Helicopter Ben: Does The Fed Meeting Really Matter?

Includes: DIA, GLD, SPY
by: Skyler Greene

Helicopter parents are annoying. You know the ones -- hovering around their children, reapplying sunscreen every five seconds, solving all their kids' problems before they even start to appear.

The main problem with helicopter parents, though, isn't that they're obnoxious. It's that they're raising utterly dependent kids, who never learn how to think for themselves. They seek approval and reassurance from Mommy and Daddy, never learning to stand on their own two feet against the winds of the world.

While there are various arguments for and against the Fed's unconvential monetary policy (ZIRP and QE), it's undeniable that Ben "Helicopter" Bernanke has lived up to his name in more than one way.

Bernanke got the nickname "Helicopter Ben" after he referred to a statement by Nobel economist Milton Friedman about fighting deflation by using a helicopter drop of money.


Helicopter Parenting, Government Style

Social programs aren't the only type of helicopter parenting the government's been engaging in. Whether intentionally or not, Bernanke and the Fed have created a market where Fed action is the end-all be-all proxy of the stock market. If the latest jobs statistics are bad, the sell-off is contained by knowledge that like any good helicopter parent, Ben will swoop in to save the day. Dan Greenhaus, global strategist with BTIG, made this point quite eloquently on June 6th.

There's just been, for the last 48, 72 hours a growing feeling that a 10 percent decline in the stock market is as deep a decline as you would get with Ben Bernanke lurking tomorrow.

Even with strongly positive fundamentals, rallies are capped out of fear that advances will lessen the chances of QE3. So it seems the market really isn't functioning based on its own judgment -- it's functioning based on the judgment of Helicopter Ben. A classic sign of helicopter parenting.

In short, the market has developed an unhealthy fixation on the Fed, as Tim Iacono pointed out in April. While I disagree with some of his points (he seems a bit bearish), I agree with his main point:

The short-term moves up and down are now almost entirely dictated by what the Fed has to say about additional money printing... It all kind of makes you sick to watch it - the Fed utters something about how another round of money printing might be needed and markets go up, then indications surface that another round of money printing might not be needed and markets go down. The scariest part is that people are starting to accept this as "normal".

So Does The Fed Meeting Really Matter?

It depends on what your "strategy" is. Here's a key differentiation you need to make: are you an investor or a trader? If you'd be comfortable leaving your portfolio mainly intact (with minor adjustments and rebalancing) over a 5, 10, 15, or 20 year period, then you're an investor. For investors, the Fed meetings are relatively irrelevant. Investors make decisions based on company fundamentals and other factors that aren't really influenced by day-to-day stock price. Fed action affects the market, but doesn't really do a whole lot for fundamentals of individual companies. The Fed affects the market as a whole on a day-to-day basis, throwing the proverbial baby out with the bathwater -- and vice versa. This phenomenon is attributable to several factors, including strong short-term correlations due to index trading and the rise of investor short-termism. (Both of those links are great reads for those interested in the mechanics of market efficiencies.) To put it another way: in fifty years, market action because of the Fed's moves will be nothing but a blip on the radar for blue chips like Procter and Gamble (NYSE:PG) or Coca Cola (NYSE:KO).

If, on the other hand, you're a trader -- and you see your portfolio changing dramatically over the course of weeks, months, or years -- then what happens at the Fed meeting is obviously critical. QE could spark a rally in gold assets like the SPDR Gold Trust (NYSEARCA:GLD), and provide indexes like SPY and DIA with a short term boost.

Personally, I don't really care what happens at the Fed meeting. I prefer sticking to "old style" investing and focusing on the real fundamentals, which I believe are positive in the long term. I don't need Helicopter Ben to interpret things for me. The results of the meeting may be useful in profiting off short-term trades (hopping on the gold train, for example). But insofar as my long-term investing strategy? The Fed meeting doesn't matter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.