Gold News

Bernanke vs Markets

Bernanke has confirmed himself as a monetary lunatic of the highest order...

'LOST: One plot...went missing on the afternoon of 13 September 2012 in Marriner Eccles Building, Washington D.C. Please contact Ben Bernanke if found.'

That's right, dear reader, Ben Bernanke has officially lost the plot, writes Greg Canavan for the Daily Reckoning Australia.

In a desperate attempt to boost employment in the US (or so he says), the Fed chief announced he will buy USD$40 billion in mortgage backed securities every month until the situation improves.

In that case he'll be buying for a long time. USD$40 billion in monthly asset purchases is not that much. We know that sounds like an insane statement but in this already hugely inflated monetary world, it's not. When Bernanke fired his first shot of QE in 2009, the monthly rate of Treasury purchases was US$75 billion. This is a diminishing amount of QE.

QE1 and 2 didn't improve the employment situation, and neither will this upcoming monetary injection. Such actions profoundly distort the functioning of a market-based economy. At times like this it is important to remember just why the US (and global) economy is in such a's because central banks held the rate of interest well below the market rate for a prolonged period of time.

This resulted in a series of credit booms which, via the price mechanism, gave off a whole bunch of false price signals. The tech boom created huge overcapacity in telecommunications and associated industries at the turn of the century. The mortgage boom created overcapacity in housing and created millions of jobs in property and related sectors. But when the flow of credit diminished it turned out to be a false economy and the jobs disappeared.

Every time the market tries to adjust to an economy based on some semblance of a free market price of credit (in turn based on the amount of real savings in an economy) the Fed adds to the distortions.

So the Fed is simply giving us more of the same slop it's served up for decades...the same policies that have brought us to the brink of economic ruin. Now, as the inflated global credit structure collapses back into itself, the Fed has to run to stand still to monetize the collapsing debt structure.

That this policy will become an economic disaster is not in doubt. History will not be kind to Bernanke and the central banking fraternity. This is an insane policy designed to enrich the bankers and help monetise ongoing US$1 trillion plus Federal deficits. (Don't forget the Fed is still monetizing $45 billion per month in long term Treasury securities, as part of 'Operation Twist'.)

But Bernanke does it all under the cloak of the 'dual mandate' and his desire to achieve maximum employment. In the press conference following the Fed statement, a reporter asked Bernanke exactly how this would benefit 'Main Street', given that the past attempts hadn't really done anything for 'the people'.

His response was extraordinary. This guy has economic theory back-to-front. As we said, insane...plotless. Here's what he said:

'...this is a Main Street policy, because what we're about here is trying to get jobs going. We're trying to create more employment. We're trying to meet our maximum employment mandate, so that's the objective. Our tools involve – I mean, the tools we have involve affecting financial asset prices, and that's – those are the tools of monetary policy.

'There are a number of different channels – mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they'll feel more – more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they'll, you know, make a better return on that purchase. So house prices is one vehicle.

'Stock prices – many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.

'One of the main concerns that firms have is there's not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason – their house is worth more – they're more willing to go out and spend, and that's going to provide the demand that firms need in order to be willing to hire and to invest.'

When the Chairman of the Federal Reserve Board holds such a view about wealth creation, we're all doomed. Seriously...this is not good.

That Bernanke has now confirmed himself as a monetary lunatic of the highest order, who deserves little or no respect, is one issue. The other is what do you do about it.

Owning precious metals is a good place to start. Storing your hard won wealth in the ancient metal while Bernanke tries to fix things is a pretty safe bet as far as we can tell.

But what else? Should you assume Bernanke's actions will have a positive effect on markets around the world?

Well, the Fed's announcement certainly put a rocket under US shares last night. His promise to maintain low rates until at least 2015 and to keep rates low even if a recovery takes hold (it won't) emboldened speculators further. But wasn't all this already expected? Hasn't the market been buying in anticipation of QE3 for months?

Yes it has. So we wouldn't get too excited about this rally just yet. If we see follow-through buying next week then we might concede the market has evolved into a higher realm of consciousness...where fundamentals don't matter and wealth creation starts not with ideas, hard work and innovation, but with higher stock prices to encourage demand for the excess of 'stuff' already on the market.

By the Fed monetizing mortgage and government debt and thereby encouraging consumption, the current broken global economic system of US excess consumption gets another lease of life. This should increase the US trade deficit and increase the flow of US dollars into the international financial system.

It will give all those nations who don't want a stronger currency vis-a-vis the US dollar an opportunity to print more money to keep their currencies 'competitive'. This could provide another short-lived injection of credit-heroin into the addict, which in turn will result in only greater withdrawal symptoms down the track.

And what about Australia, which doesn't 'manage' its currency? Apart from the speculative buzz, it gets no help at all from Bernanke's idiocy. So the Aussie dollar strengthens right at the time when our export sector desperately needs it to it should given the recent collapse in bulk commodities.

But in the Bernanke era the market never does what it 'should' – or what you would expect based on fundamental, rational analysis. Which makes it a very dangerous market indeed.

If you're wondering what to do, our suggestion is to do nothing. Sit back and observe. See what next week brings. The market could well realize over the weekend that Bernanke is the problem, not the solution. It might look around and see a simultaneous global downturn looming, and panic in the other direction.

The truth is no one knows what is going on. If the market were an animal it would resemble Dr Dolittle's pushmi pullyu...deteriorating economic fundamentals pushing one way and Bernanke pulling another.

Who wins, the market or the man?

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals