When Ben Bernanke became chairman of the Federal Reserve in
2006, he promised a significant change. The Fed would be much more
"transparent" in letting markets and the public know more about its
inner workings, its concerns, its internal debates, its potential
decisions. He has certainly kept his promise.
But sometimes I yearn for the days of former Fed chairmen Paul
Volcker and Alan Greenspan, who revealed nothing of what the Fed
was thinking. Greenspan was particularly adept at befuddling even
Congressional committees with his famous "fed-speak" language that
left committee members and analysts asking afterwards, "Wha'd he
That approach of providing no transparency helped get the
economy through a lot of problems during their combined decades in
office. We only found out long afterward how worried the Fed had
been at various times, knowledge that no doubt would have resulted
in several panics had the Fed been transparent with its concerns at
How well has it worked out having the Fed providing more
transparency since 2006?
In February 2008, in the early stage of the 2008-2009 recession,
we saw Fed Chairman Bernanke and then Treasury Secretary Paulson in
televised Congressional hearings on the economy and financial
markets. You would think all participants would want to boost the
chances of their new rescue efforts working, by providing the
public with as much positive bias as possible.
But no, in the interest of full transparency, we had Bernanke
warning about how the Fed expected still more negative pressure
ahead from the housing collapse, worsening labor markets, a credit
crunch that may have still more shoes to drop, and revealing that
the Fed was also beginning to worry about the potential for rising
That was really brilliant. Spend big bucks on stimulus plans
aimed at boosting public confidence that more serious problems
could be averted, and then completely undermine the effort with
transparency that revealed still more worries in the Fed's
Since then the transparency has increased. The Fed's statements
after its FOMC meetings have become more revealing, the actual
minutes of the meetings are now released within a few weeks, and
this year Chairman Bernanke has begun holding a press conference
following the meetings to provide any lingering information or
questions not provided in the FOMC statement.
The result has been that over the last three years, markets have
been forced to focus not so much on the normal driving forces of
markets, the economy and earnings, but on what the Fed is worried
about, what its members are thinking, what tools it is discussing
that it could bring into play if needed, and what might trigger
potential market-moving action.
And Chairman Bernanke admitted in his press conference yesterday
that the Fed is targeting the stock market as a large part of its
effort to improve the employment picture. He seemed to agree that
QE1 and QE2 did not result in the additional liquidity going
directly into jobs and the economy, and QE3 may not either, but
that it will hopefully lower long-term interest rates, including
mortgage rates, and possibly increase asset prices. And he said,
"To the extent that the prices of homes begin to rise, consumers
will feel wealthier, they'll begin to feel more disposed to spend.
So house prices are one vehicle. . . . And stock prices - many
people own stocks directly or indirectly. The issue is whether
improving asset prices will make people more willing to spend."
One has to wonder.
If using interest rate cuts, and then QE1, QE2, and "operation
twist" to bring 30-year mortgage rates down to generational lows of
3.6% has not jump-started the housing market to any great extent,
would 3.2% make any meaningful difference? Mortgage rates do not
seem to be the problem for would-be home buyers. Tightened lending
practices, lack of jobs, and uncertainty about the future are the
Will the dramatic action have its apparent other desired result,
another leg up for the stock market. Or will it result in a
sell-off, given that expectation of the Fed action has pretty much
been factored in since the market's June low?
For investors, it was bad enough that the action alone indicated
the Fed believes the economy and threat of a global recession have
become so alarming that it could wait no longer and had to fire off
such a huge barrage of measures all at once, virtually emptying its
arsenal of meaningful weapons.
So the further uncertainties Chairman Bernanke felt compelled to
provide in his press conference were not needed, and may have done
more harm than good to the Fed's intentions.
Bernanke certainly did not take European Central Bank President
Draghi's positive and encouraging approach. In promising ECB
action, Draghi said "The ECB will do whatever it takes to save the
euro - and believe me it will be enough."
press conference, while saying the Fed's target is unemployment,
Chairman Bernanke kept repeating that the Fed's monetary action "is
not a panacea," that it will not solve the unemployment or slowing
economy problems, that it can only "provide some support," and that
further help would have to come from the fiscal side (Congress). He
also said several times in response to questions that "the Fed does
not have tools that are strong enough to solve the unemployment
The Fed's action would have a better chance of producing the
sustained positive market reaction the Fed apparently is after, if
the Fed had simply taken the action and shut-up. Chairman
Bernanke's penchant for "transparency" has caused enough problems
and uncertainties over the years since adopted. And it created
enough uncertainties again this time that a positive market
reaction is far from assured.
Meanwhile, I'm still liking our buy signal on gold and 20%
holding in [[GLD]], and sell signal on U.S. Treasury bonds, and 20%
holding in the ProShares Short 20-year bond ETF, symbol
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.
Update On Citigroup: A Winning Trade That Continues
To Move In The Right Direction