“Hunting is not a sport. In sport, both sides should know they’re in the game.”
-Paul Rodriguez
Keith and I played hockey in college with a French Canadian by the name of Yvan Eric Stephane Champagne. Like most French Canadians, he has a great name, though we appropriately shortened it to Champy. Our friend Champy has many great attributes, but he is most well known amongst our friends and former teammates for enabling us to create the term Squirrel Hunting.
My junior year I lived in a tired old fraternity house with Champy. Like many college fraternity houses, this one had some issues related to cleanliness, or lack thereof. The noteworthy affliction of this house was an infestation of squirrels. While the squirrels certainly weren’t sanitary, living with squirrels did provide us some level of entertainment, particularly when Champy attempted to hunt them in the house with his hockey stick.
On one legendary Sunday morning, I laid in my bed for a good four hours listening to Champy chase the same squirrel up the front stairs of our three story fraternity house and then down the back stairs of the fraternity house. For those that have attempted to hunt squirrels with hockey sticks in a massive fraternity house, you know the reality . . . it is a herculean task. In fact, the little critters are incredibly hard to catch.
After four hours of chasing the squirrel, while I laid in bed laughing at him, Champy finally succumbed to frustration and lost it on me for not helping him. Needless to say, he also never caught the squirrel. From that day forward, whenever any of our friends engage in an activity that defied logic or rationality, we deemed it Squirrel Hunting.
On Tuesday, Chairman Bernanke was speaking at the International Monetary Conference in Atlanta and sounded like he just spent four hours in the Zeta Psi house at Yale chasing squirrels up and down the stairs. To quote the venerable Fed Chairman:
“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea."
The irony of that statement, of course, is that Chairman Bernanke has overseen the most stimulative Federal Reserve in, well, the history of the Federal Reserve. We have quantified this in the Chart of the Day below, which comes courtesy of Grant’s Interest Rate Observer. In essence, the Federal Reserve has been more than five times more stimulative over the last four years than in any other period, including the Great Depression. So, for Chairman Bernanke to now suggest that monetary policy cannot be a panacea after these actions, well that is somewhat akin to Champy telling me there were no squirrels after I listened to him chase one for four hours.
On the same day, Chairman Bernanke’s colleague, Atlanta Federal Reserve Bank President Dennis Lockhart, echoed the Chairman’s view when he stated:
“I have to express some frustration with the economy.”
No doubt. After four years of hunting squirrels with a hockey stick, I’d be frustrated as well.
Later today, we will be doing some squirrel hunting of our own as we host a conference call for clients (email if you need the information for the call and/or want to trial our services) with the title, “What’s Next For The Fed?” On the call, we will update our view of interest rates, which we have termed Indefinitely Dovish, discuss our thoughts on the possibility of another round of quantitative easing, and then hand it off to Josh Steiner to discuss the implications of our interest rate view on the financials sector.
In a nut shell, our view is simply that the Federal Reserve will remain dovish longer than the market and most participants currently realize, which from our perspective suggests well into 2012, if not beyond. The key factors supporting this view, which we will get into greater detail today, are as follows:
- Housing – We are facing another leg down in housing prices in the U.S. and any increase in interest rates would accelerate this.
- Employment – The unemployment issue in the United States is structural in nature and is likely to get worse before it gets better.
- Growth – Economic growth in the United States has been illusory at best and set to decelerate well below the long run average.
Inflation, of course, could be the one measure which changes our view and forces the hand of the Fed. Even though the Fed has been willfully blind to commodity inflation, Dallas Federal Reserve Bank President Richard Fisher alluded to the idea that that quantitative easing may actually be causing inflation. If that idea becomes pervasive amongst the Squirrel Hunters at the Fed, then our view on interest rates could change dramatically. As for now, we are sticking with Indefinitely Dovish.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
