Monday , 25 September 2017


Timing of Bernanke’s Comments a Colossal Error – Here’s Why

Fed Chairman Ben Bernanke screwed up royally at his press conference on 19 Junebernanke 2013, as he announced that the Fed’s Open Market Committee had moved up its timetable for when it would beginning drawing down its QE 4.0 program. It’s difficult to think of how the Fed Chairman could have handled the situation any worse. Let me explain.

So says Ironman (http://politicalcalculations.blogspot.ca/) in edited excerpts from the original article* posted on RealClearMarkets.com entitled The Fed’s Real QE Mistake: Timing.  

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

The article goes on to say in further edited excerpts:

Bernanke could not have handled the situation any worse because of timing, not of when the announcement was made but, rather, how it changed the forward-looking focus of U.S. markets [specifically,] how far into the future the market’s most influential investors (the primary owners and majority shareholders of businesses, as well as the people who make decisions at major investment banks and financial firms) are looking because what they expect to happen at certain points in time in the future directly drives their investment decisions.  Those decisions, in turn, have tremendous influence over the prices of everything today.

Today’s prices are really the approximate net present value of the sustainable portion of the profits that might be realized at discrete points of time in the foreseeable future…[which] means that if you can determine what the expectations are for given points of time in the future, you can work out exactly how far forward into the future the markets have focused in setting today’s prices. With that knowledge, you can then work out how today’s prices will change based on changes in those future expectations.  While that may sound challenging, in reality, it’s complex, but not difficult to do.

For a stock market, the sustainable portion of profits that might be realized at discrete points of time are called “dividends”.  We can determine what the expectations are for a given point of time in the future by using dividend futures…to calculate the change that is anticipated in their year-over-year growth rate.  We make historic price, dividend and earnings data for the S&P 500 available for free so you can obtain that data as well.

S&P 500 Quarterly Cash Dividends per Share, 1988Q1 to 2013Q1, with Futures to 2014Q1

Since late-April/early-May 2013, the U.S. stock market, as represented by the S&P 500, had been focused on the future as given by the expectations associated with the first quarter of 2014. On Wednesday, 19 June 2013, at approximately 2:42, all that changed…. Bernanke forced the market’s most influential investors to shift their focus away from the 1st quarter of 2014 to, instead, focus on either the 3rd or 4th quarter of 2013, which now coincides with the timing of when the Fed will begin to taper off its QE 4.0 net acquisitions of U.S. Treasuries. 

Our chart below shows why the Fed’s choice of timing…is so poor, at least with respect to stock prices:

Change in Expected Growth Rates of Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, 10 January 2013 to 18 June 2013

We estimate that in transitioning from a forward-looking focus upon the first quarter of 2014 to, instead,

  • focus upon the 4th quarter of 2013…stock prices for the S&P 500 will fall on the order of 45-50%, after which stock prices will stabilize at the level prescribed by the expectations for dividends in 2013-Q4…
  • focus upon the 3rd quarter of 2013… stock prices for the S&P 500 will fall on the order of 15-20%

from their 18 June 2013 closing level of 1651.

The above analysis assumes that Bernanke’s comments succeed in shifting the forward looking focus of investors to an earlier future, which would mark a shift in the expectations for the fundamentals driving the market.

At this writing, it is too early to tell if such a fundamental shift has occurred, which is why we are presently classifying the market’s reaction as a noise event.  Depending upon how the Fed responds to the markets’ reaction, it is still possible at this writing to arrest and reverse the decline in stock prices.

Now, we’ve gone into such basics in this article because we know that Federal Reserve Chairman Ben Bernanke and his successor are going to read it and might like to finally learn a little bit about how things like stock prices actually work and then, maybe, do something that would shift the focus of investors back to the first quarter of 2014, in a way that ensures the Fed’s credibility is not damaged.

[Moreover,] we’re pretty sure the Chairman and his colleagues at the Fed don’t want to have to bear the full responsibility for having followed up one colossal error on their watch with another, marked by a second monster stock market rout during their tenure.  We just don’t think that too many people would want to be able to claim that they surpassed the accomplishments of Roy A. Young, Eugene Meyer and Marriner S. Eccles, the Fed chairmen who oversaw the formation of the Great Depression and the Great Recession of 1937-38.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.realclearmarkets.com/blog/off_the_street/2013/06/24/the_feds_real_qe_mistake_timing_100423.html (© RealClearMarkets 2013; Ironman is the alias of the blogger at Political Calculations, a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.)

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Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit and the dummy out of the pram last Thursday. The end of QE is seen as the beginning of the end of super-easy policy and potentially the first towards normalization. There is only one problem: it won’t happen. Here’s why. Read More »

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1 Comment

inflationprinting-money-300x199

Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit and the dummy out of the pram last Thursday. The end of QE is seen as the beginning of the end of super-easy policy and potentially the first towards normalization. There is only one problem: it won’t happen. Here’s why. Read More »

One comment

  1. I see Ben B.’s comments as Fiscal CYA, which he can fall back on in the future!