Friday, December 18, 2009

Ben Bernanke… Hero to Goat to Hero to ???

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Earlier this week Ben Bernanke was named Person of the Year by Time Magazine, a shocking choice to me. It has nothing to do with whether he deserved it or not, but rather how wide the pendulum has swung since he was first appointed in 2006. I’ve long written about Bernanke as the perfect person for the times. As many people already know, Bernanke is best known for his exhaustive study of the Great Depression and the massive mistakes we made to perpetuate the economic collapse.

Helicopter Ben, as he was labeled, joked that the government should have dropped $100 bills from helicopters to flood the system with enough money to get people spending again to stave off deadly inflation. Anyway, Bernanke was instantly popular after his January 2006 confirmation during the height of the bull market. The higher stocks and credit climbed, the more kudos given to his Fed.

And when the credit markets began to rollover in 2007, Bernanke boldly stated that the Subprime Crisis would be contained and no recession was on the horizon, comments he would later regret more than Tiger Woods’ transgressions! As 2007 continued unfolding, Bernanke’s popularity began to wane as hedge funds were going bust and the mortgage debacle became more serious.

During 2008, Bernanke was blamed for keeping rates too high in 2007 and severely underestimating the depth of the credit crisis. But he was also given credit for his creative and outside the box strategies in attacking the various crisis with the force of an atomic bomb. And now, we’ve seen somewhat of a polarization with some folks seeking to anoint Ben, while others wanting to stick him with pitchforks. Just watch the Senate confirmation hearing and that said it all!

I truly find it fascinating that Bernanke’s influence has filtered all the way down to “Main Street” being chosen as Time’s Person of the Year. That is extremely unusual. And from my seat, not a positive sign at all. In the early 1990s, I studied the research of Paul Macrae Montgomery of Magazine Cover Indicator fame, market analyst and fellow money manager from Virginia, who examined all Time covers since the 1920s and concluded that by the time people or companies or events made the covers of the most widely read and popular publications, the party (or trend) was just about over (or about to begin if the cover was negative).

Further, he determined that once the magazine cover hit, whatever trend was in place generally continued for about a month before reversing. And one year later, he concluded that roughly 80% of the time, investors would have been profitable by fading or going opposite the magazine cover. This is commonly referred to as contrarian investing. You can Google Mr. Montgomery for more details if you’re interested.

Academics are quick to dismiss this type of analysis as bunk, but to me it’s definitely more than just coincidence. There is a classic book written by Charles Mackay called "Extraordinary Popular Delusions and the Madness of Crowds" that discusses this in great detail. Oh yeah… it was written in 1841 and still is viewed as a masterpiece!

Back in December 1991, Ted Turner graced Time’s cover as Man of the Year, yet all his stock could muster over the next year was -7% in a generally up stock market. At the end of 1997, Andy Grove, CEO of Intel was featured in the same fashion prompting that stock to do absolutely nothing for eight months.

The most famous (or infamous) Person of the Year was Jeff Bezos, CEO of Amazon, in late 1999. As you can see below, that stock peaked at $113 and collapsed 87% to $15 one year later!

Time named President Bush in December 2000 to its cover and one year later, the market was still much lower.

Finally, in late 2007 Vladimir Putin was “The Man”. In Amazonesque fashion, the Russian stock market didn’t exactly reward investors (although not many markets did in 2008).

So now we have Fed Chair Ben Bernanke on the cover of Time and named Person of the Year. His reconfirmation was just passed by the Senate Banking Committee with the full Senate scheduled to vote (and confirm) in early 2010. Bernanke is on record as saying he did what he did, sometimes with disgust (AIG, Merrill) because he didn’t want to be the Fed Chairman who presided over the second Great Depression. Additionally, President Obama is on record as crediting Bernanke and the Fed from rescuing the financial system and economy from falling into another depression.

Based on the very positive nature of Time’s declaration, Bernanke’s and Obama’s comments, it is more than likely, roughly 80% according to Montgomery, that we are near a peak for Ben Bernanke, the Fed as a whole and possibly the financial markets. Although I certainly hope it’s wrong this time, no one should effectively manage money based on hope.

Please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

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