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Before modern technology canaries served as warning system for coal miners: If the canary died it meant that lethal toxins were in the air and coal miners had to run to exits. Like it or not, newly crowned Fed boss, Ben Bernanke, has been dragged into a coal mine by investors, and if Mr. Bernanke wants to avoid watching some of these investor’s chaotically scramble to the exits he needs to play dead and flap his wings.
Big Ben Event
Since early February April gold is down by more than 6%, March crude is off by 11.7%, the dollar index is up by nearly 4%, and US stocks have edged lower (intraday high/lows). This trend of US dollar stability and falling commodity prices wasn’t entirely unpredictable beforehand. Rather, weakness in the BDI index to end 2005 suggested that bubbling commodity prices were due for a correction (BDI vs.CRB). Moreover, the raging rally in precious metals was, potentially, given a lease on life thanks to what could be an overblown reaction to Iran developments in 2006. Nevertheless, that the hot money is locking in commodity gains and comfortably plowing into greenbacks ahead of Bernanke’s first testimony could be important.
The basic story goes that if Bernanke sounds extra hawkish the US dollar will firm, commodity prices will continue their downward spiral, and US stocks will remain in a funk. The alternative is that if Bernanke is extra dovish the dollar rally will be capped, commodity prices will quickly find support, and stocks will rally. While these two tales are easily understood – and have no doubt lead to a great deal of speculator positioning in recent sessions – they are not necessarily cut and dry forecasts for the aftermath of tomorrows Bernanke event. Rather, the most enviable outcome for policy makers would be as little market volatility post-Bernanke as possible.
Can Bernanke Sing The Song?
In the land of make believe Greenspan was a vigilant inflation fighter who also crazily printed money. Regardless of the contradiction, who do think helped create this land?
Despite his many shortcomings, Greenspan was a master at saying absolutely nothing with many words. Oddly enough, this trait sometimes helped Greenspan calm otherwise rowdy financial markets, and led to numerous instances of ‘buy the rumor sell the news’ type Greenspan events. While saying nothing – or trying to appease everyone – is by no means a rounded policy mandate, Bernanke would be well served to follow the Greenspan plan, at least for now.
There are those that believe Bernanke should give investors some much needed transparency (at least insofar as his language choice). What these idealists forget is that Bernanke’s words can have a large impact on the financial markets. Accordingly, if Mr. Bernanke wants to take a firm position on anything he had better be sure he knows where the rotating mountains of capital are going to land after his words are uttered. With the yield curve already inverted and potentially destabilizing imbalances seen in US deficit, trade, savings and housing prices, it is doubtful that even Bernanke has a clue about the immediate direction of Fed policy (which, incidentally, will be crafted by all voting Fed members, not just Bernanke). For that matter, with the Street already expecting another rate hike in late March, it should be remembered that any statements Bernanke makes could have an impact on interest rate expectations as far away as May (the FOMC meeting after March).
Bernanke Will Play Along
Unwilling to risk spooking some investors, look for Bernanke to say that inflation is under control but the Fed must remain vigilant against inflation, that the US economy is growing but threats to growth can be seen, that budget deficits are a concern but not a worry by historical standards, etc., etc. Boring yes. However, large movements in the financial markets ahead of Bernanke’s first testimony suggest that speculators have essentially taken up future positions against Bernanke’s vitals. This makes each word that much more vital for the near term movement in the financial markets.
Bernanke may be able to be more open and honest one day. He may even be able, one day, to integrate an interest rate targeting scheme that serves the Fed well. Unfortunately that day is not tomorrow. Rather, for his first testimony as Fed boss - and weeks before his first rate hike as Fed boss - Bernanke looks set to follow the Greenspan script. The plan being to say nothing so that no one runs to the exits.
As for the argument that Bernanke must prove that ‘he is an inflation-fighting super hawk’, Bloomberg’s Berry states that “Why anyone should doubt Bernanke's commitment to low inflation is a mystery”. What Mr. Berry neglects to mention is that Mr. Bernanke has previously made some candid and almost taboo comments (i.e. the Fed has a ‘printing press’), and that these comments have generally been dovish. With the price of gold already in rally mode thanks to the glut of liquidity in the marketplace, and Bernanke’s more recent comments relating to housing prices and trade deficits of the rosy rather than thorny variety, there is at least some reason to believe that Bernanke will be hesitant when taking away the punch bowl. Quite frankly, while no one wants Bernanke’s first spotlight to roil the markets, and equally disturbing outcome would be Bernanke acting as the investor’s favorite pet. With this in mind, look for Bernanke, the canary in a coal mine, to favor the play dead act a little bit.
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