In Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, William A. Fleckenstein takes tough shots at the former Fed chairman. The hedge fund manager and writer of the online column Contrarian Chronicles studied transcripts of Fed meetings and Greenspan's congressional testimony, and tracked the market's moves. That is the basis for the critique he co-authored with Frederick Sheehan, published by a unit of McGraw-Hill (MHP), BusinessWeek's corporate parent. Contributing editor Christopher Farrell asked Fleckenstein how investors will fare during Ben Bernanke's regime.
Chapter headings like "How Wrong Can One Man Be?" make your opinion of Greenspan clear. What about Bernanke?
Bernanke is just a pure academic. He was almost predestined to be in over his head. When I looked at what he was saying on the Federal Open Market Committee, before he became chairman, it was clear he didn't understand what was going on. But then he was handed the big real estate bubble as chairman. He was doomed.
Many people believed Greenspan could be relied on to cut rates and bail out the financial markets when they ran into trouble. Is that the case with Bernanke?
I think the Bernanke Fed wanted to free itself from that at first. But it caved in pretty quickly. The belief is that the Fed can't let the stock market trade down. In the Greenspan era, markets could go up as much as they wanted, but they couldn't go down.... There was no penalty for taking excess risks.
Given your views on the Fed, what should an investor do?
A lot of investors think everything will be O.K. They don't understand how shaky an edifice has been created. I don't think it's possible for the Fed to solve the unwinding of credit. It's going to get worse.Paragraph This is a moment to take less risk. To race into stocks because they're down 20% from their highs—I don't think so.
The product investors should load up on is cash. You put yourself in a position to take advantage of things when the risk has been squeezed out. You might lose a little, but you put yourself in a position to win big. Let's say you get a 3% return on cash, and inflation is running 5%. But [eventually] say I can find stocks down 30% to 60%, and in two years they'll double in value.
What about betting against the dollar?
For the past four to five years, I have owned several foreign currencies. I have a core position in precious metals. You have to have a hedge against the markets' going bad.... My favorite [currency] at the moment is the Canadian dollar. They have a budget surplus, a balance-of-payments surplus, all the resources the world wants. I'm not sure I'd buy it at 99 cents to the U.S. dollar, but I feel more comfortable holding Canadian dollars than U.S. dollars.
Gold has a place in a portfolio as downside insurance. It's around $900 an ounce, up threefold in a few years. That price is a product of what the Fed has done. The Fed will print money no matter what, until the foreign currency market and the bond market say, "No more."
You've said inflation is springing up all over. So how about inflation-indexed bonds?
They're indexed to the Consumer Price Index, and the CPI is a cheat in the way it's calculated. Sometime in the next five years the bond market will price in a more accurate calculation of inflation. We'll see attractive rates then.