Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Here’s Why You Must Protect Yourself Outside the Financial System… - 22nd Nov 19
The Promise of AI - 22nd Nov 19
The Financial Implications of Bitcoin Casinos in Japan - 22nd Nov 19
FOMC Minutes Reveal an Important Shift That’s Key for Gold, Too - 22nd Nov 19
Adaptive Predictive Modeling Suggests Stock Market Weakness Into 2020 - 22nd Nov 19
Why You Should “Follow the Money” on The Yellow (and Silver) Brick Road - 22nd Nov 19
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Will Bernanke Save the Stock Markets?

Stock-Markets / Stock Markets 2012 Aug 17, 2012 - 05:58 AM GMT

By: Casey_Research

Stock-Markets

Best Financial Markets Analysis ArticleVedran Vuk, Casey Research - How far is the Fed from reaching the bottom of its ammunition box?

Well, both Mario Draghi and Ben Bernanke said no to yet more monetary stimulus last week.

Wall Street unsurprisingly was disappointed.


Wall Street expected more stimulus, as institutional investors are analyzing monetary policy from their own perspective rather than the central bank's viewpoint – understandable, but a big mistake.

Wall Street's Conundrum: with the S&P 500 up less than 7% in 2012, the year is almost over, and the investment firms have little to show for it.

This 7% return might be OK in calmer markets, but instead investors have been taken on a rollercoaster ride – all for a measly 7% return.

So what could send stocks higher?

Well, if the European crisis just disappeared, things would turn for the better… but that's not likely to happen.

Or perhaps if US unemployment finally moved downward… but that's not going to happen either.

The only short-term savior for equity markets is another round of extreme monetary stimulus, which will keep things propped up a bit longer.

Hopefully in that time, unemployment and the general economy would improve, which would lead to a reduction in the fiscal strain on troubled governments.

So Bernanke has control of the only immediate game-changer left on the table, and he's not playing Wall Street's tune.

Without that money, Wall Street faces the reality of a stagnant market.

Frankly, fund managers don't need a meltdown to be badly hurt here; failing to produce adequate returns is a bad enough outcome.

After all, how many people would place their money in a high-risk market after a few years of low single-digit returns?

Probably much fewer than today.

As a result of this conundrum, Wall Street sees monetary stimulus as the only way forward – hence the strong belief that Bernanke and Draghi will produce stimulus at any moment.

To Wall Street, this makes sense, but unfortunately for them, the Federal Reserve has different incentives.

Bernanke realizes that he is low on bullets. The last few landed way off target, and his final bullet might miss the mark even more so.

Bernanke is stuck with two options here: he can fire off his last bullet now (as Wall Street desires) and can send the market up maybe 1,000 points on the DJIA.

Or he can wait to save this last bullet in case the market crashes.

But if Bernanke shoots his bullet now and the market crashes anyway, he's going to go down in history as the worst Federal Reserve chairman ever.

And if he tries to shoot the gun again in an emergency after he has overheated it, Bernanke might very well send the economy into a hyperinflation.

In such a scenario, he would become a cautionary tale for econ graduate students for the next hundred years (and I'm not kidding about that… economists are still discussing the monetary policy of the Great Depression).

Would you take such a risk for a couple of hundred extra points on the DJIA? I don't think so.

Wall Street's incentive and Bernanke's couldn't be further apart on delivering another monetary stimulus before it's desperately needed.

You may ask yourself:

"Didn't Bernanke boost the stock market only a few years ago? Why wouldn't he do it again now?"

Times change. A few years ago, Bernanke had a lifetime wealth problem on his hands regarding the average US consumer. When someone loses 25% of their home's equity and their 401(k) crashes by 35%, they become shell-shocked as a result of their total lifetime wealth taking a sudden large dip.

Economists understand that the spending behavior of someone with a $500,000 nest egg saved for retirement isn't the same as for a person with half as much.

It's really a simple concept: when we feel more comfortable about our future, we can spend more today.

Even if one had no risk of losing his or her job in the crash, personal spending habits would often change in reflection of reduced lifetime wealth.

Beforehand, by boosting equity markets, Bernanke could stimulate the economy by increasing everyone's sense of their lifetime wealth, inducing them to spend more in the present.

Unfortunately, as we've reported on many occasions, this strategy didn't work so well.

Now Bernanke again holds the option of boosting equities with yet more stimulus. Will another thousand points on the DJIA really send the economy back into a recovery?

Most likely not.

That said, another round of monetary stimulus isn't completely out of the question.

A High-Risk Gamble: However, with the possibility of a European-led market crash around the corner, an early stimulus would be a very high-risk gamble in Bernanke's eyes – a gamble that may seal his fate forever.

While Wall Street fund managers are worried about delivering returns to their clients, Bernanke has a million problems on his mind, and equity prices are not one of them.

Though the market will continue to get overexcited at the possibility of more monetary stimulus, we probably won't see another round of a truly massive program until things really hit the fan and the Fed is forced to reach toward the bottom of the ammunition box.

While Ben scrambles around on the floor for more bullets, investors need to rethink their strategy to get them through to the other side of this crisis, because it's far from over.

© 2012 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules