Zeev's Turnips Patch-No Politics (ZEEV)

[Joe Stocks]

"Last April we drew attention to a Financial Times piece which discussed Federal Reserve officials’ worries of short term interest rates being so low that monetary policy would be rendered ineffective. The report went on to say that further “unconventional” policy measures might be used to offset this impending difficulty. At the time, we made educated guesses as to what these measures might entail and suggested that they would initially “remain covert providing that a sufficiently large critical mass of fund managers understood that there were support mechanisms at work in the market. The references to “unconventional measures” in the FT article help to create this “understanding.”
Such an implicit understanding on the part of these managers would facilitate their ability to trade on the back of periodic covert interventions, thereby supporting government objectives. In these circumstances, policy makers would likely do nothing to disavow such a belief (and might in fact quietly encourage it), since the herding dynamics of these portfolio managers would enhance the authorities’ objective of supporting the market. Only after this option has proved wanting would the authorities move to explicit intervention.

Why explicit? The public does not react to inferences and hidden coded messages by America’s leading policy makers in the way in which a professional fund manager well attuned to the vagaries of the market would. The vast majority of private investors react adaptively to historic price trends. If returns for the equity market continue to disappoint (as they generally have over the past 2 years), the adaptive expectations of the public in regard to their expected returns for equities will diminish, creating widespread redemptions and ongoing selling pressure. The belief in the efficacy of the Greenspan put will accordingly begin to dissipate. Mr. Greenspan has told us since his Jackson Hole speech in 1999 that if the incipient dynamics of panic and crash reoccur (and thereby further threaten equity wealth and, by extension, consumption) the Fed will respond, and this time with a more explicit and transparent rationale.”

Recent statements by the Chairman of the Federal Reserve, Alan Greenspan, and a prominent Federal Reserve governor, Ben S. Bernanke, suggest that we are at last in the final stages of this process.

Remainder of articles here:
http://www.prudentbear.com/internationalperspective.asp