Gaining Credibility at the Fed

Barry Ritholtz at The Big Picture has discussed many aspects of the capital market's continuous hand-wringing over the hawkishness/dovishness of Ben Bernanke and its impact on capital markets.

I think this morning's post on "How the Fed Chief Gains Credibility" really captures the discussion best. The post captures CNBC's Steve Liesman's explanation of this transition...there is a willingness to take short term criticism, "sacrificing the economy" to take a short term recession if needed just to gain credibility.

A sad reality of life is that markets adjust with expectations. Though much of CNBC's cast is afflicted with histrionics and a feeling that somehow the world is "entitled" to a bull market daily, Steve Liesman in my view, demonstrates a deep understanding that, "every additional year that he remains in office, the less the cost of that additional tightening."

Despite some oscillation in his verbage as highlighted in this post, Bernanke in my view, is the philosophical twin of Alan Greenspan.

There is no choice, in my view, other than to demonstrate firmly his credibility as an inflation fighter. The catch phrase of "data dependent" seems to be interpreted as faltering or hesitating in his decision-making. When was there a Fed chairman who was not data dependent?

Myopia about Fed transitions also seems to be standard fare for capital markets. Paul Volcker's legacy was a difficult hurdle for Greenspan to overcome. Greenspan was labelled by Barron's as "a relatively unknown quantity" at the 1987 transition. The New York Times expressed it at the time " The markets had incredible confidence in Paul. Investors saw him as the one guy with the knowledge, guts, and skill to stop inflation and hold the sytem together....Indeed, some economists are saying that one reason there is growing fear of an economic catastrophe is that the Reagan administration let Volcker go, replacing him with the less-experienced and less-well-known Alan Greenspan."

Another excellent view of Fed leadership transitions from Morgan Stanley's Steve Roach can be read  here.

The transition "curse" is nothing new. Greenspan's gradualism will likely be emulated by Bernanke. Confidence will be restored after credibility is achieved. Bernanke has not spoiled the party. Conditions of excess, particularly in housing are a corollary of previous policy, not the makings of Bernanke.

This is tough, but necessary medicine. In the interim, find your opportunities in high quality names, avoid the dreck. Continue to look for businesses with a sustainable competitive advantage. Lesser businesses will be sorely tested. Quality earnings, quality balance sheets, stable and growing cash flows will be the characteristics of successful investing.