 Misreading Bernanke
Todd Stein & Steven McIntyre
The Texas Hedge Report
October 25, 2005
Snippet Courtesy of www.texashedge.com
So it finally happened. On
a chilly Monday morning in October, news surfaced that the nomination
of Ben Bernanke as new Fed chairman was imminent. Immediately,
the stock market rallied as the selection of the Wall Street-friendly
Bernanke (who was the odds-on favorite) was seen as a positive
development. Likewise, the Dollar dropped slightly and the precious
metals edged up as most traders recalled Bernanke as the monetary
dove who once declared that the U.S. Government could prevent
deflation because the Fed/Treasury can "helicopter"
money in to stimulate the economy. Likewise, his musings about
"a technology called the printing press" have sent
hearts racing in today's momentum driven equity markets and emboldened
U.S. Dollar bears to know that however bad Greenspan was, Bernanke
is likely to be worse. You see, Greenie followed a central banking
legend in Paul Volcker, but at least the economy was fundamentally
sound when it was handed over in 1987. In contrast, Helicopter
Ben, whether he comprehends it or not, is inheriting a fundamentally
flawed economy in early 2006. The mind-numbingly large credit
and debt imbalances that have been stoked over Greenspan's 18
years will in all likelihood be unraveled sometime fairly early
on in Bernanke's tenure.
According to Briefing.com,
the Bernanke announcement "dispelled uncertainty over the
Fed Chairman's successor a couple of months earlier than investors
had anticipated, and Bernanke's stated intention of maintaining
continuity during the transition, as well as a confirmation that
Greenspan will remain Fed Head until the official end of his
18 year term in January, seemed to relieve stock investors."
So what are we to make of the
market's reaction to the Bernanke announcement? Not much. Actually,
we wouldn't be surprised if the investing public is misreading
Bernanke. Think about it, a new Fed Chairman's immediate priority
is always to establish credibility as a rock-solid central banker
willing to maintain political independence. It would be foolish
for Bernanke to give into political pressure early in his term
by reversing the Fed's direction on interest rates. Yet there
has been dissension among the ranks of FOMC members (votes haven't
been unanimous lately) and we really don't know what Bernanke
will do. Frankly, long-term investors shouldn't loose any sleep
over trying to predict interest rates over the short term. Instead,
investors should be focused on the consequences of Alan Greenspan
"the icon" being replaced by Ben Bernanke "the
unknown".
The most important element
of our financial system today is confidence. While he lacks
charisma, Alan Greenspan is the perfect confidence artist. He
is everything an all-powerful central banker should be: boring,
elderly, brainy, long-winded, and most importantly LUCKY. Easy
Al has been able to paper over all of the U.S.' problems over
the last decade or so and to date a drunken U.S. economy has
yet to feel the real hangover. There was Mexico in '94, Asian
Meltdown/LTCM in '98, Y2K, and the Internet bubble bursting/911
from '00-'02 where Greenspan (frightened at the thought of a
normal recession and the accompanying political fallout it might
bring) did everything in his power to try and avert the business
cycle. Whether it be by lowering the price of money (interest
rates) or ramping up the availability of credit through monetary
supply increases and the prompting of GSEs and banks to stimulate
lending, Alan Greenspan has perpetuated a recession-less economy
mentality that will ultimately lead to the mother of all recessions
when the giant U.S. real estate bubble he created pops slowing
our heavily-levered consumption-driven country and sparking a
nasty time in America. Bernanke will be the man in charge of
trying to put Humpty Dumpty back together again.
We would guess that 99% of
those working in the investment industry never take the time
to read through Greenspan's speeches on the Fed's Web Site.
Why should they? Substance is not nearly as important as delivery
is because body language and tonality make up 93% of communication.
As long as Americans can run on their treadmills with boring
old Greenspan on CNBC, confidence remains high. Even most members
of congress and the media remain utterly clueless about the effects
of monetary policy. The ill-winds blowing beneath the surface
of the U.S. economy largely go unnoticed. Apart from Bernie
Sanders (I-VT) and Ron Paul (R-TX), most congressmen fail to
make good use of Greenspan's appearances on Capitol Hill. Republicans
and Democrats will either ask elementary school level questions
or try to get the chairman to endorse (or reject) a particular
policy position.
This will all change once Bernanke
takes over. Bernanke, who is younger, speaks a lot less eloquently
than Greenspan. Bernanke has been interviewed on CNBC multiple
times over the last year, and looks shaky at best. We expect
him to struggle mightily when put under the microscope the next
time the markets turn lower with vengeance. Never before
has the Fed chairmanship changed hands with so many economic
headwinds blowing.
October 25, 2005
Todd Stein & Steven McIntyre
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