000, when interest rates fell to then-record lows.

"Disasters were averted, which in turn boosted confidence that the Fed always had the backs of investors and speculators." Investors felt that they had insurance in the form of Fed backing the "Greenspan put" so risk appetite grew and inflated the next bubble.

The cash infusion after the 1987 crash led to the commercial real-estate bubble of the early 1990s. After the LTCM mess, the dotcom bubble blew up. After that interest rates fell to 1%, ultimately blowing up the housing and mortgage-derivatives bubble.

Each market drop prompted a flood of liquidity that inflated the next bubble. "Lather, rinse, repeat." And it's happening again under Greenspan's successor Ben Bernanke.

The printed money being hurled at the market following the credit collapse is causing another round of irrational exuberance. And as the bubbles blown up by the Fed have become ever larger, so have the subsequent busts.