Kass: Summers vs. Yellen

This column originally appeared on Real Money Pro at 8:18 a.m. EDT on Sept. 17.

NEW YORK ( Real Money) -- I have long written that Lawrence Summers would be slightly negative for the markets and that Janet Yellen was neutral to the markets. I never bought into the notion, as expressed by Jim Cramer on "Mad Money" last night, that Summers' polarizing presence would somehow act as a "one-man wrecking crew" for the markets.

I have guesstimated a downward influence of about 25 to 50 S&P 500 points to a Summers nomination/appointment and virtually no impact to a Yellen nomination/appointment. The basic reason I held to this view was not that Summers would be more hawkish but rather there would be far less transparency in a Summers Fed vs. a Yellen Fed. And this would lead to more market volatility.

To me, the market's Sunday-night and early-Monday gap in futures (up 24 handles) was a total overshoot to reality, as it seemed almost entirely based on the euphoria that Summers was bowing out.

On the principal bases (regulatory and monetary policies, personality and forecasting ability), Yellen is simply " a whiter shade of pale" than Summers.

Policy Failures

Bottom line: I expect little divide between the policy of a Summers-led Fed or a Yellen-led Fed.

And this is the market rub: The shoulders of the Fed have been the primary support to domestic economic growth since the crisis in 2008-2009, since our political leaders in Washington, D.C., have been inert, irresponsible and unwilling to come to meaningful compromise in the face of continued structural challenges.

While monetary policy has taken on a progressively greater responsibility to energize growth, quantitative easing and zero interest rate policy are growing less effective.

Indeed, as Albert Einstein is often credited to have said, "The definition of insanity is doing the same thing over and over again and expecting different results."

Recently, in King World News interview, Bill Fleckenstein delivered a variation on Einstein's apocryphal quote more vividly in describing our monetary fantasy:

Right now, people continue to believe that the same idiots that created all of these problems, namely the central banks, are going to somehow get us out of it with the exact same policies that got us into it.... We had so much artificial stimulus, and we've misallocated so much capital (that Americans) believe in the lunatics at the Fed, and the rest of the Western world is that way (as well).... As the fantasy dies ... more people will see that the Fed is trapped.

In summary, I see little difference between Summers and Yellen, and the jubilation on Sunday and Monday (following the Summers announcement) seems misplaced.

Let's now delve into the modest regulatory, monetary, personality and forecasting differences I see between Summers and Yellen.

Summers vs. Yellen: Regulatory Policy

Summers and Yellen share similar views on many regulatory issues, according to a review of their public statements and interviews with friends and colleagues. Both forged academic careers as members of the economics counterculture that attacked the dogma of efficient markets. They both believe that markets require regulation to prevent abuses, ensure fair competition and prevent disruptions of economic growth. Regulatory policy will be important in upcoming years and, as contained in a recent New York Times article, " The next head of the Fed faces controversial decisions, in particular, about what safeguards to impose on the largest financial institutions to make it credible that if they falter, they will be allowed to fail."

Dodd-Frank provides an instruction manual, but the interpretation and construction process remains incomplete. Financial regulation will fall on the new Fed chairman, who in the past has been selected almost entirely based on monetary philosophy. That said, it is hard for me to separate Summers and Yellen as regulators.

Summers vs. Yellen: Monetary Policy

The reality is that Janet Yellen might be somewhat more dovish than Larry Summers, but even a number of Fed members have questioned the efficacy of quantitative easing and the wisdom that the only prescription to promote economic growth is more cowbell. It remains my view that as we move out over time, it will become increasingly clear that more easing will be ineffective or even counterproductive. So, the marginal differences in Summers'/Yellen's hawkish/dovish monetary views will further lose significance.

Summers vs. Yellen: Personality

I get that Summers is polarizing and that Yellen is a consensus builder, but I can make the case that the challenges ahead are so monumental that a Volcker-like Fed chairman (i.e., Summers) is preferable to a conciliatory Yellen.

Summers vs. Yellen: Forecasting Accuracy and Oversight

"For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the SIV's -- I didn't see any of that coming until it happened."

-- Janet Yellen, Financial Crisis Inquiry Commission (2010)

As well, Janet Yellen should be considered no better or worse a forecaster than her predecessors nor relative to Summers' accuracy of projections in the past. Indeed, all of the previous Fed members missed the credit bubble but not many defended the housing bubble and the disastrous Fed policy of letting them play out (as Yellen did) and then tried to print up the pieces. (If you don't believe me, check out this Yellen speech back in late 2005.)

Importantly, let's not forget that Yellen was President of the San Francisco Fed, which had oversight responsibility for the country's largest mortgage lender, Countrywide Financial.

Summers has his own visible liabilities. As Treasury Secretary, he presided over senior Clinton administration officials who reached the fateful decision in 1998-1999 that there was no need to regulate a new family of financial transactions known as over-the-counter derivatives. Not a good call!

More Challenges Down the Line

Markets tend to glom onto the headline and, in the case of the Summers news, market participants (as they seem to do far too often) fervently overreacted. Maybe this wasn't surprising considering the upbeat market mood of the last two weeks.

Late in the trading day yesterday, however, it seemed that the market was already changing its mind regarding the Summers decision, as interest rates reversed (bonds were down on the day and yields well above the morning's low), gold was barely higher and the Nasdaq traded much lower (Nasdaq futures closed down 10 handles after being up 35 handles at Monday's market opening).

Finally, let's not lose sight of the fact that without a battle over Summers for confirmation, the administration might save its ammo for what is likely to be an extremely divisive budget debate. In fact, I suspect the market came in late in the day during and following an aggressively hardline speech by the President that raised the specter of a debt ceiling and budget deficit showdown reminiscent of the summers of 2010-2011.

Indeed, after hearing Obama, I am more fearful of a possible government shutdown than the benefit of a Yellen appointment.

In summary, despite Summers being out and Yellen likely being in, I am sticking to my view that we are at a market top; we just overshot by a bit with an unjustified market ebullience based on Summers' withdrawal as a candidate to be the next Fed chairman.

At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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