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business newsIs Bernanke Too Big to Fail?
By
Josh Lipton Jan 25, 2010 12:45 pm
Strategists debate the central banker's future.
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Despite an all-out press attack over the weekend, the Wall Street Journal reports today that confirmation isn’t a done deal: 31 senators were publicly committed to voting for Mr. Bernanke, with 17 opposed, according to a Dow Jones Newswires survey.
The Senate is expected to vote before Mr. Bernanke's term expires on January 31.
Stock-pickers already had plenty of reasons to sweat, including President Barack Obama’s latest proposal to Volckerize lower Manhattan, leading to sell-offs in bellwether stocks like Goldman Sachs (GS) and Morgan Stanley (MS), both of which are falling under their 200-day moving averages for the first time in 10 months, notes Jon Markman of Markman Capital Insight.
Even more alarming for investors: a series of tightening moves out of China, which we detailed in our story, Eyeing the Bubble as China Pulls Back.
In response, investors decided to pocket profit, sending the Dow down 4.2% for the week. The iShares FTSE/Xinhua China 25 Index Fund (FXI), an exchange-traded fund that tracks Chinese companies traded in Hong Kong, took it hard on the chin, losing 11.2%. Volatility raced higher with the CBOE’s VIX, known as the “fear gauge,” shooting up 55%.
This morning, as we write, the Dow is up 0.33%.
Market pros we checked in with this morning noted that Bernanke is currently getting hammered from both sides of the political aisle. There's agreement that the Fed Head will ultimately win confirmation, they say, but also some historical precedent investors can use should the unexpected happen and our bearded banker find himself stripped of his title.Peter Boockvar, Equity Strategist at Miller Tabak, elaborates on the challenges Bernanke is juggling.
“He has problems everywhere,” Boockvar tells Minyanville. “On the Left, they criticize him for the regulatory mishaps and not spotting the crisis. On the Right, they blame him for this easy money policy. So he is getting it from both sides.”
Boockvar is a longtime critic of the Fed and he’s icy clear on how he'd vote, if he was walking the marbled halls on Capitol Hill.
“Bernanke should be fired,” he says. “People give him credit for acting how he did in 2009. But here is my analogy: He is the arsonist who set the house on fire. Then he showed up with the fire trucks and put out the fire and now everybody thinks he is a hero.”
The natural response, then, is who would better fill the role?
Or, more to the point, there could be cause for concern that the central banker confirmed as Bernanke’s replacement -- whether that was Vice Chairman Donald Kohn or San Francisco Fed President Janet Yellen -- might prove to be even more disappointing to Bernanke’s detractors.
But Boockvar, for his part, can’t imagine any central banker that could possibly more underwhelm him.
“I don’t see how anybody could be worse,” he says. “Look where we are.”
For investors, Boockvar sees all this uncertainty surrounding Bernanke as a short-term worry that ends this week, however. He does believe that the Senate will ultimately green-light the 56-year-old Bernanke for a second term.
“The worry will go away this week,” he says. “Then, we are back to focusing on what has been a mediocre response to earnings, China’s attempt to cool the inflation pressures in that economy, and sovereign credit risk with Greece.”
For his part, Vinny Catalano, president and global investment strategist with Blue Marble Research, has a different opinion. He does believe Bernanke should win confirmation, if only because a rejection of the professor would roil the markets.“Bernanke under the circumstances should get re-nominated,” Catalano says. “There doesn’t seem to me to be a viable alternative. Also, it would be disruptive to the markets if he did not. It’s almost like he is now the human equivalent of Too Big to Fail.”
If the unexpected does happen, though, and Bernanke gets dumped, what kind of response should we expect in the investment markets?
Gluskin Sheff’s David Rosenberg reminds us that the last time we had a sudden and unexpected turnover at the Fed was back on June 2, 1987 when Paul Volcker surprisingly announced his resignation.
That day, Rosenberg writes, the S&P 500 slipped 0.5%, which was a big deal then, he notes, since we were in the throes of a major rally; the yield on the 10-year note surged 27 basis points; the VIX index jumped 5%; the DXY was crushed 1.2%; and gold rallied 1.3%.
“Keep that in your back pocket just in case,” the strategist says.
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No positions in stocks mentioned.
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