The post-graduate: A tale of two Benjamins

Manley on the Street

Mr. Braddock: Ben, what are you doing?
Benjamin: Well, I would say that I’m just drifting…
Mr. Braddock: Why?
Benjamin: Well, it’s very comfortable just to drift…
Mr. Braddock: What was the point of all that hard work?
Benjamin: You got me.
The Graduate

Benjamin Bernanke is, in no way, to be confused with Benjamin Braddock, the eponymous character in the movie and book, The Graduate. The latter was without drive or direction. He had a vague sense of what he did not want and no real sense at all of what he did. He was open to frivolous suggestions and easily distracted.

Not so the chairman of our Federal Reserve (Fed). Dr. Bernanke’s words and actions, especially since October 2012, have made it clear that he is dedicated to and focused on the resurrection of the U.S. economy. He will do anything within his allotted powers (and a few things that may not have been specifically allotted to him) to attain that goal. He is in earnest, and he will not back down.

In that sense, last week’s surprise decision by the Fed not to reduce its quantitative easing program was no surprise at all. In my opinion, the chairman thought that a premature withdrawal of purchases ran the risk of undoing all of his hard work of the past several years.

I have believed that the Fed would err on the side of the angels in withdrawing fiscal stimulus from the economic mix. There was so much to be lost and so little to be gained by a premature withdrawal of support that I could not imagine Dr. Bernanke taking the risk. Last week’s events soundly reinforce that view and have profound implications for the capital markets over the next 6 to 18 months.

I think that the high standard of proof that any withdrawal of stimulus will not adversely affect the economy means that the sequence of future events will be: economic growth first, stimulus withdrawal later. To me, that means that the markets will see the good before the bad and that the good is a necessary precursor to any potentially damaging stimulus reduction. There may be waves of concern about tapering in the future, but those waves should be sequentially less severe.

Meanwhile, a number of other hobgoblins seem ready to pop up in the weeks ahead. Congress seems determined to make a scene over the budget. Syria is yet to be definitively resolved, and second-quarter earnings will be upon us within three weeks. There is a lot to worry about, and that is, perversely, comforting.

We will cross those bridges when we come to them. At least we now have a sense that when we do have to face those issues, we will be facing them with the Fed on our side and a chairman who, unlike the famous graduate above, knows precisely what he wants.

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