Even The Hawks Are Dovish

This morning on CNBC’s Squawk Box, former White House Economic Advisor Larry Lindsey said that the economy had been “levitated” to current levels by lots of government money and that the main question will be whether growth, in sales and not productivity, can eventually provide real support and replace government helium. Mr. Lindsey said what Farr, Miller & Washington has been saying for some time.

If we agree that transition to end-user demand is the critical turning point, then the next question becomes when. Our great friend and President of the Philadelphia Federal Reserve Bank Charlie Plosser has always been hawkish, which essentially means he’s always worried about inflation. When we were speakers together last January at the Annual University of Delaware Economic Summit*, Charlie was worried about the political headwinds when it came time to withdraw stimulus. He predicted that Congress would be arguing against any policy tightening based on the “fragility” of the then-nascent recovery.

This morning Plosser said, “I believe the Fed will need to withdraw the extraordinary amount of liquidity it has provided to the economy and begin to raise interest rates as the economy continues to improve and financial markets return to more normal operation.” Last month we reported the similarly steely words from Federal Reserve Chairman Bernanke: “It will be very important to remove monetary accommodations at the right time.” Golly fellas, that’s just swell. Well at least we know they’re both on the same page: the policy stimulus will eventually have to be withdrawn.

All of this supports our conclusion that the markets and economy should remain generally stable, if not positive, as long as the government-money punchbowl remains. Keep in mind that there will be down-legs, but conditions remain so fragile that the best they can do is talk about some point in the future when they will need to reverse course. The eventual and evitable tightening in policy, in our opinion, will not bode well for share prices when that time comes.

Our prescription is to follow our discipline and remain invested. We cannot predict with any degree of precision when the government might see fit to reverse course. Faced with this uncertain backdrop, our work continues to favor multi-national blue-chip companies that are largely trading at discounts to the index averages, provide a good deal of international exposure, along with somewhat of an inflation hedge, and offer strong downside protection should another crisis arise. Our “Top 10 for ‘10” list is available both on the CNBC blog site and by emailing us at invest@farrmilller.com.

*This year’s Economic Summit 2010 at the University of Delaware will be January 20th at 8:30 am. The speakers are Knight Kiplinger of Kiplinger Publishing, the Honorable Nancy Wentzler, Chief Economist and Deputy Comptroller of the Currency, and me. Nancy will focus on the future of US Banking, Knight on Real Estate, and I will focus on the stock market. All of us will present our Economic forecasts. It’s free. Please come. Again invest@farrmiller.com for details.

Hang in there,