A Certain ExitOctober 22, 2012 Posted by: Joe Morgan, CFA
Gotta leave that nine to five upon the shelf
And just enjoy yourself
Let the madness in the music get to you
Life ain't so bad at all
If you live it off the wall
Exits are a part of life.
Some are very good, such as when venture investors exit their starcompany at a large multiple of their original investment. Some arevery bad, such as the loss of 5.7 million jobs in the last 17months. And some are simply a part of life, such as the exits of EdMcMahon, Farrah Fawcett, and Michael Jackson. May they rest inpeace.
Ben Bernanke's exit began last week. That we know for sure, butwhat is uncertain is whether we are talking about a strategic exitof the markets by a Fed that has ballooned its balance sheet toward off deflation and further deterioration of the economy, or hisexit from the Fed itself.
In the same week he provided testimony defending his actionsregarding the Bank of America/Merrill Lynch combo, Ben announced apullback of a few recession-induced stimulus programs including theTerm Auction Facility (TAF) and the Term Asset-Backed SecuritiesLoan Facility (TALF).
The goal here was not to actually rein in stimulus, as themarkets have not relied on these two programs heavily in recenttimes, but to begin the overall process that will be gargantuan atbest.
Since last September, the Fed's balance sheet has grown from around$870 billion to $2 trillion as evidence that "Helicopter Ben" wason the job. This added cash plus other guarantee programs put inplace by the FDIC and the Treasury certainly saved us from dreadeddeflationary risk, but created the risk of overshooting intoinflationary territory.
More important than actual inflation, though, is inflationexpectations. Since the days of Paul Volcker the Fed has beenrightly credited with killing inflation, thereby allowing moremarginal net present value (NPV) projects to become net positive.This is simply fancy finance speak for the so-called �productivitymiracle' of the nineties.
Now, should investors come to expect high inflation, NPV analysiswill...Read More