Advisers seek profit angle in Bernanke nod

Oct 31, 2005 @ 12:01 am

By Brooke Southall

SAN FRANCISCO - Most experts and politicians are thrilled to put Ben S. Bernanke behind the steering wheel of the U.S. economy, but financial advisers say that they are more interested in how it will affect their investments.

The nomination of the esteemed economist to the position of Federal Reserve Board chairman last week in Washington has some investment veterans driving for profits - especially because news of it depressed bond markets.

"There's nothing I've done in the past day or two," as the bond market declined, said Bill Gross, managing director of Pacific Investment Management Co. of Newport Beach, Calif., in an interview last Tuesday. "If the market continued to do this, I'd pounce at some point; that provides an opportunity."

Mr. Bernanke likely would combat inflation to good effect by manipulating short-term rates with a more feathery touch than current Fed Reserve Board Chairman Alan Greenspan, which could prevent the speculative bubbles that feed inflation.

"I suspect he'd be quicker to withdraw that ease [of rates]," Mr. Gross said. "That [propensity for withdrawing slowly] in my opinion was Greenspan's mistake - relative to [the demise of] Long-Term Capital Management [LP of Greenwich, Conn. He kept] rates down way too long," Mr. Gross added. His firm manages $500 billion, mostly in bond portfolios.

"It was just the thing that speculators wanted - free money," Mr. Gross said. "They took the money and ran with it, and now here we are [with bubbles in] housing, commodities, art, etcetera."

Mr. Bernanke indeed will create a friendlier environment for bond investing than Mr. Greenspan, said Donald S. Peters, principal with Central Plains Advisors Inc., which manages $25 million in Wichita, Kan.

"It about guarantees us about zero short-term rates in the next two years," he said. "I think he understands that the long-term threat in this country is deflation, and I don't think that Greenspan did."

Thinking long term

Mr. Peters plans to keep 100% of his assets invested in long-term U.S. Treasury bonds, he added.

The Fed chairman nominee might have other advisers thinking along those same lines.

"We're still looking to lengthen durations" in light of the prospect of subsiding inflationary pressures that might come about next year under a Bernanke administration, said Harry Clark, chief executive of Clark Capital Management Group Inc. in Philadelphia. The firm manages $800 million.

"People think he's an inflation dove, and I think they're dead wrong," Mr. Clark added.

Financial advisers certainly like Mr. Bernanke's support for extending tax cuts on dividends and capital gains.

The Securities Industry Association of New York and Washington issued on Wednesday a follow-up press release to its initial Monday endorsement. It praised Mr. Bernanke for favorable comments he made this month about these extensions.

"There's no one in our business who could view that to be negative," said Dennis Miller, president of Miller/Russell & Associates Inc., which manages $1.1 billion in Phoenix. "As a group, we all know the risk that investors take to accomplish some gain, and when they do get a gain, it shouldn't be taxed away."

But advisers still should be wary of Mr. Bernanke's potential effect on currency markets, because of remarks he made in 2002 about how to combat deflation, said Charles P. Hanlon, president of Delta Global Advisors Inc. The Huntington Beach, Calif., firm manages $150 million.

The United States could combat economic jolts by cranking up the printing presses of U.S. currency and throwing money from helicopters, Mr. Bernanke said at that time in a speech.

Mr. Bernanke was exaggerating to make his point when he brought helicopters and presses into the discussion, so not too much should be read into it, Mr. Clark said.

"He was being facetious, of course, but he understands the power of printing presses," he said.

Colorful point making aside, the specter certainly could stay in the subconscious minds of commodities and currency traders for a long time, Mr. Hanlon said.

"His statement about printing presses is like suggesting that when the Mississippi River starts to overflow, that its levees should be blown up to flood a specific part of town," he said.

As a result, Mr. Hanlon might increase his allocation in non-dollar assets - mostly in Europe and Japan where currencies have taken a hit recently - to 30%, from 20% of his total portfolio. That action may be warranted if traders drive down the value of the dollar with visions of helicopters dancing in their heads.

But if advisers expected any fireworks from their trade associations or other watchdogs and think tanks, they were disappointed.

The Financial Planning Association of Denver issued a statement last Monday saying it endorsed the selection of Mr. Bernanke because he supports educating people to become financially literate. The SIA endorsed him in its own statement that same day for his "intellect and temperament."

Allan Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh, said Mr. Bernanke clearly hits the mark on two of his three criteria: political independence and knowledge-based competence. "The [other one] is judgment," Mr. Meltzer said.

"When the theory doesn't give you a clear guide, you have to be decisive," he said. "We don't know [how Mr. Bernanke is about] that."

About the only dramatic dissent came from James Grant, publisher of Grant's Interest Rate Observer in New York, who wrote an Op-Ed piece in The New York Times on Wednesday decrying Mr. Bern-anke's support of inflation rate targets. The concept is as ludicrous as expecting the head of the Department of Energy to peg oil prices, Mr. Grant argued.

Mr. Gross takes a more hopeful view of introducing the rate targets because it encourages the confident purchase of long-term bonds.

"A 30-year commitment is a long commitment, and inflation is the ultimate enemy since it erodes the value of the paper, so any procedure that holds the prospect of keeping [inflation] down is confidence producing," he said.

Kevin Hassett, resident scholar and director of economic policy studies at the American Enterprises Institute for Public Policy Research in Washington, also is open to the inflation targeting idea.

"I don't think the inflation targeting dispute will lead to much of a difference in Federal Reserve policy one way or another," he said.

"It's a dispute over the optimal level of transparency. Now [Fed policymakers] presumably have some rough idea of what they want the inflation rate to be, but they don't tell," Mr. Hassett added.

"To me, the good news is it's out of the way," said John B. Sullivan, president of Portland [Maine] Global Advisors LLC, which manages $125 million. "Less uncertainty is good for investing."

Sara Hansard contributed to this article.

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