In Bernanke we Trust
Do you feel it too … The air of complacency that has engulfed financial markets and policy makers in the last month. With inflation falling and even the spectre of deflation now returning as a market meme as well as stubbornly weak growth, more stimulus and less concern about debt and deficits might of course seem warranted.
Still, two points have caught my attention in recent weeks. The first is the decisive push against austerity with the IMF, EU commission and Germany all seemingly content to allow the periphery more time. The second is the combination of two extraordinary headlines on Bloomberg in the past couple of weeks.
The first article refers to comments by GS’ CEO Lloyd C. Blankfein that he is getting a little worried about a back-up in interest rates. Specifically, he invoked 1994 as a comparison which, I am sure, gave many food for thought. Coupled with a research note from GS noting a “zero percent upside” for Spoos into year-end many investors and analysts were asking themselves whether the Illuminati knew something was coming.
Of course, before we put on our tin-foil hats, we should consider that the comments by Blankie were simply poor form. How dare he! In a world where investors are buying Australian banks as safe “dividend yield” havens, where Wal-Mart, Apple etc are financing themselves below the rate of inflation and where defensive stocks are going parabolic due to their assumed safe income stream, invoking 1994 is just unfair.
Fear not however; contrary to 1994 and the beginning of the Greenspan era, investors have complete faith in Bernanke.
Bond investors are gaining confidence that Federal Reserve Chairman Ben S. Bernanke will unwind the central bank’s unprecedented $3.3 trillion balance sheet without sparking a crash similar to 1994, when Alan Greenspan surprised the market by doubling benchmark lending rates in 12 months.
Mis-communications, policy error and lack of transparency were all ailments of the old Fed, but not the new. Now, I am not out to get central bankers here but I think it is important to understand why investors are so happy to trust Bernanke. More specifically … so far, they have made and are still making a lot of money on the back of Bernanke et al’s ZIRP induced global hunt for yield. I find it hard to believe that bond investors (and indeed any investor) would even contemplate that Bernanke suddenly turning off the faucet of free money. I mean, that after all would mean bankruptcy for them.
However, with equities continuing to defy a lacklustre economy and headlines about retail investors betting it all on Tesla next week’s FOMC minutes may cast some light on how worried the Fed is, if at all, about the dash for yield and other un-intended consequences of ZIRP and QE.
So, starting where I began with another Bloomberg headline extolling the rising confidence of the average American we should be positive that things are improving. However, the real test for asset prices and the economy comes with monetary policy normalisation. And despite what your mate with the Tesla stocks might tell you, I think investors are more than a little worried about the Fed taking its foot off the gas; and with good reason.