Alan Greenspan: The Fate Of The Economy In 2019 Depends On The Stock Market

Late last year, during the Q4 market turmoil that saw credit spreads balloon wider and US equities careen to their worst December since the Great Depression, investors were reminded of how quickly negative sentiment can spiral, as illiquid markets and systematic flows serve to exaggerate price swings, thereby driving up volatility in a self-feeding loop.

That would be pernicious enough on its own, but the real problem comes in when widening credit spreads threaten overleveraged corporate balance sheets, and falling stock prices prompt consumers to reconsider spending plans.

That latter dynamic is a reference to the vaunted “wealth effect” – only in reverse. As stock prices fall, consumers get nervous, and the last thing an economy which lives and dies by the consumer needs is retrenchment in household spending. Here’s a crude representation:

You’ll note that the latest read on University of Michigan sentiment suggests that the Fed cut and incessant trade banter together served to dent confidence materially in August. The market volatility associated with the tariff escalations could exacerbate the problem as illustrated above.

If you ask Alan Greenspan, this is the biggest risk to the US economy in the back half of the year.  Have a listen (this is from an interview with CNBC on Wednesday):

(If the video does not load, please refresh your page – full clip here

“Strangely enough, it’s going to depend in large part on the stock market”, Greenspan said, when asked by Sara Eisen about the economic outlook for the remainder of 2019.

“We underestimate the wealth effect on the economy and these type of volatile stock market moves – it has an impact which I don’t think we fully understand”, he added.

That’s correct. And, indeed, various banks including Goldman have warned that the biggest risk from the trade war is not tied to any mechanical impact from the tariffs or retaliatory measures, but rather to the financial conditions impulse from falling stock prices and a stronger dollar.

One person who is starting to learn all of this the hard way is the President of the United States, although the osmosis that undoubtedly takes place during months like May and August isn’t yet manifesting itself in more predictable trade policy, that’s for sure.

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2 thoughts on “Alan Greenspan: The Fate Of The Economy In 2019 Depends On The Stock Market

  1. If we are going to have a stable Economic system that sustains over time there has to be enough flexibility to accommodate changing times . Random manipulation as well as the co-opting of power by one group or the other does not enhance the credibility of the system. The war between the Trump faction and the Central Banks and Fed is symptomatic of of a system overdue on it’s 50,000 mile maintenance checkup…..

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