Alan Greenspan passed away this week at the age of 100.
You never forget your first Fed chair.
For me, that was Alan Greenspan.
The reason Greenspan still matters isn’t because of who he was.
It’s because the investing lesson associated with his name is still shaping markets today.
For nearly 40 years, investors have operated under the assumption that if financial conditions become dangerous enough, policymakers will step in to keep the system functioning.
Whether you agree with that or not is beside the point.
The important question is whether that assumption remains true today.
When I first got into this business, there was no question what investors believed.
Greenspan felt like the most powerful man in the world.
If you’d asked me back then who mattered more to financial markets, the President of the United States or Alan Greenspan, I probably would’ve picked Greenspan. That’s how much influence he seemed to have.
I still remember when Ben Bernanke was getting ready to take over in 2006. Everybody had an opinion. What would the new Fed chair do? What would it mean for stocks? How would markets react?
Of course, we all had opinions.
Looking back, it’s pretty funny how confident we were.
None of us knew we were about to witness one of the most important financial events in modern history.
The banking system was loaded with leverage, risk had been building for years beneath the surface, and a chain reaction was about to begin that would reshape markets, Wall Street, and the global economy for decades to come.
If you’ve never seen the movie “Too Big To Fail,” it’s worth watching.
Paul Giamatti plays Ben Bernanke, and the movie does a great job showing how close the financial system came to breaking.
The Greenspan Put
Greenspan became Fed chair in August of 1987. Just two months later, he got his first real test.
On October 19, 1987, the stock market crashed. The Dow Jones Industrial Average fell more than 22% in a single day, still the largest one-day decline in history.
The next morning, Greenspan made it clear that the Federal Reserve stood ready to provide liquidity and support the financial system.
The market stabilized. The financial system survived. Investors never forgot it.
What many people forget is that the crash also marked the bottom. Less than two years later, stocks were making new all-time highs again.
Over the next decade, the market went on to gain more than 500%. The day that felt like a disaster turned out to be the beginning of a massive bull market.
Over the years, a pattern started to emerge.
Whenever markets faced a major threat, investors expected the Fed to step in if conditions became dangerous enough.
We saw it during the Long-Term Capital Management crisis in 1998. We saw it after the dot-com bubble burst.
Eventually investors gave this idea a name: “The Greenspan Put.”
The concept was simple. If things got bad enough, the Fed would likely do something.
Whether that was right or wrong was beside the point. Markets cared far more about what policymakers were likely to do than what anyone thought they should do.
Greenspan didn’t invent that idea.
The Federal Reserve had intervened during financial panics long before he arrived.
Arthur Burns helped stabilize credit markets after the Penn Central bankruptcy in 1970. Paul Volcker was involved in the rescue of Continental Illinois in 1984.
But Greenspan became the chairman most associated with rapid responses to market stress.
After the 1987 crash and later during the Long-Term Capital Management crisis in 1998, investors increasingly came to believe that the Fed would step in when financial conditions became dangerous enough.
The details were different every time.
Sometimes, the Fed cut rates. Sometimes, it injected liquidity into the banking system. Sometimes, it changed the rules altogether.
We don’t need to get lost in the technical details. The Fed has a lot of tools in its toolbox.
The important thing is that when markets froze up, policymakers repeatedly found ways to get money flowing again.
Greenspan became the face of that idea.
The idea that when markets became unstable, someone would be standing behind the curtain, ready to keep the financial system functioning.
Don’t Fight the Referee
One of the hardest lessons for investors to learn is that markets don’t care about our personal opinions.
You can believe the Federal Reserve should never intervene. You can believe markets should be left alone to sort themselves out. You can believe every bad investment deserves to fail and every bubble deserves to burst.
Maybe you’re right.
But that’s not really the question investors need to answer.
The question is what is most likely to happen.
For almost 40 years, the evidence has suggested that policymakers have very little interest in standing by while the financial system completely unravels.
The tools may change, but the goal is usually the same: keep the system functioning.
Could that change tomorrow?
Of course.
Maybe the next crisis comes and the Fed decides not to act. Maybe the White House decides it doesn’t care what happens to stock prices.
Maybe policymakers stand back and allow markets to fully clear without stepping in.
You can absolutely make that bet.
I just think investors should understand that’s the bet they’re making.
Today, there’s another force in the equation. In addition to what many investors still view as a “Fed Put,” there’s also what some have started calling the “Trump Put.”
Whether you agree with the administration or not is completely irrelevant. The reality is that President Trump pays attention to markets and views rising asset prices as a sign of success.
That doesn’t mean he controls markets. It doesn’t mean stocks can’t fall. It doesn’t mean every correction gets rescued.
But it does mean investors should pay attention to the incentives of the people making decisions.
As market participants, our job is not to argue with reality. Our job is to understand it.
Alan Greenspan was my first Fed chair.
Like a lot of young market participants coming up in the 1990s and early 2000s, he influenced the way I understood markets, whether I realized it at the time or not.
Looking back, I think that’s probably true for an entire generation of investors.
Maybe the belief in a “Fed Put” turns out to be wrong someday. Maybe the Fed decides not to act.
Maybe the White House stops caring about markets.
Maybe the next crisis looks completely different from every crisis that came before it.
You can absolutely make that bet.
But if you’re betting against that idea, it’s important to understand what you’re betting against.
Because for most of my career, policymakers have shown a remarkable willingness to step in when the stakes were high enough.
Whether you like that or not is beside the point.
Markets don’t care how we feel about it. They only care what happens next.
Alan Greenspan passed away this week at the age of 100.
You never forget your first Fed chair.
Rest in peace, Mr. Greenspan.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs