World Week Ahead: Perception sets the agenda
By Timothy Moore
Aug. 29 (BusinessDesk) - It’s a case of what has been implied, reading between the lines and hearing what one wants. In other words, bet on equities to rally this week for no real particular reason.
For weeks, investors have been positioning for a fresh round of asset buying by the U.S. Federal Reserve even as members of the bank’s policymaking committee have made it clear that there’s a widening of opinion on how to proceed.
On Friday, Ben Bernanke subtly and yet assuredly offered hope. He didn’t say he was going to buy more Treasuries or signal a shift in the portfolio that he has accumulated in the last few years. And he did so without the harsh rhetoric chosen by his critics, in particular the governor of Texas. Bernanke enhanced his credibility.
In a speech to global central bankers in Jackson Hole, Wyoming, there was no mistake. While Bernanke wasn’t going to do anything immediately, he wasn’t shutting the door either. It was presidential. He hasn’t yielded any power.
“Notwithstanding the trauma of the crisis and the recession, the U.S. economy remains the largest in the world, with a highly diverse mix of industries and a degree of international competitiveness that, if anything, has improved in recent years.
“Our economy retains its traditional advantages of a strong market orientation, a robust entrepreneurial culture, and flexible capital and labour markets. And our country remains a technological leader, with many of the world's leading research universities and the highest spending on research and development of any nation.”
However Bernanke made it clear that neither the Fed nor he can save the U.S. economy. The mess represented in the country’s fiscal position dates back several decades - a good reason for downgrading a credit rating even though the messenger in this case did so with extreme clumsiness to say the least.
The U.S. government’s trillion-dollar-a-year deficit reflects countless flawed decisions by lawmakers, an unwillingness to correct them and a short-term bet by everyone that the future will somehow be better because that’s how it’s supposed to be.
“The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects,” according to Bernanke’s speech notes. “To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.”
In other words, the Fed can’t continue to bail out poor policymaking. So stop bickering and get to work. It’s a good message for Bernanke to put forward because no one is listening on either side of the aisle in Congress. The rhetoric gets worse by the day and heading toward the 2012 presidential election the likelihood of compromise appears a false hope.
“As I have emphasised on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage,” Bernanke said.
Yet investors can’t help themselves. Rather than hammering equities, Wall Street rallied on Friday because Bernanke held open the door for future action - as early as next month. The rally was a sign of hope during a dismal month; so far in August, the Dow Jones Industrial Average has shed 7.1%, the Standard & Poor’s 500 Index has lost 8.9% and the Nasdaq Composite Index has dropped 10%.
September can’t arrive soon enough and Bernanke has set the tone in advance.
First, Bernanke said the Fed still had the ability and willingness to act. Second, he said the Fed’s policy committee would meet for two days next month, instead of one, to give time for a more thorough discussion of how to proceed - holding out for some better economic data. The August jobs report is due at the end of this week.
The U.S. economy is healing but very slowly. There’s no indication that anyone thinks this will change significantly anytime soon. Bernanke says there will be setbacks but he’s not losing sleep over them.
Investors believe Bernanke will step in, when and if necessary. He’s done so and without hesitation in the past. His words have been backed by actions. As history has shown, perception often is far more compelling than action.