The Un-Greenspan: Bernanke is Unusually Uncertain

Ben Bernanke caught the literary attention of global financial markets last week when he said that the economic outlook is "unusually uncertain". (See, for example, Bloomberg's report on the metals markets:"Gold Declines as Bernanke Cites `Unusually Uncertain' Outlook for Economy"; http://www.bloomberg.com/news/2010-07-21/gold-declines-as-bernanke-cites-unusually-uncertain-outlook-for-economy.html). He went on to say that the Fed does not anticipate a double dip in the economy, which is good to hear. Of course, the sound of a phrase is important to its ultimate success as a catch-phrase, and 'unusually uncertain' has a nice rhythm to it - the same rhythm, arguably, as Greenspan's famous 'irrational exuberance'. Neither man is likely to win a poetry slam, but Bernanke's phrase is likely to meet with some success in the land of economic lore. Bernanke's phrase is a little more user-friendly than Greenspan's, in keeping with the general sense that Bernanke wants to increase transparency somewhat. This is a welcome change from "The Oracle" and his obfuscatory prose, at a time when businesses badly need clear information about the economy.

A search on Google (which is not really yet a verb, imho) indicates that there are 409,000 results for 'unusually uncertain', though Google does not yet anticipate the phrase as you type it in (neither does Bing or Yahoo, for that matter).

If you trade options, you are trading volatility, and Bernanke's assessment tells us that volatility should be high. Interestingly, the VIX (the volatility index on the S&P 500) is trading around 22 today, well off of its highs above 40 from early in the summer. It's above pre-crisis (i.e., pre-2008) levels, but around pre-collapse of the world (i.e., Q4-2009) levels. Perhaps the markets are ahead of the story.

The concern for businesses these days, of course, is that demand will taper off, and this may well underlie the reluctance to hire that's been so frustrating for job seekers. There are really two ways to deal with uncertainty, which is generally defined as a lack of information about the future. One is to go get more information. Managers, however, can't just go back to school or read up on the latest forecasts - if the Fed is unusually uncertain, there's not much hope for the rest of us. The second is to stay flexible, by doing things such as shortening the tenor of contracts, building cash, and coping with demand by paying overtime instead of hiring.

The trouble with uncertainty, if you look at the VIX as a proxy, is that, over the last 5 years at least, it has spiked very quickly and dropped slowly. Hopefully, the positive signs will pick up, we can remove the 'unusually' from our uncertainty, and firms will feel confident enough to hire.