When former Federal Reserve Chairman Alan Greenspan saw the dramatic decline in Australian iron ore shipments last year, he immediately realized he had seen this movie before. It was in the early 1970s and the transition of America from a manufacturing economy to service-based one was moving into high gear.
Greenspan offered his insights on a wide array of topics on March 19 at an event sponsored by Charles Schwab & Co. for its clients (disclosure: I am one.) As someone who found his Greenspeak vocabulary from his Fed days frustrating, to put it kindly, it was refreshing to hear him talk candidly.
Greenspan called that nation the driving force of the 21st century and added that “we should all be appreciative of China.” (Tell that to an orange-haired presidential candidate.)
On the other hand, Greenspan pointed to bizarre and reckless behavior by China’s leaders that raise questions about their relationship with reality. “They were shocked when their stock market went down last year. No one else was,” the former Fed chairman said. “When they started to intervene in their stock market, I said, what a bunch of amateurs.”
On the subject of long-term levels of interest rates and returns on equities, Greenspan said he expected both asset classes to revert to their long-term historical means, which can be traced back to the 1870s. The idea that “suppressed interest rates” will hold at these levels is unlikely. “Human nature will take it back to normal levels,” Greenspan said.
Certain laws of financial economics are immutable and equity valuations are near where they were in 1869, he said.
Just look at long-term charts for economic expansions and recessions or bull and bear markets. Expansions and bull markets climb gradually for an extended period and then end suddenly and abruptly. Thankfully, recessions and bear markets typically don’t last very long, but they are painful when they occur.
That’s why fear trumps greed. Greenspan recalled speaking with sophisticated investors after the October 1987 stock market crash. People told him “it was the wrong time to sell but they did it anyway so they could sleep.”
Greenspan noted that lower rates of economic growth were predictable given the dramatic slowdown in labor force growth, which is approaching zero as more Americans retire. Since the recovery got underway in recent years, the U.S. economy has added about 200,000 jobs a month, but that number will decline, he predicted.
Besides labor force growth, the other component of GDP growth is productivity growth, which has been 0.5 percent to 1.0 percent in recent years—and economists remain perplexed as to why.