It's Ben Bernanke!

Includes: DBV, GLD, SPY, UGLD, XHB
by: Tim Iacono

[The fall of 2005 marked a watershed event for precious metals markets as President George W. Bush nominated the Chairman of his Council of Economic Advisers, Ben Bernanke, to replace outgoing Federal Reserve Chairman Alan Greenspan at the nation's central bank. Originally published on October 31st, 2005 when gold traded at $471 an ounce, the closing paragraphs of this item have proven to be prophetic in that Ben Bernanke's tenure at the Fed is increasingly seen as a "Golden Era".]

After great difficulty getting past the helicopter money and savings glut remarks, then swallowing hard when reading recent comments denying the possibility of a housing bubble due to "strong economic fundamentals", the nomination of Ben Bernanke as Fed Chairman was being approached with an open mind here, until …

Until it was learned that many years ago, in the quiet environs of Montgomery Township, New Jersey, Ben Bernanke served six years on the local School Board.

We will defer to the good judgment of Mark Twain, when it comes to the relative merits of those serving the public in this capacity:

God made the Idiot for practice, and then He made the School Board.

OK, that was just an overreaction to something that caught us completely by surprise - the School Board … who would have thunk it? It just has a weird, weird feel to it.

Fed Men Talking

The first serious thought that comes to mind when considering the nomination of a new Fed Chairman is that anyone willing to do this job after Alan Greenspan should be immediately disqualified for being hopelessly out of touch with the plethora of intractable problems facing the U.S. economy today - debt and deficits at all levels, trade imbalances, lack of domestic savings, systemic risks, the housing bubble, the quality of job creation, the pension crises … the list goes on and on.

It seems that anyone eager to accept the nomination for the post of Federal Reserve Chairman has already proven his or her incompetence.

But, then again, someone has to do it.

Bernanke's academic background notwithstanding, it appears he's a lot more like Treasury Secretary John Snow than is our current Fed Chairman - more apt to tell a big lie, some would say, rather than couch the rhetoric in vagueness and multiple qualifiers (the fact that both Bernanke and Snow were in the news recently categorically denying the existence of a housing bubble is not a good start for Ben's credibility amid all the recent Greenspan warnings on the same subject).

Is the end of "Greenspeak" really a good thing?

Has the world become too accustomed to the soothing voice of the U.S. Federal Reserve Chairman while admittedly, even happily, not understanding what it was he was saying? Was just hearing the voice with the assuring tone enough to calm markets when needed and will too much clarity from a new and strange voice have an effect opposite of what will likely be needed?

The Housing Bubble that Isn't

No other topic should be as important to makers of monetary policy than today's housing market - what The Economist magazine has dubbed "the biggest financial bubble in history". Like all central bankers, Bernanke is of the belief that the Fed should disavow any complicity in allowing asset bubbles to form and simply stand by as said bubbles run their course - ready to step in and be crisis solvers rather than be viewed as crisis facilitators, by creating a new, different asset bubble.

That has been the undeniable pattern.

Focusing on asset prices only if they affect consumer prices, economic growth, and/or job creation seems to be singularly twisted logic as it relates to today's economic realities, as both economic growth (i.e., consumer spending) and job creation (i.e., construction and food service employment) are so tightly bound to continually rising home prices and free spending consumers tapping their ever-increasing home equity.

Having spent sufficient time discussing home prices and consumer prices in this space in recent weeks, we are unable to muster the strength to once again challenge the failed logic behind the statement, "Focusing on asset prices only if they affect consumer prices…". History books will surely have the last word on this subject.

The Committee to Save the World and the Plunge Protection Team

One of the most worrisome aspects of the transition from Greenspan to Bernanke is that Alan Greenspan was a stabilizing force within the world economy, having spent so many years as the head of the U.S. Federal Reserve.

Through tumultuous times in the 1990s as part of what Time Magazine called "The Committee to Save the World" and amid continuing talk of Plunge Protection Team activities to this day, Alan Greenspan was the point-man - being replaced by a relative newcomer on this world stage may be problematic when the next crisis arises.

Confidence is key - Alan Greenspan exuded confidence.

Along with Treasury Secretary Robert E. Rubin and deputy Lawrence Summers, the current Fed Chairman was involved in defusing various world crises involving Russia, Thailand, and Indonesia among others. Looking at the Treasury Department today, led by uber-salesman John Snow, it is hard to imagine who will take up the slack if Bernanke is forced to learn quickly on the job when the first global financial crisis hits.

The Plunge Protection Team activities, as nebulous as they are, were surely stewarded by the Fed in recent years. Again, it's hard to imagine anyone at the Treasury Department doing anything more than managing the next treasury auction or anyone at the White House doing anything more than managing the next political crisis.

Inflate or Die in a Golden Era

Perhaps more than anything else, Ben Bernanke's tenure as Fed Chair may someday become known as the era when gold, oil and other commodities re-emerge onto the world stage in a way that few can now imagine. Having been handed an unbalanced world economy that is so heavily dependent upon increased spending by an overly indebted American consumer who will not be able to continue their profligate ways amidst falling home prices, at the first real signs of consumer weakness the new Fed Chairman will undoubtedly be forced to take action.

Never shy in writing or talking about what to do to combat the real or perceived threat of deflation, just think of the measures that may be employed to combat falling home prices across the country in the coming year or so. Oddly, this housing deflation would not show up in consumer prices due to the owner's equivalent rent proxy, and will in fact likely boost reported inflation, at least temporarily, as struggling homeowners turn into home renters.

Think what this would do to the dollar's international standing, if early next year, after 20 months of quarter point rate increases, the gears are reversed at twice the pace or better, and adjustable rate mortgages are once again available in the 3 percent range, or lower, to reinvigorate a U.S. housing market that is fading fast.

Or, if other unconventional measures are utilized to continue the wealth-effect-enabled spending that drives the world economy.

Rising interest rates in the U.S. appear to be about the only thing keeping the dollar magically levitated against other world currencies - rising rates seem to have already lost their effectiveness when the dollar is measured against precious metals. Nature's money already seems to understand that much of the economic reporting emanating from Washington is a sham.

If the market action in gold on the day after the Bernanke announcement is any indication, be prepared for a spectacular show.

Surely foreign investors have not detected anything recently other than rising rates and their own self interest to support the dollar. There has been no fiscal discipline or a rebirth of a savings culture in recent months. If anything, with rising energy costs and Katrina rebuilding, the longer-term situation for the dollar has recently gone from bad to worse. What happens when the dollar's interest rate prop is forcibly removed to support faltering consumption and the U.S. economy is laid bare for the rest of the world to see?

That is when gold will likely reach new highs in U.S. dollar terms and then go on to perhaps unimaginable levels as the dollar is sacrificed in order to perpetuate the "inflate or die" system that Alan Greenspan forced upon the world in his eighteen years as Fed Chair.

That is when the Bernanke term at the Fed may turn into a Golden Era.