Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Financial Markets Manipulation - The Rise of the Bernanke Put Option?

Stock-Markets / Market Manipulation Mar 23, 2007 - 10:39 AM GMT

By: Money_and_Markets

Stock-Markets

Mike Larson - Did you see that monster rally on Wednesday afternoon? The one that sent the Dow up more than 150 points in the blink of an eye? If you're wondering what caused it, I have an answer for you …

Federal Reserve Board Chairman Ben Bernanke is trying out the “Greenspan put!”

Alan Greenspan, our last Fed Chairman, was notorious for solving market crises by lowering interest rates. In fact, the Wall Street crowd even dreamed up a nickname for this — the Greenspan put.


The name refers to put options since investors often use them to minimize downside risk. The idea was that Greenspan's easy money policies would always be there to help the markets stabilize. Thus, with Greenspan at the helm, your risk was always limited!

Throughout the 1990s, investors were able to do extraordinarily stupid things with their money because they knew Greenspan would always be there to save their hides in the event of a blow-up. Want examples?

Event #1: In December 1994, Orange County, California filed for bankruptcy. It was the biggest municipal bankruptcy in recorded U.S. history, and it caused a significant meltdown in the municipal bond market.

Greenspan's response: Greenspan and his Fed buddies stopped raising short-term interest rates shortly after the crisis broke. A couple of months later, they started cutting rates .

Event #2: In the summer of 1998, the gun-slinging hedge fund Long-Term Capital Management watched in horror as it lost billions of dollars from bad bets. Stocks plunged and Treasury bond prices soared as investors ran from risk.

Greenspan's response: Despite the fact that unemployment was at 4.5% and falling and core inflation was running at a relatively high 2.5%, the Greenspan Fed responded by slashing interest rates. Three rate cuts — one each in September, October, and November 1998 — flooded the economy with easy money. That, in turn, set the stage for one last-hurrah …

Event #3: U.S. stock markets, particularly the Nasdaq, soared to new highs in the midst of ravenous speculation. Of course, we all know how that ended — the dot-com bubble started popping in early 2000.

Greenspan's response: Once again, Greenspan went to work. He cut and cut, driving the federal funds rate down from 6.5% to a puny 1%.

Reasonable people can disagree whether some of Greenspan's cuts were justified. But in my view, the record shows that he took things too far again and again. He overreacted to short-term market dislocations. He never really let speculators get punished. And he never let economic recession work its cleansing power.

Moreover, Greenspan would swoop in with a fresh flood of easy money no matter what kind of data he had on inflation, employment, growth, or virtually everything else.

And it looks like Ben Bernanke is following his lead. Let's fast-forward to this week …

All Indicators Point to Higher Inflation, Yet Bernanke Is Caving Anyway!

The Fed's primary mission is to fight inflation tooth and nail. And the latest inflation stats have been anything but tame:

  • The Producer Price Index, which measures inflation at the wholesale level, surged 1.3% in February, more than twice the market forecast.
  • The “core” PPI, which excludes the impact of food and energy prices, jumped 0.4%.
  • Core intermediate goods and core crude goods prices, which indicate inflation at earlier stages of production, rose at the fastest pace in several months.
  • The Consumer Price Index climbed 0.4% in February, pushing the year-over-year inflation rate up to 2.4%.
  • And the year-over-year core inflation rate rose to 2.7%. Know what the Fed's unofficial target for inflation is? Between 1% and 2%!

Those numbers are all snapshots of inflation. But the Fed also watches real-time inflation indicators. An important one is the difference between the yield on 10-year Treasury Inflation Protected Securities and the yield on regular 10-year Treasury notes. When this “spread” is increasing, investors are becoming more fearful about inflation.

As you can see from my chart, the spread has been rising for several weeks now. It just hit 243 basis points, or 2.43%. That's the highest since September. In other words, the market is saying loud and clear that inflation pressures are building!

Given all the evidence, you'd think the Fed would come in guns blazing, leaving absolutely no hope of a rate cut. Instead, their language has gotten more wishy-washy …

On January 31, they said:

“The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

But on March 21, they said:

“Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

Read quickly, these two statements sound almost identical. However, note that the Fed went from talking about “additional firming” to potential “policy adjustments.” Firming is code for hiking rates, while “policy adjustments” could mean any action.

Put another way, the Fed opened the door to a potential rate cut! Why?

Bernanke and Company Are Scared, Scared, Scared …

In a word, the Fed is worried about housing. They know that a massive tech bubble was replaced with a massive housing bubble, which is now popping. They're scared that subprime mortgage losses will cause banks to curtail other forms of lending … scared that the broader economy will follow housing into the toilet … and scared that the recent stock market hiccup will turn into a stock market rout.

I feel for the true victims from this housing bust. I really do. Lots of people were brainwashed into thinking house prices would go up forever. And lots of lenders just plain ripped people off.

At the same time, a huge chunk of the run-up in home prices was fueled by dumb investors doing dumb things with money borrowed from dumb lenders. If the Fed bails them out with yet another dose of easy money, it's just going to continue the vicious cycle of bubbles and busts.

Look, I hope I'm wrong about Bernanke. I hope he's not going to start offering the market “Bernanke puts” whenever things turn sour. I hope he stays focused on inflation and lets the markets sort themselves out.

But I don't like the sound of that door-opening comment. I think it shows the Fed's true intentions — to lower rates whenever investors get into a little trouble.

A Bernanke Put Could Have Two
Important Market Implications

For starters, the Fed's new approach is causing the yield curve to return to normal. In plain English, that means short-term interest rates are now falling below long-term rates. [Editor's note: For more information on the yield curve, see “ Fed Chairman Wrong Again? ”]

That's an important signal! It tells us that bond traders are afraid the Fed will sacrifice its long-term, inflation-fighting credibility in order to try and “save” housing. They're buying short-term notes, which will benefit from a rate cut. And they're selling long-term bonds, which will get whacked if the Fed lets inflation get out of hand.

I can't argue with that strategy. In fact, I've been telling you to stick to short-term Treasuries for a long time. If you're still holding long-term bonds, don't wait. Dump them now! The long bond already got pasted for a full point on Thursday, and more downside could be dead ahead!

Plus, the dollar will likely continue to weaken if Bernanke cuts rates. Several foreign central banks are still hiking interest rates, some aggressively. Therefore, investors will pull money out of the dollar and switch into other, higher-yielding currencies.

It's already happening. The dollar is trading right around its lowest level versus the euro since March 2005. Relative to the Australian dollar, it's at its lowest level since late 1996.

In my opinion, the investments that are most likely to benefit from a continued decline in the dollar are international bonds, gold, and high-yielding foreign stocks.

Until next time,

by Mike Larson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com


© 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