Portfolio managers shun Greenspan's optimism

IN CONVERSATIONS with US portfolio managers one message came through loud and clear: most are 'underwhelmed' by the economic leadership emanating from Washington. As a result, a huge amount of cash is building up on the sidelines in anticipation of a substantial drop in price-earnings ratios and in markets overall within six months to one year.

There is no better 'reality check' for policymakers than this type of discussion with people who actually move markets. As Alan Greenspan, the chairman of the US Federal Reserve Board, was delivering an upbeat assessment of economic growth last week, some of Wall Street's biggest money managers were singing a different tune.

They foresee an economic downturn directly related to President Clinton's budget negotiations with Congress, which many decline to acknowledge as a deficit reduction. 'From the numbers I see, I see big tax hikes that will be contractionary for growth and not nearly enough spending cuts. The result will be continued high fiscal deficits for several years out,' said one mutual fund manager.

Meanwhile, Mr Greenspan was delivering surprisingly good economic news - that the US economy grew by a stronger-than-expected 3 per cent in the second quarter and was on track for overall growth of 2.5 per cent this year. Unemployment, now high by US standards at 7 per cent, would decline to 6.75 per cent by December. Mr Greenspan's one big worry was inflation, which he said was stabilising in the 3 to 3.5 per cent range rather than subsiding as one would have expected with unemployment hovering at 7 per cent. He thus dangled the threat of higher interest rates before nervous bond markets, even as he sought to keep up the pressure on Congress to pass a substantive deficit reduction programme of dollars 500bn over five years. 'Should the expectation of deficit reduction be thwarted or scaled back, markets will react appropriately negatively,' Mr Greenspan predicted.

He agreed with portfolio managers that US growth would be restrained for months as a result of high consumer debt and big cuts in military spending. But he disagreed over the nature of the economic foundation being laid in the deficit reduction negotiations. Assuming that the fiscal deficit is actually restrained and that the healthcare crisis is resolved, the US economy should emerge 'healthier than it has been in decades,' according to Mr Greenspan.

The big question, of course, is who is right? The negative attitudes of many in the financial community are not surprising given the very murky indicators of future US growth. On the macroeconomic front, growth has been quite sluggish in relation to traditional post-recession recovery rates of 6 per cent or more. The fact that the Fed is worried about inflation suggests higher short-term interest rates in the very near future.

Sectorally, there are also big trouble spots. The US airline industry, for example, is in such bad shape that a Federal panel recommended special help. It proposed sweeping tax cuts on transportation fuels and passenger tickets, and minimum tax rates for the airlines to assist the ailing industry. Additionally, one need only fly over the rain-soaked Mid-West and glimpse its bulging rivers to realise that the total cost of the flooding will be many billions of dollars.

Deficit reduction is another big unresolved issue. Mr Greenspan believes that it must be substantive. Portfolio managers are unconvinced, because of the lack of bigger spending cuts, most notably in entitlement programmes. The ultimate success or failure of whatever is agreed by Congress may ride on the fate of one man, Dan Rostenkowski, the powerful chairman of the House Ways and Means Committee. As has already been reported in this column, he is critical to the success of President Clinton's present and future economic programme because he is the only House official at present with enough strength to push through the politically unpalatable parts. If he is indicted on embezzlement charges related to the House Post Office scandal - as has been reported in many papers - he will be forced to step down until the charges against him are settled.

A final unknown is the role that the Fed itself will play in influencing future economic growth. Mr Greenspan acknowledged last week that the traditional money-supply tools that the Fed has used to engineer growth are no longer reliable. It is unclear now how the Fed will set targets for real interest rates, its new guide post in determining economic growth.

Since the late 1970s, the Fed has based its most important decisions on specific targets for growth in the money supply, defined as money in circulation plus savings and checking accounts. Now, it is relying on targets for real interest rates, which are determined by subtracting the inflation rate from nominal interest rates that have inflation built in. Thus, a 5 per cent interest rate actually translates into a 2 per cent real interest rate, if inflation is at 3 per cent. In seeking to set real interest rates at levels that produce steady growth with low inflation, the Fed is in effect guiding the economy by the stars rather than by the scientific methods it has used in the past. How well this will work is an open question. We therefore end the debate with no clear answer as to who is right, the portfolio managers or Mr Greenspan.

News
people
News
people And here is why...
News
peopleStella McCartney apologises over controversial Instagram picture
Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
PROMOTED VIDEO
Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
News
i100
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
people
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsWelsh town changes its name, but can you spot the difference?
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Kristen Scott Thomas in Electra at the Old Vic
theatreReview: Kristin Scott Thomas is magnificent in a five-star performance of ‘Electra’
News
Destructive discourse: Jewish boys look at anti-Semitic graffiti sprayed on to the walls of the synagogue in March 2006, near Tel Aviv
peopleAt the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Life and Style
Couples who boast about their relationship have been condemned as the most annoying Facebook users
tech
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Time to stop running: At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity

Time to stop running

At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence