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Jackson Hole: Bernanke as a Magician
Aug. 23, 2011
This appeared on MarketWatch on August 23: Get Ready for a Jackson Hole Surprise. http://bit.ly/BernankeSurprise
After recent tough going in global markets and a raft of dismal economic reports, investors and institutions around the world are looking to the Tetons for Fed Chairman Ben Bernanke and the cavalry to ride to the rescue yet again.
This is no doubt true. The investment world really does await an announcement of an economic cure-all. But what can the Federal Reserve do that will restore the lost productivity? What can restore the weak recovery that never did get off the ground on Main Street? The world answers: "Federal Reserve digits." The investment desperately world wants more fiat money. Its plans call for fiat money. The world's experts are convinced that only a new round of fiat money can save this stock market.
Their faith is in magic: the magic of something (economic recovery) for nothing (cost-free digits).
As the Fed conclave begins this week, the question on everyone's mind is will it be, as Yogi Berra said, déjà vu all over again? And how can one position a portfolio of exchange-traded funds for either a "yea" or "nay" on more Fed action coming from Jackson Hole?
Proponents of a new round of quantitative easing say that the Fed will have to act to try to avert what could quickly become a double dip recession. Certainly the recent spate of dismal economic reports would indicate that the soft patch in this economy just got longer and softer.
Particularly dismal was last week's shocking decline in the Philadelphia Fed Index to -30.7 from a previous +3.2. This indicator has never been at this level without a recession going along with it, not to mention that it's the lowest reading in this indicator since March 2009.
How will Federal Reserve inflation reverse this? The FedFunds rate is at near zero. Fear of recession had driven down longer rates. What can additional monetary expansion accomplish? Businesses are not expanding. They are not borrowing. They haven't in two years. Why will another round of expansion persuade small business owners to borrow to expand?
On the other side of the debate, analysts point out that inflation is on the rise --which limits the Fed's options -- while the Fed, and Bernanke in particular, have become political targets of the recent statements and positions of presidential candidates Texas Gov. Rick Perry and Congressional members Ron Paul and Michelle Bachmann.
First, there is no price inflation. Second, there really is public criticism of the FED by people running for President. This has never happened in American history. It is a positive development. It puts Bernanke on the defensive.
So, on the one hand, the investing public believes in the FED, believes in digital salvation. These are the smart people. The voters to whom Perry, Paul, and Bachmann are appealing to have lost faith. Conclusion: the best and the brightest believe in magic. Common people know better.
This forebodes ill for the future of the country. The common people are not in charge and have not been ever since 1913.
Plus, a new round of quantitative easing is likely not to be met with approval from the emerging world, particularly China, or other large holders of U.S. Treasurys and U.S. dollar-denominated assets.
We can safely forget about them in a recession. They are mercantilists. They are stuck with their own programs of monetary inflation. They will continue to buy U.S. Treasury debt and European debt. They are trapped by their own policies of inflation and subsidies for the export sector. They can talk tough, the way Merkel talks tough. It's all for show.
To get an idea of what may happen, one needs only to look at the history of this Fed and its most recent statement. which said, "The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate ... It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate."
So, we are expected to believe that this statement is important. OK, I will now take him up on his challenge. I will look at the history of the press releases of the Federal Open Market Committee over the last five years.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
December 11, 2007 (the month the recession officially started)
The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.
But we are supposed to believe that the FOMC's most recent statement is significant. This is tea-leaf reading. This is tarot-card reading.
So with the U.S. and global economies approaching stall speed and very likely already in recession, it seems clear that the Fed won't be shy about trying to carry out their dual mandate regarding unemployment and inflation and that some sort of new monetary policy action will be coming in the near future.
What has the FED done for unemployment since 2009? As for price inflation, there isn't any to speak of.
Since the Fed can only change policy at their September meeting, at the earliest, Bernanke's speech this year at Jackson Hole is most likely going to hint at changing the composition of its assets towards longer-dated bonds and perhaps also increasing the size of its portfolio, as well.
Like what? Bond rates are falling, day after day. What can the FOMC do to reverse this? And why would it want to? On the other hand, it need do nothing to keep rates falling.
Global markets are desperately hoping for another helping hand from the Fed and so it could easily comply with a third round of quantitative easing or it could disappoint and not do anything.
I am sure he is right. Global markets are awaiting magic. Investors believe in magic. Green magic.
Either path will be a shock and surprise to the markets, and both paths carry risks. However, whatever happens, investors in exchange-traded funds can find ways in which to successfully position themselves regardless of the tactics deployed by the Federal Reserve this week or in the weeks and months ahead.
But how? To short stocks or go long? This is useless gibberish. It is what passes for sophisticated economic analysis today.
So as the world comes to Jackson Hole, only three things can be certain. Either the bulls or the bears will be surprised by Bernanke's speech, the outcome of this pivotal meeting will set the tone for markets over the next couple of months and there will be enormous opportunity for investors to seek profits using ETFs on the other side of "the Jackson Hole surprise."
There will be no surprise. There will be only Bernanke's patented droning speech outline: a survey of past history, a promise of nothing much, and reassurance that the FED is monitoring things. Same old, same old -- business as usual.
Whatever he says on Friday will be dissipated by the following Wednesday.
But what if the article is right? What if there is a big surprise? It will immediately be dubbed QE3. It will be an admission of defeat for QE2. It will be an admission that there is no exit strategy from the monetary base expansion since October 2008, contrary to Bernanke's assurances for three years. It will be an admission that the FED is trapped in endless digit-creation.
This will be cheered by investors and pundits. It will be hailed as the road to recovery.
All this is stage show. All this is theater. He could announce it today. But the world wants theater. It wants Bernanke playing Penn & Teller.
I wish he would play Teller: as silent as Harpo Marx.
It's not Penn & Teller. It's Siegfried and Roy. At some point, Bernanke is going to wind up like Roy. So is the economy.
The world is in the grip of a really silly idea: that the FOMC knows what it is doing and can fundamentally change the world economy for the better by increasing digits.
This is lunacy. Lunacy is in charge of governments all over the world. Lunacy is in charge of fund managers. They really do believe in magic. They really do believe Bernanke knows what he is doing.
The public is losing faith. This is a positive development. But it will not come soon enough to reverse prior FED policies on a pain-free basis.