After half a decade of Federal Reserve monetary expansion, interest rate markets are in a state of flux. Bernanke has telegraphed his punch – the party is not going to go on forever. And that is a very good thing. The trick to managing any crisis is to ensure that the emergency measures do not outlast the emergency. So while many an analyst would suggest that economic data do not support a complete suspension of QE, the analysis cannot be merely based on unemployment, housing starts, and durable goods orders, but also on an evaluation of what the incremental impact is on the economy of each additional dollar of expansion of the Fed’s balance sheet. I am sure that everyone would have hoped for more than 2% GDP growth given the TRILLIONS of dollars that our government has effectively lent to itself, but the reality is that the efficacy of the “program” is waning dramatically. So it’s getting to that point in the process where it’s time to start planning for the end of free money, for better or worse. Bernanke has given us that warning.
But if US Treasury Bonds reclamation of market driven equilibrium price discovery wasn’t going to be volatile if not painful enough on it’s own, we have an added layer of complexity to deal with. Chairman Bernanke is tired and he’s ready to write a book and start teaching Econ 101 again. The man has been fighting a war for the last 5 years and he is toast. So on top of the over-televised, over-blogged, over-discussed issue of where the 10 year bond is going relative to the strength of the economy, we have to hear and read on a daily basis about the Yellen vs. Summers debate. Who’s good for equities? Who’s bad for bonds? Who’s a better leader? Would it be cronyism to hire Summers? Would it be too much of the same to give it to Yellen? It’s enough to make you want to crawl under a rock, never watch Bloomberg or CNBC again, and cancel your Twitter account. And in my opinion, it is exacerbating the already difficult process of the bond markets finding their new levels given the Fed’s eggression.
So who is to blame for this added and wholly unnecessary volatility in bonds? Speculators? Seeking Alpha bloggers? CNBC talking heads? Hedge funds? The answer is “E” – NONE OF THE ABOVE. The responsibility for this nonsense is none other than the White House. The President has told the world from his vacation in Martha’s Vineyard that he needs some “space” to make his decision about the new Fed ChairPERSON. He needs space. What is this? A college girlfriend he doesn’t have the courage to break up with? I get it…He’s tired and needs to play some golf, hang with the kids before school starts, have a beer on the beach with his wife. We all need that once in a while. But while President Obama is an amazing communicator from the stage of a political rally with adoring fans cheering for him, when it comes to managing his “business”, it’s not really his strong suit. Markets have been climbing the wall of worry for the last 5 years despite Obama’s opacity throughout. And while of course there needs to be a rigorous and through process for these kinds of major decisions, and they cannot be dictated or rushed by hyper-sensationalism on social media and journalism outlets, sometimes pragmatism has to prevail. I believe now is one of those times. There is no need to perpetuate the added drama of this debate and its exacerbation of already challenged credit markets, despite the fact that the President needs a vacation. Markets, homebuyers, and businesses need some visibility. They need some communication on this issue. They deserve it just as much the President deserves a vacation.