Thursday, July 20, 2006

Psychic Investment Advisor...

Yes it is I, the psychic investment advisor here to amaze you with my incredible mental powers... Now, I will predict whether your portfolio made money or lost money yesterday.

First, I will need complete silence. I may be psychic, but I'm easily distracted.

Now I will ask you a few questions. Do you own Yahoo? No? Good, because that stock got hit like a Lebanese airport.

OK. Are you long anything? I mean, other than Yahoo? Stocks, bonds, gold, orange juice futures? ANYTHING? Yes? OK good. You had a great day yesterday.

Back to being serious for a moment. Seems like Ben Bernanke can't win. When he was sounding hawkish, market commentators were blaming him for causing volatility in the markets. Now I'm hearing a lot of people complain that he is being unclear about his intentions. Here is the problem with this line of thinking. The FOMC simply doesn't know what it should do next. My take on yesterday's commentary is that Bernanke and co. think they have pushed rates high enough, or almost high enough, to achieve price stability. With consumers spending looking weaker, its hard too see inflation accelerating from here. But here is the thing about economies. THEY'RE DYNAMIC!!!! There are literally thousands of variables interacting with each other impacting the U.S. economy. The Fed may be staffed with the world's best economists, but they still can't possibly predict exactly how any given monetary policy regime will ultimately effect the economy.

John Maynard Keynes once accused of inconsistency responded with "When the facts change, I change my mind. What do you do, sir?" We should afford Ben Bernanke the same grace.


Rederin said...

Merrill's weekly research piece was chastising the market (especially the stock market) for grossing over-examining and over-reacting to Bernanke's every word.

Interesting side-note, Merrill's reaction was one of, "Finally the Fed is seeing the picture. economy's weakening, the inflation is transitory and the output gap is still a reality." Whereas JP Morgan was incredulous saying, "How could he possibly be dovish when commodity prices are at all-time highs!" They yammered on about the "sacrifice ratio" being much higher today. I thought the 90's disproved the existence of things like the "sacrifice ratio!" What's next? Mercantilism?

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