Alan Greenspan: Stock Prices are a Major Factor in Economic Activity
Alan Greenspan was on CNBC with Maria Bartiromo yesterday commenting on the odds of the sequestration, or automatic government spending cuts, occurring in a couple of weeks (March 1st deadline), and what effect it would have on the overall economy and stocks.
Greenspan said he had difficulty imagining a scenario where sequestration doesn’t happen, so he believed the odds were very high the automatic spending cuts would go into effect. Greenspan stated the “effect wouldn’t be horrendous, but it would be marked.”
Saying the stock market is the key player in economic growth at the moment, Greenspan highlighted the importance of the sequestration on stocks. Greenspan said the equity premium is probably the highest in U. S. history, meaning it will be very difficult to get stocks down; or the PE ratio is at a level were it can’t go down very much.
Greenspan said if the stock market can hold up through the sequestration, the effect on the economy would be minor.
Greenspan stated data shows that stocks are not only a leading indicator of economic activity, they are a major cause of it. According to Greenspan, six percent of the change in GDP results from changes in market values of stocks and homes. “The wealth effect is actually probably the reason why consumers are actually holding up more than one would expect given the payroll tax increase,” Greenspan said.
The interview continued with Greenspan commenting on the severity of the budget situation, what will be required to reduce the deficit, the “double whammy effect” of baby boomers beginning to retire, and his view of the economy currently.
Back in May 2012, Greenspan said he was certain interest rates would rise over the next 10 years and it could happen suddenly, and stocks were cheap [link].