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To Be a Fed Chairman

To Be a Fed Chairman

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Published by: zerohedge on Nov 17, 2009
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11/16/2009

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To Be A Fed Chairman
By Nathan J. Burchfield
Monday, November 16, 2009
 
 
This report explains the method I use to interpret the financial markets, economics, and potentialinvestment opportunities. I have found this method to be very helpful.
Please Note: The econometricmodels used in this report are real. I created and tested them myself.
If had to name my method, I would call it the Multiple Personality Financial Market EconomicInvestment Disorder, or simply (MPFMEID). The definition of Multiple Personality Disorder listed below, iscourtesy of www.merriam-webster.com will help me explain why I would call me investment style(MPFMEID).
Multiple Personality Disorder: “
a dissociative disorder that is characterized by the presence of two or more distinct and complex identities or personality states each of which becomes dominant and controlsbehavior from time to time to the exclusion of the others—abbreviation
MPD
; called also
alternating personality, dissociative identity disorder” Within my approach there is a list of certain individuals to put it more crudely that I must becomeand, let their thought process dominant and control my interpretation of the financial markets, economics,and investments. This allows me to compartmentalize everything and then form specific schemata for  possible reactions to events that unfold and the impact or possible impact to the financial markets,investments, or economic policy. It allows me to envision how certain key financial authorities may likely react to these events. The economic prescriptions they adhere to, and so forth. The key criteria to my 
(MPFMEID)
approach is psychologically profiling and studying individuals who make the economic  prescriptions i.e. monetary authorities, key politicians, key academics, and financial professionals. I do thisby reading their books, essays, speeches, and whatever else I deem important as possibly to helping seethe world as they do. As I am studying the specific individual, their essays, and books I begin to approachthe markets as they do. The quote below from George Orwell’s essay titled. “Literature and Totalitarianism” 
express exactly how I feel about what individuals’ writings say about them, who they really are, and whatthey really feel and believe.
 
“For writing is largely a matter of feeling, which cannot always be controlled from outside. It is easy to paylip-service to the orthodoxy of the moment, but writing of any consequence can only be produced when aman feels the truth of what he is saying.”
 
George Orwell: ‘Literature and Totalitarianism’ June 19, 1941.This leads me into the main point of this report. To show you how I implement my (MPFMEID)
 
approach, and think like a specific key individual that is involved in the financial markets. The individual’s wperspective I am going to analyze is none other than Chairman of the Federal Reserve, Ben S. Bernanke. Ihave read all of his speeches, econometric studies, and his book, “Essays on The Great Depression”. I wasable to gain insight into how Bernanke interprets, approaches economics, his monetary policy, and thepowers of the Federal Reserve. It is now time to begin my analysis through the eyes of the Chairman of the Federal Reserve, Ben S. Bernanke.In my booked entitled, “Essays On the Great Depression”, I state at the top of page 6, I am amacroeconomist rather than a historian, and my book is intended to cover the broad economic issues of theGreat Depression not historical details.On page 44 I mention how the U.S. banking system was extremely vulnerable, because it wasmade up of so many small independent banks, and that nations with only a few large banks Britain, France,and Canada never had the difficulties on the scale the U.S. did. The reason I brought that section of my
 
book up is to highlight being a nation with a few large institutions is better if a nation wants to limit their banking sector’s vulnerability.This is the last key point I will draw out from my book, it is on page 54. It has to do with the creditmarkets during the Great Depression, and what I used to gauge their stress. I use the yield differentialbetween Baa corporate bonds and U.S. Treasury bonds. It is merely a measurement of preferences for safe “liquid” assets, but I must note that because it has no adjustment for reclassifying firms that should bein higher risk categories; it tends to greatly understate the yield difference between safe and risky assets. Imust also note the indicator showed rather large moves from 1929-1930. The yield differential in July of 1932 jumped up to 7.93 percent. That was a drastic shift when compared to the fact during the 1920-1922recession the yield differential never went above the range of 2.5%. The yield differential has a strongrelationship to the banking crises. Milton Friedman and Ann Schwartz where the first people to point outhow important the yield differential was during the banking crises that occurred during Great Depression.Below is a monthly chart from January 2007 through December 2008 of the yield differential (Baayield minus the 10-Year Treasury yield constant maturity). I also calculated the Exponential Moving Average (EMA) for the same period, because that gives one a better grasp of what the yield differentialactually was for the specific month. The data is courtesy of the Federal Reserve Bank of Saint Louis.When Bear Sterns failed in March of 2008, the yield differential was 3.38 percent, and the EMAyield differential was 2.13 percent. For the month of September of 2008 when Lehman Brothers failed, theyield differential was 3.62 percent, and the EMA yield differential was 2.57 percent. The credit marketswere seizing up and banks where under tremendous pressure. The financial system as we knew it was onthe verge of a collapse if emergency action was not taken. Liquidity had dried up, and banks could notafford to risk the scarce capital they had.

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