Why Ben Bernanke May Call a Do-Over

President Obama’s comments earlier this week about the departure of Bernanke as his term ends and Bernanke’s desire to leave probably have not helped the market’s decision to trust Bernanke over the timing. We still think that the market may be overreacting to Bernanke’s real comments in favor of listening to market pundit interpretations, but trying to step in front of a freight train is never sound advice. The train will run you over every time.

So, what investors might want to consider going into the weekend is that Bernanke will now try to make clarifications. If he is as smart as he is reported to be, the clarification will be short and sweet. He simply needs to say that he is puzzled about how the markets interpreted a tapering of bond purchases and that the fresh rise in yields and the drop in the value of stocks almost assures that the buying will continue. In short it would simply be a chance for Bernanke to play a kid’s game and say “Do Over!”

The question is whether Bernanke actually will try to do any damage control. Now that Greece is back in the soup and threatening the euro, a new round of concerns is likely to come back into mix next week. Another negative development is that 10-year Treasury notes just hit the 2.50% yield, versus 2.13% when we all went home last Friday. This is the first time we have seen a 2.5% handle on the 10-year Treasury yield going back to August of 2011.

We would not expect that Ben Bernanke will address the stock market reaction. Stocks are still up about 13% for the year on the DJIA. The correction has so far been only about 5% from the highs. The Nikkei 225 in Japan corrected 20% after Abe did not follow through with more stimulus.

It is hard to know if Bernanke will surface with a “Do-Over!” or not. The one parting thought we want to telegraph is that no central bankers want things to end badly on their watch. Central banks also almost always try to create a “soft landing” rather than a “hard landing” after easing policies have to be reversed or tapered back.