Goldman’s $105 Oil Prediction a Little Too Slick

INTELLECTUAL CONSERVATIVE.COM ^ | APRIL 5, 2005 | NOEL SHEPPARD

[CHARLITE]

One day the public is going to wake up and realize that when analysts are telling them to buy things at all-time highs, it might be time to sell.

The day after a government report showed that crude oil inventories have risen to their highest levels since July 2002, the esteemed Wall Street brokerage firm, Goldman Sachs, released an analysis forecasting a continued increase in energy prices that could result in oil hitting $105 per barrel. As reported by Reuters:

"We believe oil markets may have entered the early stages of what we have referred to as a ‘super spike’ period -- a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return," Goldman's analysts wrote.

Oddly, according to Bloomberg, the Energy Department had this to say just 24 hours earlier:

“Stockpiles gained 5.4 million barrels, or 1.7 percent, to 314.7 million in the week ended March 25, the biggest increase since October, the report showed. Supplies are 9 percent higher than a year ago.”

This begs the question: Why would one of the most respected brokerage firms in the nation make such a prediction when the inventory data is suggesting the oil shortage that has been squeezing prices higher for the past twelve months seems to be waning?

Well, as the Chicago Board of Options Exchange Oil Index indicates, energy stocks have been going almost straight up since May 2003. In fact, this index has risen by more than 100% during this period. This compares to only a 33% increase in the S&P 500, and about a 45% rise in the NASDAQ 100.

What this means is that energy stocks have been the most exciting investment game on Wall Street for the past two years. Moreover, just look at what they’ve done so far this year -- up an amazing 18%. By contrast, the S&P 500 is down 2.5%, and the NASDAQ is down 8%.

Given this, if you ran a brokerage firm, would you want this party to end? Wouldn’t you do anything within your power to extend the merriment as long as possible?

To better understand just how hot energy stocks have been of late, and why securities companies across the globe have such a vested interest in keeping oil prices from falling, one only needs to look at the frenzy for oil related initial public offerings that has occurred in England recently. According to an article published by Bloomberg a few weeks ago:

On March 14, Afren Plc., a new oil and gas company, listed its shares on the London exchange at 20 pence each. By lunchtime, they had jumped to more than 56 pence, almost tripling in just a few hours.”

White Nile is an exploration company set up by the former England cricket star Phil Edmonds. Listed on the London market at the start of February, the shares increased more than 11-fold in a week before being suspended.”

Centurion Energy International Inc., which develops oil assets in Tunisia, has seen its share price rise from just 52 pence in 2003 to a high of 780 pence last month.

Sound a bit like what was happening to Internet, dot-com, and technology stocks in the first quarter of 2000? Do you remember what brokerage firms and their analysts were saying then? These stocks were all going to just keep going higher, and higher, and higher, right?

Well, ladies and gentlemen, Caveat Emptor: The time has come for Americans to be fully educated as to how the brokerage community works.

Having been employed by one of Goldman Sachs’ major competitors for eight years, I know full well that the primary modus operandi of such firms is to sell product. Period. And, the easiest product to sell is that which is already in the news.

Think back to the first quarter of 2000. Why was it so easy for brokerage firms to suck innocent and inexperienced investors into technology stocks as they were not only reaching their peaks, but trading at levels that equities never had in our nation’s history?

Well, because every day, newspapers and television stations would proudly broadcast the new high the NASDAQ had hit. And, they would talk about the new IPO that had just come to market, and how it had quadrupled on its first day of trading.

So, when a high-profile analyst from a high-profile firm came out and raised his price target for XYZ.com, the unwitting masses couldn’t get to their phones or computers fast enough to jump in headfirst.

The same thing is going on right now in energy stocks. On a daily basis, the public is being bombarded with talk of $3 gas, and pending rolling blackouts. So, when a high-profile firm like Goldman Sachs comes out with a $105 per barrel oil prediction, it shouldn’t be surprising that the CBOE Oil Index jumped by 1.3% on the announcement.

For myself, I can only hope that the public is going to one day wake up and realize that when analysts are telling them to buy things at all-time highs, it might be time to sell.

Noel Sheppard is a business owner, economist, and writer residing in Northern California.

Comments: slep@danvillebusinesscenter.com

[nicollo]

Yeah, but, the point here is, it's all in the timing.

(Oh, and the '29 tightening wouldn't have been necessary but for the '27/28 loosening... Choose your poison.)

[Only Waxing]

Well, I wouldn't call this a flat yield curve. Right now, there's basically 200bps between short and long rates. That's not flat. That's actually pretty steep for this late into a recovery. With that much of a spread, banks have a lot of profitability with all of their loan rates thereby exacerbating the real estate expansion.

Taking this a step further, one of the problems in the mortgage market right now is the low bill rates making adjustable negative amortization loans so popular. To really cool this real estate market off, the Fed needs MUCH higher short-term rates that scare people away from ARMs. Only then will this bubble stop being inflated.

[cdrw]

Keep in mind that short term interest rates ( the only ones the Fed controls) have been WAY artificially low since the stock market bubble burst. The Fed was quaking in its boots about possible deflation so it decided to err on the side of inflationary stimulus. They probably prevented a substantial economic crash in the wake of the Internet bubble coming apart. But they have been printing money (keeping interest rates artificially low) for a long time now. Printing excess money is the source of ALL inflation.

So here we sit with short term interest rates lower than current inflation and oil prices going through the roof. You may recall that when oil prices spiked during the embargo in the 70's, Nixon took us off the gold standard and the fed printed money (lowered interest rates) in an attempt to counter the negative effect of higher oil. They just made the problem worse and we wound up with huge inflation that required huge interest rates to keep us from going hyper-inflationary (remember Paul Volker?).

What the fed is doing right now is not "tightening" per se. They are simply removing the stimulus they have been applying since the bubble burst. This stimulus SHOULD BE REMOVED in the face of higher oil prices lest we repeat the mistakes of the 70's and return to 17% interest rates, 10% inflation and huge unemployment. They are not applying the brakes to the economy - they are taking their foot off the accelerator. It can easily take a year for the impact of monetary policy to work its way into the economy - so if they wait until inflation is kicking our butts, it will be way too late.

[Only Waxing]

Largely agree. However, the problem the Fed has here is that they want the dollar to stay down. Remember, there are likely two reasons the Fed has kept the foot on the accelerator this long -- to keep real estate strong, and keep the dollar down. Now, they clearly are concerned about how out of control housing has gone in some areas of the country, and are worried about inflation a bit. However, they don't want to worsen the trade deficit by creating a rally in the dollar.

Quite a conundrum. Their solution -- slow but steady removal of the easing. To this point, they've accomplished their goal of not starting a huge dollar rally, even though it looks like it's bottomed. Unfortunately, they haven't stopped the housing bubble yet.

[cdrw]

I agree. The money they print always finds its way in somehow and, in this case, it was the real estate market. The nice thing about real estate, unlike stocks, is that everyone has to live somewhere. Real Estate drags a lot of jobs and income along with it so they compensated for the high-tech losses by boosting real estate.

I suspect they are trying to "stabilize" things with respect to the dollar and inflationary expectations. A Dollar in free fall would trash our financial markets ( I mean real free fall, not the steady down trending activity we've been seeing). The global media has been in a dollar frenzy lately with all the central banks announcing programs to diversify their foreign reserves (dump the declining dollar in favor of the Euro ...) If the Fed can get the dollar to flat-line and can also keep inflation in check by bringing short rates back up to the "neutral" position it would probably be a good thing.

Yup - conundrum - it's been one for a while now.

[Only Waxing]

Well, I believe the dollar bottomed months ago, and is now just in a stabilizing pattern. The universal bearishness was clearly a sign. When all four panelists on "The McLaughlin Group" including the host -- none of which are economists -- agree that the dollar is going lower, that's a sign of a sure bottom. :-)

With regard to real estate, certainly you are correct in your assessment that everybody has to live somewhere. However, much of the buying in the past twelve months in America's hot spots has been by investors looking to turn a quick profit, or earn rental income. When the market stops going up, the former investment scheme dies. And, when people are spending more per month than they can receive in rent after taxable considerations, this investment scenario also fails.

Asset bubbles are bad, for when they pop, they cause a huge loss of wealth. Now, one could argue that this wealth should never have been created in the first place, and the implosion just eliminates that excess. However, the problem with real estate versus stocks is that the dollars involved and the leverage are MUCH greater. For instance, stocks have margin requirements of at least 50%. By contrast, people today can get mortages with NO money down. Furthermore, the average home in the country is worth $250k. I guarantee you that in 2000, the average brokerage account in this nation was probably less than $25,000. As such, both the dollars and the debt involved when this bubble bursts are significantly more vast than when the tech bubble imploded.

Something that people seemed to ignore after the stock bubble burst was the component of the economy during the late 90's that was exclusively caused by this securities Ponzi. For instance, what would employment really have been without all the dollars created by the increase in securities prices? What would tax revenues have been, and, therefore, what would the budget surplus/deficit have been?

There is a fairly large part of our previous recovery that was falsely precipitated by a fallacious bull market in stocks that exaggerated economic results. Isn't the same thing happening today? How much of our current expansion is exclusively due to the explosion in real estate values, and the dollars that the consumer is spending based on the increase in their home equity? And, as our economy worsened once these stock market forces dissipated at the beginning of this decade, won't the same thing happen once the housing bubble bursts?

[jriemer]

>I discount that of those guys paying good money to radio stations to plug gold
I have`nt paid a lot of attention but since it settled back from that point has it been a very good investment other than for short term intervals?

One thing that has disturbed me since the late 1980s is the fact that most conservative talk show programs run advertisements hawking gold and gold coins like it's more essential than air and water. It's always the same pitch that gold is the only "sure investment in uncertain times" and other fear mongering crap. The gold market has been oscilating just as much as the Stock market over the same time.

DJIA / Gold Price (since 1885)
Note: Please ignore all the arrows & crap. The important thing is the ratio graph.

What the gold advertisers on conservative radio are doing is no different than GS shilling oil.

[Only Waxing]

On the one hand, I am and have been appalled by gold ads for decades as well. However, I can't equate this behavior with Goldman's announcement for a variety of reasons.

First, Goldman is one of the leading investment banks in the world. They command a great deal of respect within the brokerage community. Many of their analysts like Abby Joseph Cohen and Bob Hormats are almost idols. As such, unlike E.F. Hutton, when this company speaks, people listen.

Second, the average person is tremendously impacted by the price of oil and gas, but could care less about the value of gold. So, when a brokerage firm like this talks up its position in energy stocks by making a prediction like this, Americans are going to suffer as a result. People's buying decisions are going to be curtailed if energy prices head higher, which could result in companies laying folks off. By contrast, gold could double from here, and, for the most part, the masses and the economy would likely be unaffected.

Finally, gold is a commodity. As such, it goes up, and goes down like any other commodity. This means that there are times when gold does well, and times when it doesn't. However, gold has gone from about $260 to almost $460 in the past four years. That's about a 75% return. Is that bad?

Don't get me wrong, I'm not a gold bull, and have never owned it as an investment. But, if Goldman really was just issuing this report to talk up its position in oil and energy stocks, this is almost evil in how it affects Americans and our economy. By contrast, gold and gold coin dealers are just trying to sell investment products like any other investment house.

[Only Waxing]

One more thing: When a company advertises gold and gold coins, it is transparent to the viewer or listener that this is indeed an ad. As such, most people can come to the conclusion that the opinions being expressed in the ad are specifically designed to get the viewer or listener to purchase the product being recommended.

By contrast, what Goldman did last Thursday has no such transparency. Few Americans likely made the connection that this might be a brokerage firm trying to push up assets that it owns, or keep the bull-market in energy stocks going. Just look at how oil and gas responded to this announcement, as well as the rumors that something was going to be released.

Last Wednesday morning, oil was down to $52, and wholesale unleaded gas was at $1.56/gallon. By Friday, just a day after Goldman's announcement, and two days after the rumors of this pending announcement were likely being disseminated to Goldman's top clients, oil was over $57 (a 10% increase), and gas was at $1.73 (a 12% increase). That's called moving the market. Do the companies hawking gold and gold coins on TV and radio have this kind of impact? Not even close.

Finally, did you consider the possibility that this was a brokerage firm talking up its position BEFORE you saw this article. I didn't see any articles like this one in the Wall Street Journal on Friday or over the weekend. As such, what percentage of the American people at this point in time have any knowledge of the possible duplicity inherent in Goldman's announcement?

[cdrw]

We're pretty much on the same page. I'm with you on the dollar. The dollar has been undergoing an adjustment since mid-2001 (against the Euro, I don't track the trade weighted index). It's so obvious at this point that virtually everyone who wants to short the dollar has long since gone short. We could see that coming from a long way off with the bubble burst and 911. That adjustment won't continue forever, so, at some point, the market starts to discount whatever macro issues are going to happen next and all the big players hand off their positions to Johnny-come-lately types.

Asset bubbles - bad, very bad. You describe the situation very well. It is the drag-along economic activity combined with the asset feeding frenzy that creates the "virtuous cycle" that IS the bubble. Ed Yardeni used to provide a very nice web site that include data on household balance sheets, debt levels, income, just about everything I could think of. He went off line for a while and I've lost track of the data. If we are really seeing speculation start to drive the real estate market then we are all in it deep.

The last data I saw on household balance sheets (a year or two ago) indicated that people were surprisingly able to afford their mortgages. My HOPE is that business investment will recover in time to take some heat off the real estate market by providing an income (GDP) source beyond the interest rate induced housing "multiplier". The thing I take some comfort in regarding real estate, versus say stocks or tulips, is that the interest rate induced activity creates permanent, valuable, hard assets. The stock market bubble was pure vapor. Billions of dollars were literally being thrown at ideas based on the religion of the day ... new economy concept. Even the massive amounts of fiber that was run by telecom companies was predicated on enormous growth from all those vapor products.

As those overextended households at the margin get squeezed out of their homes, or as those REIT's get squeezed out of their apartment / condo complexes, and as prices drop, there is a large pool of dual income families who will buy houses and soften the blow. When the stock market started down there was no bottom. The NAZ lost something like 80% of its value because it was all vapor. The key question is 'just how big is that group at the margin?'. If they're not really the margin anymore then we're in big trouble. If they are indeed the margin then I have hope that the bulk of wage earners could absorb the assets of the weak and prevent a calamitous blow out.

[Only Waxing]

Well, I believe that the household debt-to-equity numbers are telling a rather convoluted story. Is this improvement caused by the consumer reducing his debt, or the value of his house going up? Obviously, it's the latter, for aggregate debt levels are increasing. So, this statistic only looks good as long as real estate values are escalating. However, once they start going down, debt-to-equity ratios will increase, correct?

To a certain extent, using household debt-to-equity ratios as a sign of consumer health in the middle of a real estate bubble is akin to looking at net worth data in March 2000. Aren't both numbers being dramatically skewed by the asset bubbles of their day?

[jriemer]

Last Wednesday morning, oil was down to $52, and wholesale unleaded gas was at $1.56/gallon. By Friday, just a day after Goldman's announcement, and two days after the rumors of this pending announcement were likely being disseminated to Goldman's top clients, oil was over $57 (a 10% increase), and gas was at $1.73 (a 12% increase). That's called moving the market. Do the companies hawking gold and gold coins on TV and radio have this kind of impact? Not even close.

IMHO, both Goldman and the gold advertisers are organizations pushing investment options that risky at best and manipulated at worst. Yes, one can make money in the oil and gold market but it's not a long term investment strategy and requires a lot of market timing in order to make money.

[cdrw]

Yes - debt to equity ratios are indeed skewed as you describe and would behave as you've predicted in a housing decline. The numbers I'm recalling (and it's lame that I don't have them so I'll look for them late tonight) were more like income versus debt service load and cost of living. They were much better than I expected them to be and they were independent of home values (except to the extent that home values and income levels are correlated through the mechanisms you've described in previous posts). Aggregate debt levels have been increasing for a very long time but then so has aggregate income.

I need to find my numbers.

People sell stocks in a flash of fear but they don't downgrade their homes unless they lose a job. They will just live in the house until they are forced out by inability to pay. Something has to trigger the job loss or the vicious cycle of people selling houses into a declining market will never start. That trigger could be an interest rate spike if inflationary expectations get out of hand. I suppose it could also be an external shock like oil was in the 70's. Rising interest rates would also squeeze floating rate mortgages independent of job loss but if the fed can prevent a spike by gradually raising short rates and thereby taming inflation expectations then the squeeze will be slow and the market will have time to adjust in an orderly fashion. It's the rapid run for the exits that we need to avoid.

I'll see if I can dig up the numbers I have in mind.

[T. Jefferson]

If Greenspan would have raised rates on January 2, 2000 maybe the NASDAQ wouldn't have gotten anywhere near 5000. Instead, he waited until February while stock prices continued the rise that had begun in November shortly after his Y2K easing.

Your memory is failing you. Greenspan starting raising rates in 1998 stating it was due to "irrational exuberance" in the markets. He should have been fired that day. His job description is not to destroy the market and create recessions. Greenspan continued to raise rates from late 98-2000. He should have been lowering the rates, we were in a deflationary spiral. He created the nasdaq bubble. Every rate raising was responded with higher prices. People dumped dow stocks which had debt and bought tech stocks which had none.So he's raise them again, and they'd go higher still. The crash catalyst was Clinton's attempted government takeover of MSFT. The day they lost the court case, the crash started. All Greenspan had to do was nothing, or lower rates and the world would have different.

[Schwaeky]

Well, much as it dismays me, I talked to someone in the know (can't say who) concerning oil prices and that given current infrastructure (refineries, open running wells and lack thereof where there is plenty of oil going unused), and they said that gas price et al are likely to continue at current levels. Highly disturbing to me for two reasons, one just a month after 9/11 and for some time thereafter I was paying under a dollar a gallon for gas, and the highest I saw it for sometime thereafter (till mid 2002 was about $1.35--and usally no more than $1.15., and for another I'm not a person where gas prices were just 8-10% of expenses, I'm not high up the food chain yet, and its taking a beating out of me. I've had to park the Cutlass and rely on the wife's car almost exclusively, because it was costing $18 a week before the most recent spikes. I am surprised that there haven't been more driveoffs than there have. Not endorsing that kind of behavior, just understand the desparation in some because hey, I'm starting to really feel the pinch, and when I can't enjoy my toy well it hits below the belt.

I hate even considering the idea of a government intervention to smooth the effects of this crisis, and yes for many people it is precisely that if you're sitting at home still comfortable driving your ford excursion v10 and not having a coronary each time you approach the pump, then you don't have it like me (I make $8.40 an hour my wife makes $7.80 an hour--I get some overtime from week to week, she never gets a full 40 hours at her job). But anyway, given that government is the PROBLEM in this case, my solution is part stroke of a pen, part bully pulpit to ram through congress... 1. Emergency suspension of all executive regulatory oversight on refinery construction (NEW construction not additons to existing ones). EO

2. Tax credits and amnesty/regulation amnesty for immediate investment into said refinery construction. Since only matters for generating revenue require congress, this could be done by EO to get it started, but would probably need eventual congressional approval.

3. Since the reason for shutting down many domestic wells a few years ago was that oil prices were so low (like $10-12 at one point)that it cost more to drill/pump domestic than they made, given present prices they'll still make a lot for each 110 gallon barrel, and give tax credits so to provide incentive to continue pumping even after prices drop.

4. Given what we spend on stupid social programs a year that do nothing, make a little sacrifice/investment in taking this energy noose off us by providing subsidies (direct grants for development, extended tax credits etc) to quickly build up the infrastructure we're lacking, as we're currently using 99.9% of our refinery capacity. would take congressional approval, but given dems propensity to spend we could call them out for refusing to reduce our dependence on foreign oil (actually not reducing, just owould take the noose off our necks in terms of capacity--because most countries have massive surplus capacity that is not even being used--if one refinery is shut down for them, no big deal, but for us it is a VERY big deal in terms of supply/price.

5. For the resourceful and innovative individual or business, immediately suspend ALL highway fuel tax on LP gas, compressed natural gas etc--since this is a small range of revenue stream, it wouldn't affect much. EO would work fine here to get the process rolling, but approval would be preferable (executive branch could just refuse to collect it though).

6. suspend all regulatory (read: ATF) strings that prevent one from home producing alcohol as a vehicluar fuel. It is proven that 70-85% alcohol to 30-15% gasoline is perfectly safe even in carbureted cars w/o adverse affects, so let people produce their own fuel energy using a renewable source, or be less taxing on a non-renewable source EO

7. Since it has been done before for producing fuel for internal combustion engines, and science no doubt could take care of its previous shortcomings, use the power of the marketplace (primed by subsidies if need be to get started) to use our neverending supply of coal to produce synthetic fuel the way the Germans did in WW2 for their fuel demands--starting out with NO fuel tax to begin with, to keep prices low to turn the situation around. marketplace, combined with EO

8. if we're going to look at combustible fuel sources to use, lets also look at hydrogen peroxide (no not the 10% solution of it in the bottles from the pharmacy either) powered motors... That can be used as a hydrogen source or in an internal combustion engine (as it is just as flamable as gasseous hydrogen, and more over, has oxygen in it to burn as well in equal parts, eliminating the need for a carb or plenum. The Japanese used H2O2 motors in their mini subs during world war II.--important especailly in an environment where oxygen independence is essential.. and they were powerful too, generating almost 2000 hp on a one or two man mini sub. marketplace

There's a combination there of ideas involving de-regulation/tax amnesty, and granted some subsidy type programs. But given how much money is wasted in a calendar year on useless programs, why not use some on something that could turn the situation around.. I dunno about ya'll but I REFUSE to accept $2.00+ per gallon prices for gasoline as the new reality. I know i know, adjusted for inflation it is still quite cheap, but it has been cheaper in recent years such that in the late 70s early 80s dollars we'd be paying THIRTY cents a gallon at those rates!!!! I can accept inflation elsewhere homes cars themselves, consumer goods, but fuel is one area I won't, and neither will many others. Heck I bet a handful of the Freepers on here have already started to protest by driving off. I won't but I don't blame ya'll.

[The Great Yazoo]

Great post!

But even on Free Republic, too many people have the idea that the government is the solution to this problem or that problem and that the government is gotta fix things by stepping in and doing things and telling people what to do. All this notwithstanding that government hasn't yet done anything competently since government was first established.

[Only Waxing]

Again, we're very much on the same page. Actually, people might think we're the same person with different monikers having a psychotic discussion. :-)

I've seen those income to debt service numbers. They are strong. Of course, my concern here would be the percentage of ARMs that are currently out there, and how this stat will be impacted by rising monthly payments as rates head higher. Clearly, this is a huge issue.

I also agree with your jobs statement. Historically, real estate declines are precipitated by huge job dislocations. This was certainly the case during the 1990-1994 real estate bear market when our nation lost jobs in defense and all related industries, as well as in S&Ls. At this point, there is no reason to believe that such dislocations are imminent.

However, much of the home purchases in the past three years in America's hot spots are second homes, and investment properties that the owner does not occupy. As such, with higher interests, debt service, and property taxes, if appreciation begins to slow or cease, will these folks be forced to sell regardless of their employment condition?

[Only Waxing]

Actually, my memory is quite good, thank you very much. For instance, Mr. Greenspan made his irrational exuberance remarks in 1996, NOT 1998:

http://www.pbs.org/newshour/bb/economy/december96/greenspan_12-6.html

That said, my point was that even though the economy was clearly overheating -- your suggestion that we were deflating during this period is inaccurate -- and the tech bubble was pumping up, Mr. Greenspan chose not to raise rates in December of 1999 due to Y2K fears, and didn't raise them at the January meeting either. Instead, he waited until February of 2000 to continue the tightening that had begun a few years earlier. My belief is that if he had raised rates immediately in January -- maybe by a half a point -- the last 2000 points of the NASDAQ may never have happened.

Regardless, I guess I'm having a hard time understanding your logic. Are you suggesting that the Fed raising rates in the late 90's caused the stock bubble? So, if rates had been lower, people would have been less inclined to buy stocks, and the tech bubble wouldn't have happened in your view?

As for whether the Fed should be concerned with stock valuations, as stocks are a leading economic indicator, certainly this should be a factor under their consideration. However, it probably isn't appropriate for the Fed chairman to be making such statements.

[oceanview]

it is. about $10-15 per bbl. but don't underestimate the power of the brokerage firms to pump it up, remember the Nasdaq 5000. In the absence of an affirmative step by government to break the bubble, prices will continue to rise. Perhaps not to $105, but even $75 would be devastating to the economy.

[T. Jefferson]

My point was that the economy was clearly overheating...

Ah, another follower of the fatally flawed Phillips Curve that Greenspan worships. The theory is a rapid growing economy creates inflation, hurts employment, and forces the fed to raise rates to stop it. It's dead wrong and ass backwards. Reagan inherited a negative growth rate, inflation at 21%. During his term, as the GDP skyrocketed, inflation, unemployment and interest rates shrank 50%, causing the market to double. Thank God Greenspan wasn't there with his Phillips Curve, he would have been raising rates and destroying the economy. Actually Greenie showed up late August of 87, immediately started raising rates screaming inflation, rumors spread the dollar would be floated, and in 6 weeks we had the largest crash in history.

Inflation is price based. The US is perfectly capable of an 8% GDP without inflation pressures, but the fed is too blind to recognize it.

your suggestion that we were deflating during this period is inaccurate.

The same $50,000 supercomputer in 1990 could be built in 1996 for $5000. A $2000 computer in 1996 is worth $100 in 3 years. Does that sound like inflation? Tech is deflationary, and by definition lowers prices on everything. The 90's economy was a case study for economic growth achieved by productivity gains from new technology, thus the huge market gains. Faster production, fewer employees needed, lower costs across the board. For example, car manufacturers for the first time in history were redesigning new vehicles top to bottom and releasing the new years model at LOWER prices than the previous year's model. This happened with the top selling cars in the US, the Accord, Maxima, on down the line. Transportation is 12% of our economy, tech is close to 25% of our economy. Combined, almost 40% of our 90's economy was in a deflationary cycle, yet Greenspan was screaming inflation, raising rates, and choking the economy, causing the recession.