The most controversial Federal Reserve Chairman in the 100-year history of the Federal Reserve spent two days testifying before Congress last week. In all probability it was Ben Bernanke's best and final chance to sit directly in front of elected officials and define his vision and legacy.
What did we learn? Not much, actually. According to Lee Munson, founder and CIO at Portfolio LLC, there was little reason to expect to glean new information from a man who has spent six years being, if anything, too transparent. Bernanke hasn't changed his tune in at least two years. He's trying to create jobs and will keep his foot on the stimulus gas pedal as long as inflation remains subdued. The only thing that changes with each Bernanke appearance is the reaction of financial markets.
"The key thing I'm noticing is that professional speculators as well as Main Street investors are not yet used to this level of transparency and I think it's disruptive," Munson says in the attached video.
Not that Bernanke is entirely to blame. He's a central banker not a psychotherapist. Having rejected the cagey obfuscation of his predecessors, Bernanke has attempted to remain willfully consistent. It's the markets that are manic depressive, not him.
Munson is as perplexed at the notion of making huge portfolio changes based on Bernanke's latest utterance. "When you already know the game-plan I find it bizarre that people are reacting to every little thing he says when there's no new information."
The Fed has given corporations free money but he can't make them hire new employees. Corporations as a whole are using low rates to stockpile cash. Other corporations, most notably Apple (AAPL), have used the low rates to issue huge amounts of debt for the purpose of buying back stock. It's a bit of financial alchemy that may briefly please shareholders, but increasing debt and reducing equity does nothing to create jobs unless you're an investment banker.
So what should investors do instead of lunging about maniacally based on every verbal tic of an outgoing bureaucrat?
Munson suggests being long bonds shorter in duration than the remarkably volatile 10-year Treasury (^TNX).
"Have less and less of those real long-term bonds because that's where the animal spirits are going to happen," he concludes. "Have bonds be a dampener of portfolio risk and not a way to try to play it."
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