Attending last month’s Asset Manager Showcase (AMS) in Boston, I had the opportunity to hear many perspectives about what the financial markets are telling us about central bank policy and the global economy. Certainly, there is no shortage of voices coming out of America’s Fed.

In the wake of the financial crisis, it was understandable that then-chairman Ben Bernanke recognized that the Fed, having asked the American public for $700 million to bail out banks and AIG, needed to do some explaining. The Sphinx-like statements that Alan Greenspan used to issue in front of Congress were insufficient to satisfy a public that was angry and scared, in 2009.

When Bernanke asked a senator in 2008 what kind of response he was receiving about proposed TARP legislation, the senator responded that his constituents’ thinking was running about 50-50. “Fifty percent said ‘No,’ while the other 50% said, ‘Hell, no.’”

Bernanke is now enjoying a well-earned book tour. But what about the rest of the Fed’s Board of Governors?

Some, like David Ellison, portfolio manager of the Hennessy Large Cap Financial Fund, think the Fed’s open mouth policy has gone too far and is confusing the markets. “People at the Fed talk way too much,” Ellison remarked at the AMS event.

Among some Fed governors, it is almost as though they are taking off on their book tours before they leave their government jobs. Wave after wave of information eventually overwhelms even sophisticated investors.

Ever since the Fed under Paul Volcker slayed inflation in the early 1980s, the U.S. central banks have played the good guys for most of three decades, cutting interest rates far more frequently than raising them. Their indecision over a trivial 25 basis point rate increase pales in comparison to the crises that have faced previous Federal Reserve governors. Volcker himself actually received death threats.

Some think the smartest strategy current chair Janet Yellen could pursue would be to lower the central bank’s profile and raise rates sooner, not later. In the view of savvy longtime observers like Ellison, waiting to raise rates could translate into significant capital losses.

The areas that are most vulnerable are those where there has been lots of lending or equities with very high valuations. Companies like Tesla and Facebook have market capitalizations in the hundreds of billions and sell for about 10 and 30 times revenues, respectively. Losses in the $50 billion range are quite possible.


Evan Simonoff
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