The Cone of Uncertainty

Ben Bernanke and Irene have a lot in common.  It is difficult to imagine two entities whose pending actions are more highly anticipated.

Of course, I’m speaking of Federal Reserve Chairman Bernanke’s big speech on Friday at Jackson Hole, Wyoming, where he will address U.S. and global economic concerns.

And yes, the Irene is the already infamous Hurricane Irene which is making its way up the eastern seaboard with Category 4 speed, according to recent reports.

In both cases, based on their respective reputations, we think we have a pretty good idea but we’re not 100 percent sure of what to expect from them.

For example, in challenging economic periods — like the one we are currently living through — Bernanke has responded in a very specific manner.  There was QE1 and then QE2.  And the freeze on short-term interest rates until 2013.  So will he hint at a QE3 on Friday?

The market is responding this week to Bernanke’s reputation for Fed action in situations like this one by buying equities and cashing out gold.

One headline today reads:  “European shares hits highs on Jackson Hole Optimism

Another reads:  “Market wants Bernanke to be Mighty Mouse

And yet another says, “Bernanke should act on QE3

But will he?  This isn’t August 2010 after all.  Most financial experts say the economy is on a stronger footing vs. one year ago, and many regions of the U.S. are showing a drop in unemployment claims.

And despite the fact that market conditions are very different than one year ago, optimism remains largely based on how Bernanke acted in the past in similar situations.  Investors are responding to Ben’s reputation for action.

Hurricane’s have an equally strong reputation — for being unpredictable.

While Bernanke may act in one or two ways on Friday, the jury is still way out on Hurricane Irene.  Forecasters are updating Irene’s progress by the minute, and are predicting at least a half-dozen potential scenarios.  As we get closer and closer to the day Irene is slated to make landfall, the weather professionals become more and more confident in their forecasts.  But still, with a hurricane of this magnitude even the greatest weather forecasting technologies can be fooled by a sudden twist by Irene.

The economic markets like predictability.  Stockholders like predictability from the companies they invest in.  Employees appreciate predictable behavior from those signing their paychecks.  We enjoy working with co-workers we can count on.

For the most part, Bernanke has lived up to his reputation for taking Fed action to stabilize turbulent markets.

Likewise, hurricanes have lived up to their reputation for fraying the nerves of countries, cities and towns in the possible path.

I’ll take predictability almost every time.  But one must prepare for all possible outcomes because even those with the best reputation can be full of surprises.

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