Making Investing too Difficult: The Fed
Thirteen months ago there was a lot of publicity about how it was impossible for the Fed to achieve what many call a "soft landing" and we like to call the "glide path." There was some market research circulating showing that the Fed had an impossible problem. We showed the errors in that research in a mid-August 06 article. Mostly, the researchers reached far back in time to include the Great Depression as evidence that the modern Fed could not succeed. There was no notice or recognition of our observations at the time.
In February, we pointed out that following this flawed research was the biggest mistake of 2006.
Since August of last year the S&P and the Dow are up over 20%, the NASDAQ composite is up 28%, and the popular NASDAQ 100 is up about 36%.
This was an easy 25% to make as long as you did not fall into the big trap. We hope that regular readers joined us in celebrating a big day.
Is Everyone an Expert?
During this thirteen month period, the economy has experienced a rise in oil prices to new highs, the (expected) problems in the housing market, and the (somewhat unexpected) spillover into other credit markets. Anyone knowing these developments last August would have been even more negative about the chances that the Fed would succeed.
At some point the skeptics should look at the actual evidence. After many weeks of pontificating by those who purport to know more than Ben Bernanke, it is time to reconsider.
At "A Dash" we have an unusual viewpoint. Unlike everyone else, we do not claim to know more than the experts. Instead, we try to determine the real experts. Being modest can help your portfolio.
Your Favorite Pundit versus the Fed
Here are a number of relevant facts to help investors in finding the real experts:
- Your favorite pundit is not smarter than Ben Bernanke. He was a Professor at Princeton and he had front-line policy experience in government. None of the people that you are listening to could have gotten either one of these jobs. They write blogs or run hedge funds. They are good at parsing anecdotal information and making trading decisions. They are not experts at economic policy. If they claim to be good because they have not studied economics, that is a red flag.
- Your pundit does not have the colleagues of Ben Bernanke. Bernanke gets the advice of a group of Fed Governors who have similar credentials to his own. The pundit consults fellow bloggers and other pundits.
- Your guru does not have the staff of Ben Bernanke. Bernanke has about 350 economists at various Fed installations. They are all extremely intelligent, committed to what they do, and spend all of their time on specialized issues. No pundit comes close.
- Your pundit does not have access to advanced econometric models. Ben Bernanke does. That is why the pundits see everything in black and white and construct "rigorous analysis" that consists of long chains of binary effects. Real economists think in terms of supply and demand curves and look for marginal effects.
- Your pundit introduces all sorts of extraneous arguments with fancy names. He imputes motives to the Fed related to asset pricing, creating and pricking bubbles, moral hazard, the Greenspan or Bernanke put, and other considerations. The Fed, according to all reported accounts, does not attend to these issues. Their mission is to balance inflation expectations (not backward-looking data) and economic growth.
If you had a visit from an appliance repairman, or took your car into a mechanic, you would probably listen to the advice. Economic policy is much more challenging. Think about it. Where is your edge in listening to those without the strongest credentials?
Disrespect for the Fed
We are amazed — almost daily — by the barrage of Fed commentary by those with little expertise. Apparently it makes the pundit seem sophisticated to talk about "Greenie" or "Uncle Ben" or "Helicopter Ben" or such. Meanwhile, those who actually read and study the Fed have an advantage. It is not difficult. Pay attention to former Fed Governors like Wayne Angell, Laurence Meyer, (frequently cited here), and Robert McTeer. Tune out the others.
Pay attention to public speeches, which provide background and reasoning, but not actual policy.
The Fed deliberations and communications are much more transparent than in the past. This is not a Hollywood conspiracy with secret, unstated motives. Former Fed members write memoirs, write blogs, give speeches, and appear frequently on CNBC. Those of us who watch these sources for clues may seem naive to the pseudo-sophisticates who think they are smarter and wiser. In fact, these sources have provided a better insight into what is really happening.
Investors have a clear choice. The (consistently wrong) bearish pundits assert that the Fed is either panic-stricken and "behind the curve", caving in with an excessive rate reduction, or creating a new round of inflation. These pundits all agree that the Fed has it wrong — but their policy prescriptions are completely different!
Alternatively, one might conclude that the Fed has done a good job, and continues to do so. Their read on the economy is that it is still solid, but they accept the warning signals of problems. They are not merely looking at past data, and they are not focusing on a specific report. They are using a wide range of information — government reports, private reports, consultations with those in financial markets, and anecdotal evidence from Fed Districts — to look ahead.
The interest rate reduction — in their view — is pre-emptive, not reactionary.
The Fed is looking forward. If they continue in their successful path, there is plenty of opportunity ahead. Corporate earnings continue to beat estimates. Viewed on a forward earnings basis, major US equities are attractively valued.