Fed Chairman Bernanke’s much anticipated ‘Jackson Hole’ speech is finally here. On Friday morning investors will be listening for hints that the Fed will undertake a further round of stimulus. My guess is that he’ll be short on specifics, leaving the markets to be disappointed. But, this is only a guess and investing on a hunch should be left to gamblers and the few short-term scalpers who can sufficiently manage the risk of market disappointment—this isn’t our investment strategy and shouldn’t be yours, either. As uncertain as I am about the details of the speech, I am equally as certain about some other related issues.
First, from all angles, we’re hearing that there isn’t much more for the Fed Chairman to do. A Washington Post link from my Thursday morning reads is titled, “At pivotal moment, Bernanke low on economic ammo”. Or, over the weekend in Barron’s, “Many economists believe that the Fed can’t do a whole lot more.” There are a countless number of examples echoing this consensus sentiment. To which I ask, have these economists or pundits even bothered reading Bernanke’s famous ‘Helicopter Ben’ speech in November of 2002?
If not, click here for the complete transcript (Federal Reserve Board: remarks by Governor Ben Bernanke) because Bernanke’s has been following this playbook to a tee. In the speech he says, “Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has ‘run out of ammunition’–that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory.” Bernanke goes on in the speech to detail the many ways in which additional stimulus can be applied even in a zero interest rate environment.
It is true that politics will have an impact on the Fed’s ultimate decision. However, Bernanke already knew this back in 2002. “The central bank’s inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy’s response to policy actions. Hence I agree that the situation is one to be avoided if possible,” said Bernanke. With mixed economic signals and the S&P hovering around 1400, there might be reason to delay the timing of the stimulus…for now.
But when markets and the economy start to deteriorate again, the button for stimulus will be pushed. Why? People just don’t like confrontation and will avoid it at all cost. We have referred to this in the past as the “Boogaard Effect” after the hockey brawler named Derek Boogaard. Years of fighting in the NHL lead to his accidental drug overdose. But beyond the physical toll inflicted on Boogaard during his years as a player, it really was the mental anguish that led to this man’s demise. Each night, Boogaard would have to bring his emotions up to such a level that he would be prepared for a confrontation. Boogaard’s trainer eloquently describes the emotional aspect of confrontation and the toll it takes on us in a NY Times interview (NY Times interview of Boogaard’s trainer).
We humans are just not built to endure conflict. Boogaard, a man who was seemingly equipped and willing to engage in confrontation, is proof of why people seek to avoid conflict at all costs.
Josh Brown, in a brilliant missive using similar psych 101 techniques, argues that additional stimulus is inevitable because he knows “wealthy white people.” And that, “wealthy white people, American or otherwise, can always be counted on to compromise at the last moment so as to preserve the status quo. And that compromise will typically involve whichever option is the least painful, even if it means that more work must be done in the future (the proverbial can-kick). And we know that euro printing, even if it means a bit of inflation for the German middle class to wrassle with, is probably worth it if the task is preserving the hegemony of the creditors, rentiers, landed gentry and aristocracy.”
I’ve said many times that this massive money printing is an economic science experiment with a questionable long term success rate. But the short term sugar high provided to markets is difficult to dispute. And given human nature, you should expect the Fed/EU to apply additional stimulus when being forced by financial markets. This should impact investment portfolio positioning because the stimulus will provide a floor to the markets for at least the near term, even given the backdrop of a simultaneous global deleveraging