Alan Greenspan was the master of the overstated understatement. A group of investors could listen to his testimony and come away with diametrically opposed interpretations of what he had said.
By contrast, Ben
Bernanke has promised a new openness and clarity, but it has been slow going so far. It is my belief that he has a bit of a tin ear to the markets. He had not come to the realization that HE IS the news and billions of dollars of bets are spring-loaded in computerized trading systems hanging on his every word.
Greenspan had a lot of faith in the markets. He listened to them, and he talked to them. If he saw the traders going off in the wrong direction he would say something simple and clear to get them back on the right track. If he thought they had it about right, it seemed to me that he became more obtuse.
Next week we have the first real test of the
Bernankespeak. The Fed meeting on September 18
th, is now on the lips of everyone from cab drivers to cowboys. Will he, won't he? That is what we are all asking, and all of us have become closet economists arguing our points of view, no matter how silly or off the wall they may be.
At the rate we are going, by next Tuesday, all of the markets will grind to a halt awaiting the Fed's decision on interest rates.
In the midst of all the talkers are a group of investors who are making bets, so to speak, on the outcome via Fed Fund Futures.
Bloomberg has a new analytical tool that extracts the implied probability of changes to Fed Funds by analyzing the trading data. Today's readings for Fed Funds Futures, are as follows:
- 4.75%. . . . . . .74%
- 5.00%. . . . . . .26%
If you do the math, 100% of investors in Fed Funds believe at least a .25% rate cut is coming. Significantly, and perhaps surprisingly 74% of investors believe a .50% cut is at hand. I'm in this latter camp for reasons I have discussed earlier.
Here's where everyone is flying a bit blind. If Greenspan would have seen this Fed Fund action and he had no intentions of cutting rates by half a percent, he would have Greenspeaked it --talked it down.
We don't know if that is how Bernanke is going to operate. He may believe in more openness but less guidance and less Bernankespeak. If this is the case, my thinking is a quarter percent cut will be viewed as a disappointment by the stock market and it may well sell off. Heaven forbid if rates aren't cut at all.
The saving grace is the Fed's statement accompanying their decision. They can still signal there intentions in the statement which would have the effects of muting the actual move they might make. That may be where Mr. Bernanke has decided to speak.
I can't remember a Fed meeting in years where so many investors are so confused about the outcome. Should make for an interesting day.
