What if Bernanke Succeeds? 19 comments
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In the aftermath of the employment report one could almost hear the investment community asking the same question. What will the investment landscape look like if the Fed, Treasury and Administration succeed at turning the economy around?
The answer is unknowable, but the market suggests a few bets have changed. The most striking example of the reversal of thinking can be seen in the US Dollar trading before, during and after the report.
Click to enlarge:
US Dollar Index - 5 Minute Chart
The initial reaction was an immediate sell-off in the dollar and a concomitant rally in US equity futures. For the last several weeks, the predominant and profitable line of thinking has been, “When you see green shoots, sell the dollar and buy equities.” However, that all changed at 8:40am on Friday morning.
In last Tuesday’s Surf Report, our headline was “It’s Alive,” a reference to Frankenstein and the Triple R rally. It appears that last Friday market participants finally got around to reading our Tuesday report!
So what will the investment landscape look like if the monetary and fiscal stimuli actually work? The first stop on our tour of the new outlook will be dollar-land. If the economy is recovering, then the need to print more money has ended. In fact, the Fed may actually be able to cease quantitative easing altogether. The implication is that those who have been fearful of a falling dollar due to oversupply are wrong. We are included in this group.
An economic recovery means that the Fed will begin to decrease the money supply. Recent Fed rhetoric has foreshadowed such an action. Many of the governors have become increasingly concerned with the Fed’s independence and are actively seeking an exit strategy.
A contraction in the money supply is precisely what Chairman Bernanke has been concerned about. His entire academic and professional career has been devoted to avoiding the mistakes made during the Great Depression. In particular, Chairman Bernanke has concluded that the Depression was exacerbated by the Fed’s inaction on a declining supply of money. The Fed Governors who are looking for an exit strategy will have a tough fight on their hands, as they should.
Now is not the time to talk about exit strategies and a contraction of the money supply. Sure, there are green shoots, but a farmer does not remove the fertilizer once the sprouts have sprung. There will be a time and place for such discussions, but now we must tend to the sprouts.
Attending to the sprouts may mean the rapid expansion of the money supply is over and that is enough to get the dollar moving higher. It is also enough for us to tighten our stops in our weak dollar trade, especially gold and silver.
The dollar also received a boost from the market belief that the Fed may actually raise rates. At one point on Friday the Fed Funds Futures implied there was 60% chance the Fed would raise rates by November! Once again an unlikely and detrimental scenario and once again we need to remind ourselves that we are trading the market, not our opinions.
So where does that leave us? Let us summarize: the probability that the Fed will slow the rate of expansion in the money supply means the dollar may strengthen, coupled with higher rates (both actual and perceived) should attract capital to the United States. Our answer to the question “What if they succeed?”
Buy American!
Disclosure: I am long GDX, SLV, FXE and many US Equities.
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This article has 19 comments:
Pumping money into an economy doesn't make it a sound bet for sustainable capital investment.
You can put all the lighter fuel on a dying barbique you wish, without more charcoal, it will flair up instantaneous and then extinguish all the quicker.
Bernanke won't succeed. Frankly, he hasn't really grasped what he is try to achieve.
If the Fed and Treasury succeed it will be on the backs of all our kids in higher taxes and mass devaluation of the dollar. Don't envy the young. Looks are transient. Debt can lasts a lifetime.
1. Initial reaction
2. Fed lackeys tattooing the offer with more taxpayer debt money
There are no markets, there are only interventions. Fed, Fed lackeys, and Treasury know how to paint the TA tape, and it's easy to do when you have unlimited money. Even the widely touted "green shoots" are entirely attributable to interventions. The underlying fundamentals still stink as bad or worse than they ever have. Let's close a few thousand car dealerships and a few auto plants and see what U3 and U6 do.
We, American people, will pay for this in the next 12-24 months.
On Jun 09 08:46 AM FloridaBoy2 wrote:
> I thnk Bernake is on the right track and has done a great job. I
> have not seen any alternative ideas from naysayers. I'm cautious
> but optimistic about the future. I agree with Brian.
He will be forced to make some moves, many of which will have unpleasant consequences.
Woe unto those that believe free money comes with no cost.
On Jun 09 01:42 PM swaps wrote:
> I think Greenspan and Bernanke have already proven that the central
> bank concept is a dead horse that should be relegated go the dust
> bin of history.
On Jun 09 09:55 AM Noonan wrote:
> Here is an alternative idea: We, as an entire nation should stop
> spending money that we don't have.
Of course it's all in the timing. Bernanke will want to keep throwing money for too long.
This is complicated by the fact that the green shoots will not all sprout at once. In fact, it would be amazing if they did. So someone get to pick the shoots that fail.
It won't happen. The dollar is dying.
Fools are still fighting the Fed.
The article is right and the ideologues are wrong, as usual.
Don't. Fight. The Fed.
Use to be every trader knew this. Now they don't, and think it is some grand libertarian heroism on their part. It isn't, it is just blind stubbornness.
The hyperinflation thesis died in the summer and fall of 2008. It isn't coming back. Give it up already.
I know several people that have fought the Fed. They're wealthier than ever. They stored all their savings in gold and silver since the 1920's. What do you think that family is worth now?
If you stuck with the Fed, you went to work, earned $1/day and put $0.10 away in a savings account. You save and save and save. But in the future, the money you saved is worth almost nothing...
Example, my great grandfather had worked his whole life (as everyone does) and gave my grandmother an inheritance of about $10,000. My grandmother kept it in bonds. When she died... it was worth barely more than $10,000.... Do you know how long it took her father to earn and save that money? A life time... and his lifetime of savings can't even buy a car today. If he had put all his earnings into gold and silver as he went, my grandmother would have been wealthy, simply because the Fed is doing a one way trick with the purchasing power of the dollar. Purchasing power goes down. Period.
So the family that I spoke of, that has been putting savings into gold and silver for generations, is a very very wealthy one. Why? They know where to store wealth (besides their real estate holdings, of course). Their great grandfather who earned $1 a day or a $1 a week or whatever the wages were back then, was able to keep his buying power with the money he earned to use at a later date. Their great grandfathers buying power remains today.
The way our fiat currency is made, it helps keep us commoner's down. Why should my great great grandfathers daily pay be worth less than what it would take for me to buy a pepsi? Why should I work and work and work and save and save if my savings won't buy anything in the future? So our culture has developed a BUY IT NOW attitude. It costs less now then it will in the future, so borrow to buy it if you have to... but then we get stuck paying interest on everything and when interest spikes or a job is lost, you get wiped out and have to start from scratch...
People can bet against the Fed and win. I know some that have been doing it since the Fed came into existence........
On Jun 09 07:21 PM JasonC wrote:
>
> Fools are still fighting the Fed.
>
> The article is right and the ideologues are wrong, as usual.
>
> Don't. Fight. The Fed.
>
> Use to be every trader knew this. Now they don't, and think it is
> some grand libertarian heroism on their part. It isn't, it is just
> blind stubbornness.
>
> The hyperinflation thesis died in the summer and fall of 2008. It
> isn't coming back. Give it up already.
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