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 Why This “Bernanke Put” Could Make for the Scariest Hallowee

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Number of posts : 440
Registration date : 2007-07-01

PostSubject: Why This “Bernanke Put” Could Make for the Scariest Hallowee   Tue Oct 30, 2007 10:20 pm

Why This “Bernanke Put” Could Make for the Scariest Halloween Ever

By Keith Fitz-Gerald

Contributing Editor
The markets are clearly counting on the "Bernanke Put," which is how
market insiders refer to the Federal Funds rate cut nearly everyone is
hoping for today (Wednesday).
I have to say that I’m dumfounded.
I simply can’t understand why investors believe that another rate
cut will somehow bail out the stock market and sweep away the nation’s
housing and credit problems - as if Federal Reserve Chairman Ben S.
Bernanke were the second coming of Harry Houdini.
Nor do I understand why millions of investors who have no rational
belief in the tooth fairy, Santa Claus or any other creatures of myth
and mirth, are willing to wager their hard earned money on nothing more
than an assumption (with some folks, it’s more of a blind hope) that
Team Bernanke will cut interest rates
What I think, though, really doesn’t matter leading up to the
announcement that Federal Open Market Committee (FOMC) policymakers
will make at around 2:15 this afternoon.
In reality, what doesmatter are the facts. And when you consider
the subprime mortgage mess, the spillover effect that financial
catastrophe has had on the global credit markets, and the sorry state
of the U.S. housing market, well, those "facts" aren’t especially pretty
The bottom line: No matter what the Fed actually does today, there
are three key factors that underscore why it is crucial for you to "go
global" - as always, the dominant theme here at Money Morning. Let’s take a look at just why this is the case:

  • First, the Fed usually bases its interest-rate decisions on
    inflation. Right now, inflation is running at an annualized rate of
    almost 2.5%, meaning it is well above the central bank’s
    well-established "comfort zone" of 1% to 2%. (If you really want a
    Halloween scare, check out which tracks unadulterated versions of the CPI that are tracking north of 6% at the moment).

  • Second, the Bernanke-led Fed is right now engaged in the shell game
    of its monetary life. The central bank desperately wants to create the
    perception that inflation will take a breather. Not surprisingly, much
    of the commentary it has provided recently is oriented around the
    notion that oil prices will stop rising and that the credit crisis will
    ease. In other words, Bernanke & Co. are trying to get us to focus
    on an "inflation-free" future - ignoring what’s right in front of our
    noses. I find that worrisome at best, and troublesome at worst, for it
    leaves me wondering just what they really know. Hmmm….

  • Third, Team Greenspan - and now Team Bernanke - has created and
    then perpetuated what is probably the most massive asset bubble of all
    time [and given the Godzilla-sized bubble Japan created back in the 1980s, we’re really saying something here] by allowing real interest rates to slip
    to unprecedented lows. Greenspan dropped rates in the late 1990s to
    stave off an implosion of our financial system because of the Asian
    Contagion and the collapse of the Long-Term Capital Management hedge
    fund - only to inflate the money bubble that created the "dot-bomb"
    debacle. When Internet stocks imploded, we merely shifted what was left
    of our excess capital from stocks and into real estate - creating a
    housing bubble fueled largely by a barrage of hazy "liars’ loans." I
    mean, to borrow under some of those subprime- and "no-documentation"
    mortgage loan programs, prospective borrowers essentially only needed a
    heartbeat and they could obtain money to buy a house, or car, or some
    other hard asset. That ill-advised credit policy finally came home to
    roost this summer, as banks realized they couldn’t accurately value the
    asset-backed debt and the credit markets seized up. Now we’re left with
    a greenback so tattered that it looks like something a Depression-era
    hobo would wear while hopping a westbound freight train.

After reviewing all this "evidence," I reach two inescapable conclusions - both of which point to higher inflation:

  • First, there’s still too much easy money available [in technical
    terms, the money supply is still way too high], an inflation-inducer if
    ever I’ve seen one.
  • And, second, judging from the fact the global economy is still
    accelerating - even as the U.S. market slows - real interest rates are
    far too low to slow inflation down.

So when the Bernanke and the policymaking Federal Open Market
Committee end their two-day meeting with a public pronouncement this
afternoon, it will take one of the following three forms:

  • First, the Fed could cut rates again. Given the way the markets reacted to the Sept. 18 "Bernanke Surprise,"
    you can almost bet the ranch that a rate reduction of any magnitude
    would fuel an immediate rally in U.S. stock prices. However, it will
    simultaneously make the dollar weaker than it already is. And that’s
    going to mean more pain for American consumers because foreign made
    goods will be made more expensive. So will fuel. However, this will
    likely point to more big gains for investors holding shares of
    companies deriving a substantial portion of their sales and profits
    from outside U.S. borders.

  • Second, Fed policymakers could actually raise interest rates -
    although that’s about as likely as the Air Force holding a press
    conference to say that a UFO really did crash at Roswell. This
    would make the U.S. dollar more valuable to overseas investors, but
    U.S. investors and consumers would suffer as U.S. stocks plunged. The
    only domestic beneficiaries might be the cardiologists called in to
    treat patients who’d suffered coronaries over the unexpected news.
    Globally, this might actually fuel growth, since investors worldwide
    would have more confidence that all markets would advance.

  • Third, the Fed could stand pat, and do nothing. The decision alone
    would not affect the greenback’s value in either direction. However,
    global traders would likely take the dollar down anyway as companies
    begin raising prices to keep up with the inflationary pressures being
    felt around the world. And as you probably guessed, global growth -
    sans the U.S. market - would continue unabated.

No matter what the Fed decides to do, make sure to pay close
attention to its commentary, and especially to its near- and long-term
outlooks. Given that they’re being issued on Halloween, they could well
be scary as anything for investors - especially if they’re expecting
one scenario but end up getting another.
And no matter what the outcome is for the U.S. economy, nothing will
change the green light for global growth. And that’s yet one more
example of the American consumer, for so long the integral cog in
global growth, becoming increasingly irrelevant on the world stage.
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