The Market Will Like Bernanke 10-24-05

Good Afternoon.

So it seems as if "W" has selected Ben Bernanke to be the new Federal Reserve Chairman. The issues concerning Bush on this appointment were not to be taken lightly. The economy is at an important juncture continually threatening to slip into a stagflation mode. As is often the case, the stock market tail wags the economic dog. Specifically having the confidence of the financial markets is imperative in order to have the real economy perform well. Ben Bernanke will provide that confidence.

The markets will be pleased with his qualifications and credentials. In addition the delicate transition from Greenspan to Bernanke should go well, further eliminating uncertainty. As we all have learned numerous times uncertainty is the enemy of the stock market. Mr. Bernanke has been a strong advocate of Fed transparency which will bode well for the stock market. Furthermore he has also been considered somewhat dovish in his approach to monetary policy over recent years. He believes there are inherent deflation tendencies. Therefore, he is likely to have a lighter foot on the interest rate gas peddle. Mr. Bernanke also believes in targeted rates of inflation as opposed to Mr. Greenspan who is more open ended.

The implications of this are quite large. Having a Fed policy of defined neutrality for levels of interest rates will provide more certainty to the global economic system. The tendency of Mr. Greenspan to overshoot perceived neutrality has been a chronic complaint from the financial markets during his tenure. The likelihood is that a Fed under the helm of Mr. Ben Bernanke would suffer less criticism of this kind.

Of course, a change in style of this nature is not without risks. Remember the central job of the Federal Reserve is to control inflation. Long-term economic viability would be severely threatened by a Fed Chairman that allowed systemic inflation to creep back into the system. Mr. Bernanke who is considered by some to be a "deficit hawk" would likely advocate reducing spending as a means to further fight inflation tendencies. His embracing of the Bush tax cuts along with his dovish tendency's regarding interest rate policy will likely lead to the administration gaining support for further cuts in overall spending.

Clearly this appointment of Mr. Bernanke will satisfy the fraction of the conservatives that have been severely critical of the overspending tendencies of the Bush administration. In hindsight no one should be surprised that Mr. Bush has selected a well qualified, dovish and conservative individual at this point in his presidency. The recent pressure the Bush administration has been experiencing regarding Harriet Miers, Iraq, Katrina, and Republican scandals has lead the president to make the safest and quietest choice possible.

Our next post will be tomorrow morning due to various business meetings with new clients.

We're still Bullish.

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