Robert R. Johnson - Invest with the Fed : maximizing portfolio performance by following Federal Reserve policy

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To Heidi, the love of my life and my best friend.Robert Johnson

To my family, and especially, my wife and soul mate, Penny, my son, Tyler, and my daughter, Alyssa.Gerald Jensen

To my parents, Carmen and Manuel, and to the love of my life, ElisaLuis Garca-Feijo

Thanks to my coauthors Gerry and Luis. Gerrys wisdom, sage counsel, intellectual insights and friendship have greatly enriched my life over the past thirty years. Luis is the rare individual who combines intellectual firepower and quick humor. Anyone fortunate enough to spend time with Gerry and Luis are better people for having done so.

My dissertation chairman and friend Thomas Zorn along with Richard DeFusco continue to have a profound influence on both my personal and professional life. I learned a great deal from working with them. The most valuable lesson was that you could combine friendship and academic rigor. John Maginn and Donald Tuttle are consummate professionals and their influence has truly made me a better person. John and Don are each the embodiment of the gentleman-scholar.

Dean Anthony Hendrickson and my former colleagues in the Heider College of Business at Creighton University have supported this project. I was fortunate to work with individuals who recognize that business is an applied disciplinea simple concept that all too many business school academicians forget.

There are times in your life when you discover who your friends truly are. Thanks to Matt Scanlan and Jeff Lorenzen for their unwavering support during difficult times.

Most of all, thanks to my mother, Rowena, for inspiring me to continue learning throughout my life. She didnt have the opportunities that I have, but instilled early in my life a thirst for knowledge. I wish she had lived to see the publication of this work.

Thanks to my parents, Bob and Marilyn, who instilled in me the importance of hard work and doing the right thing.

I am forever indebted to my coauthors for making this book project both intellectually rewarding and enjoyable. Bob and Luis are both consummate academicians and true friends.

I acknowledge the influence of three professors that had a profound effect on me and who I have tried to emulate throughout my own academic career, Manferd Peterson, Thomas Zorn, and Roger Stover.

Thanks to my coauthors, Bob and Gerry, for their trust, guidance, and example; and for sharing with me their sense of humor. Thanks also to Richard Pettway and Jeff Madura for their advice, and for becoming my mentors without realizing it.

I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.

Reginald McKenna,
chairman of the Midland Bank,
addressing stockholders in 1924

S eptember 8, 2013, started with the global equity markets spiraling downward, languishing as a result of a confluence of economic data that were below expectations for a recovering economy. Suddenly markets all around the world reversed course and surged upward, restoring billions of dollars in global wealth in literally a matter of minutes. What dramatic event caused this remarkable reversal of fortune? Shockingly, it was the pronouncements of a single man. Thus is the power of the Federal Reserve chairman, in this case Ben Bernanke. On this particular date Bernankes dramatic announcement was simply that of a delay in the Feds planned curtailment of its monthly injection of money. The dramatic global response to a seemingly innocuous announcement exemplifies the tremendous influence that the Fed has on the financial markets. The Fed chairman has been described as the second most powerful person in the world, second only to the U.S. president, and many would argue that this understates the power of the position.

The most memorable case of the market reacting to the pronouncements of a Fed chairman was the famousor, if you are a stock market bull, infamousirrational exuberance phrase uttered by then Fed chairman Alan Greenspan. In the course of a very dry speech (and for anyone who ever heard Greenspan speak, was there any other kind?), Greenspan interjected the following lines: