Posts filed under “Think Tank”

Be Careful What You Ask For . . .

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Be Careful What You Ask For………..
July 24, 2009

Oh, Ben. Why did you offer this?

In his Q&A session at the Senate on the second day of his testimony, Federal Reserve Chairman Ben Bernanke offered a response to a question about the Fed’s role in consumer protection. He suggested that the Senator reopen “the Act” and add the consumer-protection role to the Fed’s mandate.

I cringed.

So did several others within the Federal Reserve who were in disbelief at what they heard. So did many others outside the Federal Reserve who have been championing the Fed’s independence when it comes to monetary policy. In Bernanke’s defense, he also added that any law changes must not alter the independent ability of the Fed to formulate monetary policy. Those words mean the Fed’s ability to raise interest rates when it deems it has to fight inflation.

But by inviting the Senate to open the law to changes while asking to remain independent is like putting your head in the lion’s mouth and asking the beast to be considerate. Chairman Bernanke is now engaged in a high-risk gambit.

Reopen the Federal Reserve Act?

I am now seriously worried that the Congress will take Bernanke up on his offer. Once an amendment to the Federal Reserve Act is on the table (which it is), anything may happen. Remember, this would be a bill that has to clear the Senate and the House (Pelosi, Frank, and company) and then get to a conference.

In the famous Geithner “white paper” which will receive Congressional discussion today by various witnesses including Bernanke, there is a proposed provision to give the Treasury Secretary a veto over the Fed’s use of emergency powers. Remember, the Treasury Secretary meets weekly and one-on-one with the President. What could be more political than that?

Picture a situation where there is a need for one of the Fed’s emergency actions, such as we have seen in recent months. If the Geithner proposal comes to pass, how would that work? And can we ever be assured that the policy positions of the Fed would be taken from a neutral starting place? I wonder.

Fed policy could easily become asymmetric and therefore inflation-biased. Imagine a situation where the Treasury has invested TARP funds and doesn’t want to admit losses. Isn’t it easier for them to have the Fed keep an entity alive with hope for a miracle rather than be embarrassed by a failure? Is it possible for a politician to admit an error and take a small loss rather than defer the loss, even though the final cost will be much larger? Decision-making biases are hard enough to overcome without imbedding a structure that worsens them.

Bernanke knows this. So why did he invite the Senate to reopen the Act?

Maybe his political advisors are not guiding him well. They may be telling Bernanke that this proposal will be disarming and soften the Fed’s critics. Maybe he is following a protocol of open democratic process that is a result of his academic career. Or maybe he believes the Act will be reopened anyway and it is better tactically to propose changes proactively, and try to modify the outcome, rather than resist it. No matter how one plays out this sequence, it is hard to find a good outcome. We fear the politicization of the central bank.

That said, markets are not focused on the Fed and political risk. Markets are looking only in the shorter term for Fed policy that remains highly stimulative. That means continued very low short-term interest rates are in the cards. For Treasury bonds that means retrenching (higher rates, lower prices) as the risk of an economic Armageddon subsides and as signs of a bottoming economy recur.

We continue to emphasize spread product on the bond side. Tax-free and taxable Munis offer good values in the bond turf.

Stocks have an upward bias. In the stock markets our accounts are fully invested. So far, the summer has been beneficial to clients in both fixed-income and equity asset classes. We are pleased with our ETF strategies as the stock markets of the world recover from the March lows. In the United States, we are targeting 1100 on the S&P 500 index by early next year.

David R. Kotok, Chairman and Chief Investment Officer, email:


Cumberland Advisors
614 Landis Avenue Vineland NJ 08360-8007

Category: Federal Reserve, Think Tank

Revenue misses continue

Revenue misses from MSFT, AMZN, KLAC, AXP and BNI has the futures below fair value but well off their lows as European stocks rallied at around 4am when Germany’s July IFO business confidence number was released and was almost 1 point more than expected rising to the highest level since Oct ’08. Also, the Euro…Read More

Category: MacroNotes

Nobody Likes Missing Out on History

Good Evening; Unless you’ve been in a cave or in meetings all day, you know by now that U.S. stocks were kited to new highs today. And that’s really all you need to know. There was a batch of reasons given, from economic data to corporate earnings, but the biggest reason for today’s surge was…Read More

Category: Markets, Think Tank

Existing Home Sales

June Existing Home Sales totaled 4.89mm annualized, 50k more than expected but May was revised down by exactly 50k to 4.72mm so taken together about in line. It is though the 3rd month in a row of gains and its at the highest level since Oct ’08 as both single family and condos/co-ops saw sales…Read More

Category: MacroNotes

NDX RSI at highest since Oct ’07

The Relative Strength Index (RSI, defined as a non trending indicator that measures the momentum of a security to determine whether it is in an overbought or oversold condition according to Bloomberg) of the NDX is at the highest level since Oct ’07. RSI is just a snapshot perspective of a particular move and doesn’t…Read More

Category: MacroNotes

Emergency Unemployment Compensation

Within the weekly jobless claims data, the Labor Dept also includes a category called Emergency Unemployment Compensation which includes those that have exhausted the 26 week period of receiving claims. It includes the extra 20 weeks that were added in the stimulus package and another 13 weeks above that for certain states that have unemployment…Read More

Category: MacroNotes

Jobless Claims

Initial Jobless Claims totaled 554k, 3k less than expected but the prior week was revised up by 2k. Continuing Claims continued to fall, by 88k for the week and was 165k less than expected. Both are impacted by the unusual seasonal adjustments this year because of the differing timing of auto plant shutdowns. However, continuing…Read More

Category: MacroNotes

Fed’s Fisher on Treasury purchases

Non voting member Fisher of the Fed is giving his own ‘personal’ opinion on the continuation of the Fed’s purchase plan of US Treasuries in a speech he’s giving on the economy. He does not wish “to expand or extend our purchases of Treasuries beyond the cumulative $300b planned by this fall.” He said “we…Read More

Category: MacroNotes

Households and home prices

As the sustainability and depth of an US economic recovery will come down to the financial health of households and home prices, today we get data on Existing Home Sales and Jobless Claims. Jobless Claims may have one more week of seasonal distortions due to auto plant shutdowns that didn’t occur in July because they…Read More

Category: MacroNotes

CIT = Capitalism In Transition

Good Evening: U.S. stocks finished mixed for a second straight day on Wednesday, as positive earnings from Apple fought lingering credit concerns to a virtual draw. The NASDAQ did manage to advance, however, extending its streak of positive closes to eleven. The rest of the capital markets didn’t stray too far from unchanged, either, with…Read More

Category: Markets, Think Tank