by Andrew Houghton and Nick Atkeson 05/01/08
Ben Bernanke has demonstrated his ingenuity and willingness to innovate in order to bring order and liquidity to the markets a few times during the current credit crunch.
After being initially vilified for having waited too long to begin to add liquidity to the markets, once he began, he did so swiftly and in a variety of ways. His credibility rose, too, as he introduced various term lending facilities and then increased their size and scope.
Given his demonstrated ability to understand and address some of the most complex and interrelated problems our financial markets have ever seen, one would have thought that the market would have taken the time to evaluate the language of the Fed's statement after yesterday's 25-basis-point reduction in both the Fed Funds and Discount rates a little more closely.
Instead, because the accompanying statement did not contain the words "The Fed will now pause cutting rates," the market sold off and the dollar/commodity trade reversed its most recent decline.
Ben Bernanke is an academic by trade, not a market practitioner; he is also not the kind of person that speaks in New York Post-style headlines. His meetings at the Fed are heard to have an almost-collegial air. Topics are raised and discussed with the goal of reaching consensus so that the resulting decision represents, in some way, the input of all who participated.
The current schedule of Fed meetings creates an unusual 8 week gap between Tuesday and Wednesday of this week and the next gathering. There is an implicit pause in the schedule alone. Considering, as well, the drubbing he got for not acting quickly enough earlier in this crisis, it is understandable that Mr. Bernanke did not want the language to appear as if he'd thought he'd done enough and was headed off to the Caribbean for a month or two. Does the market really believe that should another Bear Stearns (BSC) event occur that the Fed would not race to the rescue like it has recently?
The market has shown some of the worst that human nature has to offer during this crisis. First denying that the problem existed and then placing blame everywhere but where it belonged. Now that we are close to seeing the light at the end of the tunnel, the sentiment seems to be somewhere between "it never happened" and "we could have fixed it ourselves." That the first of these statements is obviously incorrect should give the proper perspective on the second.
The move higher in the S&P 500 (SPX) that began with the March 17 lows was not damaged by the market's precocious reaction to the Fed's language yesterday. The credit markets suggest that new long equity positions should be established in a number of consumer-related names and one or two in the auto industry supply chain. Shorts were placed in some basic material names and longs were sold in the energy, chemical and insurance areas.
The financials, insurance and homebuilders continue to exhibit the kind of volatility that prevents a major representation in those in our portfolio. This might change after the market realizes that Ben is, in fact, pausing.
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