Greenspan signals his worries

Flash back to last year at this time-specifically to January 3, 2001. That was the day Federal Reserve Board chairman Alan Greenspan dropped a bombshell.

In a rare move between reserve board meetings, it was announced the Fed was cutting interest rates by a whopping half a percent. The move was stunning both in its magnitude and its timing.

Shortly after, I wrote: “Wednesday’s move by the Fed is an indication that the complex stream of data that pours through Alan Greenspan’s computer every day is telling him that there are very serious problems emerging in the U.S. economy, many of which we are probably not even aware of yet.”

Economy still wallows
As it turned out, that was indeed the case. The U.S. economy officially tipped into recession a few months later and is still wallowing there despite 10 subsequent cuts. These have taken interest rates down to their lowest levels since the 1950s.

Now Greenspan is warning that the pain is probably not over. In a speech on January 11th, he spoke of “significant risks” still facing the U.S. economy and,y extension, our own. The Fed chairman singled out his main areas of concern:

  • Earnings
  • Capital investment
  • Consumer spending  

Certainly there is reason to be worried on all fronts.

Next page: Many pitfalls remain

Many pitfalls remain
Greenspan watchers immediately shortened the odds on yet another interest rate cut when the Fed meets again at the end of this month, probably by 25 basis points. The stock markets reacted badly to the speech, with all the major North American indexes falling on Friday to end a losing week.

My position has been that, while I am are cautiously optimistic about 2002, I don’t see a robust economic recovery and a return to a roaring bull market as slam-dunks. As Greenspan has so forcefully reminded us, there are many pitfalls still out there.

Making decisions
It now appears that we will see at least one more round of interest cuts, both in the U.S. and here. That could be the bottom of the cycle-or not, depending on what happens with the economy.

Greenspan’s latest signals are a reminder that the economic patient is still in intensive care. Your investment decisions should be guided accordingly. Capital preservation remains the top priority. Fear should still override greed in investment decision process.

Adapted from the January 14th edition of the Internet Wealth Builder.