BETTING ON BEN?

8/29/11

Today’s (i.e., Monday, 8/29’s, page C1) Wall Street Journal contained an article that, while not living up to the billing of its headline, “Fed Faces Old Foe As Hazard Returns,” nonetheless contained some compelling observations and a few piquant facts.

One of those observations was made by Richard Weiss, senior portfolio manager for asset allocation at American Century Investments in Kansas City. Mr. Weiss, according to the article, is continuing to invest in growth stocks because, in his words

“One of the Fed’s mandates is to avoid a recession at all cost, and we fully expect them to use all their tools to do so.”

Mr. Weiss is largely right in his observation on the Fed’s mandates. Before 1978, the Fed’s sole mandate, at least concerning its management of monetary policy, was to rein in inflation. But in 1978, with the passage of Full Employment and Balanced Growth Act, better known as Humphrey-Hawkins, after its chief sponsors and presumed authors, the Fed’s mandate changed to a dual role of both containing inflation and assuring full employment. Unfortunately, neither Congress nor President Carter handed the Fed a magic wand along with this mandate, but I digress. So, indeed, as Mr. Weiss said, one of the Fed’s mandates is to avoid recession. I probably would not have used the words “at all cost,” but Mr. Weiss is largely right in that contention.

Mr. Weiss may also be right in the conclusion he draws from his observation; i.e., to buy growth stocks that, as the Journal puts it, “benefit from stable economic growth.” (I wonder whether Mr. Weiss’s, and American Century’s, decision to buy growth stocks has more to do with the nature of American Century as a growth shop than with any notions about the market at any given time, but, again, I digress. At least I do so parenthetically in this instance.) But I doubt it.

If the Fed uses all the tools at its disposal to avoid recession, and it certainly has so far, there are three possible outcomes:

--The Fed succeeds in avoiding recession and does so with such a degree of aplomb that it also avoids igniting inflation and debasing the currency.

--The Fed succeeds in avoiding recession but, in the process, ignites inflation and debases the currency, making its “victory” largely an ephemeral one.

--The Fed fails miserably at avoiding recession and ignites inflation and debases the currency as a result of those ill-fated efforts, leading us into a dystopic bout of stagflation.

In order to buy growth stocks based on the Fed’s efforts, one would obviously have to assign a higher degree of probability to the first possible outcome than to the other two put together, though one could see how growth stocks could do well, at least in the short run, under the second above scenario. As loyal readers might guess, I would assign the highest degree of probability to the third scenario, followed by the second scenario, and trailed at an eyesight challenging distance by the first scenario. Therefore, I won’t be buying growth stocks any time in the near future. But one does not have to have as bleak a view of the current Fed, or of life in general, as yours truly to avoid growth stocks at this juncture. One only has to assign equal probabilities to the above three scenarios; two out of three would thus carry and dissuade an investor from investing heavily in growth stocks.

Fighting the Fed is rarely advisable; doubting the ability of the Fed is often advisable, especially when we are dealing with Obsequious Ben Bernanke’s Fed.