ByPatrick J. O'Hare:
In a classic scene from the classic movie,
, Bill Murray's character, Carl Spackler, recounts for a young
caddie at the point of a pitchfork the time he carried the Dalai
Lama's golf bag (big hitter, the Lama).
Carl notes how chagrined he was when, at the end of the round,
the Dalai Lama did not tip him. He said, "Hey, Lama, hey, how about
a little something, you know, for the effort, you know?" According
to Carl, the Dalai Lama replied, "Oh, uh, there won't be any money,
but when you die, on your deathbed, you will receive total
consciousness." Looking at the fearful caddie forced to listen to
the story, Carl quips, "So I got that goin' for me… which is
As we fondly remember that scene, we see a strongconnection to
the equity market, to which we would assign the role of Carl, and
Ben Bernanke, to whom we would assign the role of the Dalai
In his speech at Jackson Hole today, Ben Bernanke basically
said, "there won't be any tip today, but on your deathbed, you will
receive total consciousness."
In more specific market parlance, the takeaway from the speech
is that QE3 is not a certainty, but if economic conditions warrant
additional accommodation, the Fed stands ready to provide it… which
the market thinks is nice.
All kidding aside, the highly anticipated speech from Jackson
Hole was mostly an academic exercise. The Fed chairman focused on
the history of monetary policy since late 2007 and called attention
to various studies that have addressed the Fed's unconventional
The conclusion, which was not absolute, was that "…a balanced
reading of the evidence supports the conclusion that central bank
securities purchases have provided meaningful support to the
economic recovery while mitigating deflationary risks."
The equity market suffered a knee-jerksell-off as headlines from
the speech hit the wires. The quick-strike interpretation by many
was that the market was disappointed there was not aclear cut
signal that QE3 is on the way soon. Those same people were left
scrambling to explain the rally that ensued only minutes later and
carried the market to new highs for the day.
Reading between the lines of the intraday action in a thinly
traded market is futile, particularly as we take into account too
that it is the last day of the month before a three-day weekend,
that Spain announced a "bad bank" plan, and that the ECB will hold
court next week.
What we learned from the 2012 Jackson Hole speech was more of
- The Federal Reserve, weighing the respective costs and
benefits of unconventional policy tools, will employ those tools
if it feels the benefits outweigh the costs.
- The hurdle for using nontraditional policies should be higher
than for traditional policies given their uncertain costs.
- There are limitations to monetary policy support as it cannot
achieve by itself what a broader and more balanced set of
economic policies might achieve (i.e. the chairman said it cannot
neutralize the fiscal and financial risks that the countryfaces,
as it cannot fine-tune economic outcomes).
- With stable inflation expectations, employment trends remain
the primary guidepost for the Federal Reserve as it assesses its
progress in meeting its dual mandate.
- The Federal Reserve is confident in its ability to manage an
exit strategy from its unconventional monetary policy.
- The Federal Reserve would like fiscal policymakers to get a
credible plan in place that sets the federal budget on a
sustainable trajectory in the medium and longerruns, while taking
care to avoid a sharp near-term fiscal contraction that could
endanger the recovery.
Saying the same thing over and over again gets the message
across, yet that does not guarantee the message being communicated
will be effective.
In 2009, the message that unconventional policy tools were being
employed was impactful because those tools were new and innovative.
In 2012, with the U.S. economy not even growing 2.0%, the message
that the same unconventional policy tools can still be used does
not have nearly the same impact.
That is partly owed to the fact that the unconventional tools
are now thought of as being conventional. In this regard, the
speech from Jackson Hole failed to offer any real accommodative
impact in our judgment because there was nothing for the market to
think of as being new and innovative. References to unconventional
policy approaches revolved around asset purchases and communication
policy. Been there, done that.
As discussed in our note, "The Irrelevance of QE3," monetary
policy will help preserve the status woe of subpar economic growth,
but it will not be the catalyst for sustained economic growth above
potential. The past three years have proven asmuch, and we are
concerned the equity market is putting too much faith in monetary
policy alone as a growth driver.
There is a growing risk that the equity market's faith in the
Federal Reserve and other central banks as market saviors will be
lost. This is a risk that should not go unappreciated as economies
around the globe slow and both revenue and earnings growth
Something else market participants should consider is that the
September 12-13 FOMC meeting comes and goes without a QE3
announcement. To be sure, it is not a done deal as many pundits
were suggesting only a short time ago. That does not mean the
equity market will unravel. Today's speech at least offered the tip
that the Fed will do more if necessary. That could be enough of a
tease that puts a floor of support under equity prices during
No one knows for certain what the future willbring -- not even
the Dalai Lama. There will be some interesting days ahead in the
near term with the ECB meeting (Sept. 6), Germany's high court
ruling on the constitutionality of the ESM (Sept. 12), the US
presidential election(Nov. 6 ), and the task of dealing with the
fiscal cliff (TBD).
In the face of those unknowns and weakening earnings trends, our
tip is to remain defensive.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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