You may have heard the news that Fed Vice Chairman Stanley Fischer has resigned, and you’re wondering so what? What does it mean to me and my investments?
Well, I’m no mainstream media pundit, but I have been tracking and writing about the Fed and its influence on the market for a very long time.
So let me give you my perspective on what this resignation does or doesn’t mean.
I’m a data guy, not a political expert. I view the world through the prism of what the data tells us about action and reaction, cause and effect, as it applies to monetary and fiscal policy and stock and bond market behavior. However, people make the decisions about those all-important actions, so to that extent, maybe personalities matter.
Here’s what Fischer’s resignation means for your money…
Personalities Don’t Matter
My view is that central bankerism is a personality disorder, and if you’ve seen one central banker, you’ve seen them all.
People who are attracted to the field tend to be genius megalomaniacs, who, when you put 12 of them in a room, become completely delusional about their impact on the real economy.
Likewise, they don’t fully grasp the unintended long term consequences of their actions on the financial markets.
But the impact is direct and profound.
Most of the time, they don’t know what’s going on in the real economy. The Fed’s history of dot plots and economic forecasts is clear: they’re always wrong.
They don’t know or understand the current conditions, let alone what the future holds. Heck, almost all of them are academics. They’ve never even held a job in business.
Instead, they devote their whole lives to becoming economic policy makers. The most determined of them reach the highest level of policymaking, the Fed. They get to make policy in an echo chamber where 12 academics, scholars, sit around a huge walnut table in an ornate, marble-tiled conference room and tell each other what they want to hear.
One of them is so politically shrewd that he or she manages to rise to the top of the heap and become the Fed Chair. Today it is the esteemed economist Janet Yellen. All her life she’s been either an academic or a central banker. The same was true of her predecessor, Ben Bernanke.
And the same is mostly true of Fed Vice Chair Stanley Fischer.
Fischer is notable also for having been Bernanke’s professor and mentor at MIT. He was also ECB Chairman Draghi’s professor at MIT. He is the former Governor of the Bank of Israel. He was an official at the World Bank. For three years – from 2002 to 2005 – he even held a position in the business world, as Vice Chairman of Citigroup in a role that actually had wide ranging responsibility.
So no doubt, Fischer is a man of enormous intellect, experience, and political skill. He is an influential figure in that padded cell in the Eccles Building where the Fed Board and FOMC get together to reinforce each other’s delusions and make policy.
But he’s not the boss of bosses. He’s merely the Consigliere. Let us not lose sight of the fact that the Fed Chairperson decides the policy. It has always been so and always will be. The other members of the Fed Board or FOMC always form a consensus around the views of the boss.
And Janet Yellen is very much still the boss.
All the Fedheads give speeches and interviews. The media pays an inordinate amount of attention to them. While you should look at the headlines and be aware of the general consensus of where Fed policy is headed, please don’t waste too much of your valuable time on them.
Yellen Is Still In Charge
Here’s the thing: Fischer’s leaving will have absolutely no impact whatsoever.
Personally, I think Stan, at 73, is getting out while the getting is good. He’s bailing before the proverbial sheet hits the fan, which will happen when the Fed starts tightening money for real (if not next month, then a few months hence).
He’s also getting out just as the US Treasury will start selling immense amounts of new debt.
That will happen on the heels of this pending sham debt ceiling deal that Trump made with the Democrats yesterday. I’m still trying to wrap my mind around what this early deal will mean to us and the markets. I was expecting it to come only when the Treasury ran out of money at the end of September. Instead it looks like it will come very shortly.
We’ll talk more about that next week. If the deal is really done, it’s a far more important piece of news than the Fischer resignation.
In the weeks and months ahead you will hear lots of news-noise about personnel changes at the Fed. The Fed Board is three members short of a loaf. Trump will have to name three replacements to get to a full complement of seven board members.
But as long as Yellen is Chair, none of those personnel changes will matter.
And Yellen will be in place at least until next February, when her term as Chair expires. The course of policy is set. It’s set if Yellen is reappointed, and if she’s not, any incoming Fed Chair will take his or her time to make any changes. It took Yellen three years after appointment to decide to shrink the balance sheet, a momentous change that any incoming Fed chair will be loath to overturn.
Yellen says their goal is to shrink the balance sheet. So rest assured they’re going to shrink it.
And that tightening – an actual siphoning of money from the liquidity pool that is available for the purchase of stocks and bonds – is the only thing that matters.
The Fed has put its intent to do that in writing as an attachment to the last FOMC statement. It has put in writing that it will happen “soon.” Their Wall Street and media mouthpieces have said that that tightening will be announced at the September meeting.
Only the timing is at issue, and that’s always an issue anyway. It could come a little later than the recent consensus expectation thanks to hurricane season, but it’s coming sooner or later, and the effect on the stock market will be negative.
So it may take longer than expected, but that’s actually good news because it gives us more time to get done what we need to get done.
For Now, Stay the Course
For a few weeks now, I’ve been telling you to raise your cash position, and you should continue to sell stocks regularly until you get to a level of cash that’s right for you. For me, it’s 60-70%. I want to have my selling program done by the end of this month.
If it’s not feasible for you to raise cash in the short term, I’d use any rallies over the next few months to do it.
For now, we’ll let the LAMPP be our guide. It measures the actual money flows to and from the Fed and Treasury, personalities and opinions be damned.
Follow the money!