The Investment U e-Letter: Issue #683
Wednesday, June 13, 2007

Alan Greenspan: An IU Exclusive My Private Meeting With the Former Fed Chairman
by Dr. Mark Skousen, Advisory Panelist, Investment U

Alan Greenspan, the former Fed chairman, was the world’s most powerful government leader from 1987 until 2006. He was paid a reported $8.5 million advance for his forthcoming book, The Age of Turbulence: Adventures in a New World - the second highest advance ever for a non-fiction book (Bill Clinton got $10 million).

Normally, one wouldn’t expect to pay such a handsome fee for a straight-laced economist and dry government official, but Greenspan promised to deliver some “shocking surprises” in his 640-page memoir due out in September.

The Greenspan Surprise was supposed to be saved until the final chapter, “The Delphic Future.” It’s about the future of the financial world, and the publisher is intentionally mysterious about its “blockbuster” content. But guess what? I think I know what it is

An Exclusive Interview with Alan Greenspan

Two weeks ago, I got a chance to hear Alan Greenspan at an exclusive meeting of book publishers in New York. He gave a private interview to a few hundred book publishers that was not open to the public. Tape recording of the interview was prohibited.

But by special arrangement, I was able to attend and get my subscribers an exclusive.

Greenspan was warned by his publisher not to spill the beans, but I guess he couldn’t help himself. (After all, what can one expect from a man who wrote all 640 pages in his bathtub?) The former Fed chairman revealed several incredible insights that could be extremely profitable

He candidly confessed that while he was the Fed chairman he deliberately obfuscated his remarks before congressional committees, calling it “Fedspeak.” He didn’t want to spook Wall Street, so he refused to answer certain questions. “I had to be careful not to upset the markets,” he said. (Wall Street went into a brief nosedive when he warned that investors suffered from “irrational exuberance” in 1996.)

Now, in his book, he was ready to speak his mind.

A Tale of Two Crises

In his interview, Greenspan admitted that the stock market crash on October 19, 1987, was an “extraordinary baptism of fire.” It came only months after becoming chairman under Reagan. “We were on the edge of a world-wide financial collapse,” he said. It was “scary.” The president of the New York Stock Exchange told him that he was about to close the world’s largest stock exchange, and the commodity exchanges in Chicago came close to closing down as well.

Greenspan acted decisively and promised a gigantic injection of cash and government credit to support the financial institutions, and that saved the day. But for the next 10 days, he said, “it was touch and go.”

The other major crisis was the terrorist attacks in New York and Washington in 2001. Again, Greenspan described the scene as “scary.” And again, under emergency powers, he instructed the Federal Reserve to inject new liquidity - some $40 billion worth - in a matter of days to stave off any panic selling. Still, the economy plummeted quickly and Greenspan and other government officials worried that the global financial economy would spiral out of control.

Greenspan didn’t admit this, but he panicked! He slashed interest rates sharply in 2002, and cut rates time and time again, all the way down to 1%. He feared that the United States was going the way of Japan - a long, drawn out slow-growth economy.

But then came the first of Greenspan’s “Surprises”

A Quick U.S. Recovery

In his talk, he said, “I was surprised how quickly the economy stabilized. I learned then that the economy was more flexible and resilient than I ever imagined.” It was good news for a change. The United States economy was no Japan! He realized that he had overreacted to the crisis by cutting interest rates too much, and in 2005-06, he rapidly raised rates.

If Greenspan were a betting man, he would have undoubtedly loaded up on stocks in 2003-04. But as Fed chairman, he couldn’t.

But what is his surprising forecast for 2007 and beyond? Here even I was shocked. Greenspan is apparently deeply worried about another case of “irrational exuberance” in the financial markets

Two revelations in particular stood out:

First, Greenspan is especially exuberant about the European Union, which he says “will move forward in a way that it never has” under the new leadership of French President Nicolas Sarkozy, Britain’s Gordon Brown, and Germany’s Angela Merkel. Greenspan noted that he had developed a friendship with Sarkozy, who served previously as France’s finance minister. “They will mold a new Europe,” commented Greenspan.

But more importantly, he raised a warning flag. “The biggest surprise to me is that real interest rates all over the world are at near historical lows!” Greenspan noted, in particular, that interest rates have “always” been in the double-digit range in developing countries, but now, suddenly, they have fallen to single digits in most nations.

In my mind, the fall in interest rates worldwide is the most surprising statement by Greenspan. It has driven stocks, both here and abroad, and real estate to new highs in the past year.

But will this unprecedented decline in real interest rates last? In my judgment, Greenspan was hedging his bets. We are already seeing the signs of higher interest rates in the past week.

Greenspan: Beware of “Black Swans!”

In the private publishers meeting, Greenspan sent a warning sign to all investors. He said that every crisis that the Fed faced in his 18 years as Fed chairman was “unpredictable.” The October 1987 crash, the 1997 Asian currency crisis, the 2001 terrorist attacks - they all were like “black swans,” to use Nassim Taleb’s term for unforeseeable events. Greenspan’s conclusion: “Because we cannot forecast these events, we must be prepared to deal with them when they occur.”

What does the Fed do to get prepared? I mentioned in a previous letter that Ben Bernanke, the current Fed chairman, has set up a “crisis center” to anticipate potential global problems, including a currency crisis, a housing collapse, another terrorist attack, or a sharp rise in inflation.

What should you do to get prepared? I say use protective stops to get you out in times of a stock market collapse; buy gold and silver coins for survival protection; and keep a large position in cash If Alan Greenspan and his successor Ben Bernanke are preparing for future “black swans,” maybe you should too.

Good investing,

Mark Skousen

Today’s Investment U Crib Sheet

Historically low interest rates, worldwide, have been coupled with stellar stock-market returns across the globe. Of the 23 “developed” markets MSCI Barra tracks, all but one (Japan) are up by 20% or more over the last 12 months. Here are the one-year returns in the top 5 markets, as of yesterday’s close:

Singapore +63.2%
Germany +47.8%
Denmark +46.6%
Sweden +46.2%
Finland +43.8%

The U.S. ranks 21st on the list, up 21%.

In our recent capital opportunity report, find out why tracking overseas cash flows “may be the only way to make any kind of real money any more.” Full story.

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• Inflation Targeting: What You’re Not Hearing about Ben Bernanke and How It Could Affect Your Portfolio
• Leading Economic Indicators: The #1 Indicator the Fed Fears the Most

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