Farrell: The Mighty Ben Delivers

Ben was superb. He knew he had to deliver a strong messageand not get bogged down by the often inane questions of our political elite. The best way to get your point across is to tell them what you're going to say, say it, and then tell them what you said.

Even Congressman might hear the message.

In a brilliant move of marketing, Ben wrote a very detailed and understandable articlefor the Wall Street Journal in which he outlined his plan for an exit strategy. There was no mystery, and the article was complete and the outline got delivered in its entirety without hostile barbs.

Ben Bernanke
Ben Bernanke

Ben had to address two constituencies — Congress and the markets. The markets can agree or not but they got Ben's thoughts. Congress got to listen to the same message in a well timed interview on Bloomberg. They then got two days of testimony that they can use as an electioneering platform but they can't avoid all the delivery mechanisms Ben employed.

Ben will use the Federal's Reserves balance sheet to eliminate or neutralize the excess reserves in the system. He will do long term reverse repos to get liquidity out, and he will pay higher interest rates on those excess reserves to prevent them from being loaned out. The Fed and the Treasury will sell paper into the market to drain liquidity.

The issue then becomes one of timing and Ben made it clear the Fed's independence should not be compromised. Fighting inflation, which most of us feel will be a risk before too long, requires political independence because it involves the unpopular decision to raise interest rates. And being poll driven as Washington is, the Administration should heed a Bloomberg survey that gives Ben a 75% approval rating (apparently Democratic Senator Reed has endorsed a second term.)

Any move other than his reappointment would be, in my eyes, a blatant political attempt to undermine the Fed's independence and take political control of monetary policy. Ben also challenged Congress to get their own strategy in order saying the Fed helped avoid a catastrophe and Congress is adrift with its plans to finance a very aggressive agenda.

One that last point, President Obama held a news conference Wednesday night. The big truck of courageous politicians is backing up at full speed since the almighty polls have turned down. The President needs to get in front and define his plan and not let Congress do it for him. That was a big mistake to cede the agenda and the news conference is probably too little, too late to get a vote before the August recess.

It's time for real leadership, whether you agree with the program or not. No more voting "present" as he did too often in the Illinois legislature.

As to the market — we have had a run of some seven days of advances. Sentiment turned on a dime last week with Goldman's earnings report.

Some 77% of those companies that have reported have exceeded estimates compared with the usual 60% that know how to under promise and over deliver. But most of the performance has come from cost cutting, not revenue growth.

If the consensus estimate of $51 for the S&P is correct for the year, the market is almost 19 times that number. When inflation has been 2% or lower the median multiple has been 18.4 times. But with the nagging fear that our next issue will be a rising rate of inflation I think the market is ahead of itself. But what do I know, this rally has caught me flatfooted, but I would continue to be cautious.

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