Yoshikami: Activist Bernanke is More Important Than Any President

Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.
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Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.

The president (whoever that may be after November's election) can impact many things. But what will have the most important impact this year is the action taken by Ben Bernanke and the Federal Reserve. Tax policy certainly will impact economic growth and market returns, but no one in the United States has the type of leverage that the Federal Reserve has, led by the activist Federal Reserve Chairman, Ben Bernanke.

It's a sad state of affairs when governments around the world can't manage their fiscal affairs in such a way that economies can grow as they should in a free market environment. Massive deficits, irrational tax policy, wasteful spending, and a general incompetence seem to be the order of the day on a global basis. Sad to say, the United States is not exempt from fiscal policies that clearly are not benefiting citizens as massive debts pile up left to be paid for by our children. If only governments would be run by competent leaders like Apple's Tim Cook or Berkshire Hathaway's Warren Buffett.

Amid this haze of spending and lack of fiscal control, the Federal Reserve is left as the one institution that can provide the stimulus that a comatose economy needs to jumpstart economic growth. Is this free-market economics? Of course not. This is managing economies through the use of phantom adrenaline money. But frankly, given our current legislative state of affairs, perhaps there is no choice but to accept the adrenaline and hope for the best in the future.

You can expect action from the Fed this week. In all likelihood, Operation Twist will be extended. I would expect further action to be deferred and to be dependent on economic data and Europe. Markets will be disappointed in the measured action but Twist is just the beginning; more is coming.

The choice could be made to simply let economies default, banks collapse, real estate to be priced at its real value in the marketplace, unemployment double, and a host of other natural realities occur resulting from the poor choices made in the last 20 years. But frankly, there simply is not the appetite for making the hard choices in the legislative bodies. Likewise, like Greek citizens, the United States population is really not interested in more pain. For this reason, any candidate that votes for living within our means and absorbing difficult economic medicine now will be drummed out of office in the next election. Such is the world of democracy.

Do not forget that markets move based on data and sentiment. Facts alone are not what drive market performance and, if you invest solely with this perspective, you will miss out on themes or sentiment runs that could negatively affect portfolio performance. Whether you agree with the Fed's policies or not, a massive inflow of money is headed toward the U.S. economy after the June Federal Reserve meeting and it will likely be a positive for equity markets. Should this be the case? It doesn't really matter actually. We’re not talking about long-term economic health; we're talking about market responses to temporary measures.

With the world so troubled, some are flying to cash as the only hedge against disaster. But remember, cash pays a minus 3 percent from a purchasing power standpoint and you can only hide in that cave for so long. Consider buying equities that pay dividends like Johnson & Johnson or Vodafone or Exxon. Yes, they will fluctuate in value but if you can brace yourself on a monthly basis for the roller coaster in market capitalization's, you can rest knowing that at least you have a reasonable stream of income that will help you keep pace with inflation.

Let's face it: It's a very difficult time for an investor to make the right decision. For this reason, consider making decisions with a defensive perspective. Be balanced in your view to avoid the pitfalls that others fall into (too much or not enough risk). Pad your strategy with dividends, precious metals, global fixed income, and wrap it all in a healthy dose of anxiety and paranoia.

Don't forget that even if all looks disastrous, there is still opportunity to be had. In the United States, the Federal Reserve will likely be the economic physician ready to resuscitate the economy if necessary. It's not the free market system that many hope for, but it's what we have now and it's best to invest based on that reality.

Tune In:

Michael Yoshikami is scheduled to be a guest to discuss this post on CNBC's "Closing Bell" today, Wednesday June 19, 2012 at 4pm/et.


Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.