What a $558K bottle of wine says about Fed

THE other day, a 73-year-old bottle of French Burgundy sold at an auction for $558,000. It had been expected to go for “just” $32,000.

A bottle of 1945 Romanée-Conti, another wine with an impressive French pedigree, sold for $496,000 a short while afterward.

Why am I mentioning this? Because it goes a long way toward explaining why the Federal Reserve is worried about inflation and raising interest rates even though the cost of living for consumer goods seems to be under control.

Back in the late 1990s, Fed chairman Alan Greenspan kept saying he was worried about inflation. But as I pointed out frequently then, it wasn’t regular inflation that had Greenspan concerned — not the increasing price of eggs or even the rising costs of health care and education.

No, Greenspan was really wor- ried about “asset” inflation — the rising stock market, in particular, where he found “irrational exuberance” among investors.

The ex-Fed head was coy about his concerns, but he eventually confessed that asset inflation was what really had him concerned.

Because the Fed had flooded the economy with liquidity in the late 1990s by keeping interest rates very low, there was too much money seeking goods and services. So the concern was that prices on everything were going to rise, especially since the stock market was bubbling.

Why was Greenspan so accommodative with his monetary policy? Well, there was the impeachment of President Clinton, which was scaring Washington and the markets.

And there was the Y2K hoax, which lots of people bought into. You might remember that the world’s computers were supposed to go blooey because they couldn’t handle the millennium change on Dec. 31, 1999.

And there was also the fact that Greenspan wanted to be liked by the politicians. So he pumped lots of money into the economy and tried to talk his way out of the predicament by warning investors that they were irrational.

And they were. Stock prices soon collapsed, and the dot-com bubble — which was caused because the economy was awash with cash that needed to be invested, even foolishly — burst. So, what are today’s similarities? There’s the wine I just mentioned, whose auction price was 17 times higher than the experts anticipated. And there is real estate that’s so high ordinary people can’t afford a house.

Fine art is breaking records by a lot because the rich don’t know what to do with their money. And there are cryptocurrencies like bitcoin that are the new dot-coms — worthless, yet bid up because people don’t have a better investment idea.

New Fed boss Jerome Powell hasn’t yet warned about irrational exuberance. While I’m not sitting in on his policymaking meetings, I’ll bet the Fed isn’t worrying about the price of eggs as much as the silly appreciations on luxury goods and the stock market.

When I was writing the daily stock market column for Reuters and The New York Times a long time ago, I had a rule.

I would say that the market went up or down for the reason that I knew every other newspaper used. I didn’t want to fight with my editors and, for my own sanity, I wanted my headline to be the same as everyone else’s.

But I’d also put the real reason for the market’s movement deeper in the story. That was the honest thing to do. So here goes a dose of honesty. Everyone said the Dow Jones industrial average rose 400-plusp points on Monday because of a couple of good corporate profit reports.

That’s nonsense. Stock prices rose because this is one of those options expiration weeks in which traders manipulate prices higher.

I’ve written about this many times. And you can go back and see the pattern for options expiration weeks.

And why did prices fall sharply Wednesday morning and rise later in the day? Because traders still had control of the market, and that’s where they wanted prices to be. A senior adviser to the Chinese government named Zheng Xinli told Market News late last week that China should look to switch its future foreign reserve investments away from US Treasury securities.

I’ve been telling you since before the start of Trump’s trade war with China that the Chinese government’s holdings of around $1.2 trillion in US government securities will be the last-resort weapon used by Beijing. Zheng is reportedly the former deputy director of the Policy Research Office of China’s Central Committee. So he’s no slouch.

These sorts of warnings have been coming for a while. And China seems to have reduced its purchases of US government bonds, although it doesn’t appear to have sold many that it already holds.

Why should you care about this? Because if China stops buying bonds or starts selling the ones it already owns, some other huge buyer will have to step forward to take its place — or interest rates in the US could go up a lot more than they already are.