September 20, 2013

Kass: Summers vs. Yellen -

I have long written that Lawrence Summers would be slightly negative for the markets and that Janet Yellen was neutral to the markets. I never bought into the notion, as expressed by Jim Cramer on "Mad Money" last night, that Summers' polarizing presence would somehow act as a "one-man wrecking crew" for the markets.

I have guesstimated a downward influence of about 25 to 50 S&P 500 points to a Summers nomination/appointment and virtually no impact to a Yellen nomination/appointment. The basic reason I held to this view was not that Summers would be more hawkish but rather there would be far less transparency in a Summers Fed vs. a Yellen Fed. And this would lead to more market volatility.To me, the market's Sunday-night and early-Monday gap in futures (up 24 handles) was a total overshoot to reality, as it seemed almost entirely based on the euphoria that Summers was bowing out.On the principal bases (regulatory and monetary policies, personality and forecasting ability), Yellen is simply "a whiter shade of pale" than Summers.Policy FailuresBottom line: I expect little divide between the policy of a Summers-led Fed or a Yellen-led Fed.And this is the market rub: The shoulders of the Fed have been the primary support to domestic economic growth since the crisis in 2008-2009, since our political leaders in Washington, D.C., have been inert, irresponsible and unwilling to come to meaningful compromise in the face of continued structural challenges.While monetary policy has taken on a progressively greater responsibility to energize growth, quantitative easing and zero interest rate policy are growing less effective.Indeed, as Albert Einstein is often credited to have said, "The definition of insanity is doing the same thing over and over again and expecting different results."Recently, in King World News interview, Bill Fleckenstein delivered a variation on Einstein's apocryphal quote more vividly in describing our monetary fantasy:

Right now, people continue to believe that the same idiots that created all of these problems, namely the central banks, are going to somehow get us out of it with the exact same policies that got us into it.... We had so much artificial stimulus, and we've misallocated so much capital (that Americans) believe in the lunatics at the Fed, and the rest of the Western world is that way (as well).... As the fantasy dies ... more people will see that the Fed is trapped.
In summary, I see little difference between Summers and Yellen, and the jubilation on Sunday and Monday (following the Summers announcement) seems misplaced.