Fischer resignation and your portfolio

Finally the incessant play by play of the post-election coalition negotiations was bumped from the headlines as Bank of Israel Governor Stanley Fischer surprised some with the announcement of his resignation. While Fischer is getting accolades from all corners of the political spectrum, readers of this column know that I have been quite critical of him at times.

I was critical of his confirmation process when our Knesset members thought it was more important to grill him over his Hebrew-language skills than ask him questions about his policies that directly led to the Asian financial crisis of the 1990s. This was of critical importance because his arrival was immediately following Israel’s near bankruptcy a la Argentina. To be fair, the questioning process was not his fault.

What is his fault has been his constant intervention in currency markets to weaken the shekel. For some reason central bankers the world over seem to believe that they are stronger than market forces, and they try and manipulate their currencies in one direction or another. They almost always fail, and Fischer was no exception.

A strong currency means that investors are giving the local economy a thumbs up. It speaks to the strength of the country as a whole. Trying to prop up one sector of the economy at the expense of other sectors is not a central banker’s job. Government officials, whether elected or not, should not be in the game of picking winners and losers.

In addition, his intervention in the housing crisis led to a deeper crisis and didn’t solve the problem. Everyone is crying that young couples can’t afford to buy an apartment.

Well they certainly can’t if they need to put down a lot more money thanks to Fischer’s forcing the banks to require larger down payments.

To Fischer’s credit he garnered worldwide respect, which certainly helped Israel’s credit rating and upgrade to become a member of the OECD. He also helped bring more transparency to the central bank. According to Globes, Fischer summarized his impact on the Bank of Israel by saying: “The next governor will be in a better position than I was when I arrived at the Bank of Israel. We have a Monetary Council with three external professors. This results in better, more established and higher quality monetary policy. It supports the next governor and what he does and will also prevent him from making big mistakes.”

What can we expect next? While no one knows who will replace Fischer, some pundits have Prof. Manuel Trajtenberg, of Trajtenberg Committee fame, as the leading candidate. Look out. His recommendations directly got us in the deficit mess that we are in.

Remember free education from three years old is not free! Maybe Prime Minister Binyamin Netanyahu can pull another rabbit out of the hat and bring in another respected global economist to lead the central bank, just like he did when he was finance minister by bringing in Fischer.

The question for investors is whether any of this change will have an impact on the local stock market. My hunch is no. In fact, in trading since the announcement, the shekel remained firm and the Tel Aviv Stock Exchange dropped a bit, but that can be attributed to the security situation in the North.

Of greater importance to the market is who will be chosen to be the finance minister and what kind of policies will be implemented to close the budget gap. Will we see higher taxes that are sure to stifle growth? Will we see a continued running of the printing press and a expanded deficit? Will we see lower taxes and pro-growth policies that will actually enlarge the governments haul from tax revenues, lower unemployment and again make Israel the economic envy of the world? The stock market is waiting for answers to these questions, and only then will investors have a clearer outlook on how to position their local investments.

Regardless of my opinion of his policies, I still think Fischer deserves a big thank you for uprooting his life to come to Israel and contribute to our country. Thank you.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.