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Ben Bernanke’s Missing Puzzle Pieces

Politics / Central Banks Jul 01, 2010 - 02:23 AM GMT

By: Graham_Summers

Politics

Best Financial Markets Analysis ArticleThe “Man Who Saved the World,” Ben Bernanke delivered a truly incredible speech last week, stating that he was “puzzled” by the recent rise in Gold. A few of his more startling comments are below:


“Other commodity prices have fallen recently quite severely, including oil prices and food prices… So gold is out there doing something different from the rest of the commodity group.”

"I don't fully understand the movements in the gold price, but I do think that there's a great deal of uncertainty and anxiety in financial markets right now."
 
"Some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."

First off, I have to applaud Chairman Bernanke for admitting he doesn’t understand something in public. The only problem is that he reserved this admission to Gold’s performance, instead of applying it to the entire US economy, financial system, derivatives, inflation, human behavior, investor psychology, and a slew of other topics that he seems completely in the dark about.

Indeed, so far the guy’s record has been 100% accurate… if you interpreted what he said as the exact opposite of reality. In the past three years he’s told us that the sub-prime mortgage Crisis was contained, that there would be no spillover into the US economy, that the financial markets were sound, and that the US economy was stronger than ever… right up until the entire financial world imploded.

Regardless, at least he’s finally admitting he doesn’t understand some things. Hopefully, this is the beginning of a new pattern in his speeches: admitting his mistakes.

Back to Gold.

Bernanke’s statements are simply extraordinary in their ignorance. Either he is flat out lying OR he has no clue about money and should not even be allowed near the Federal Reserve.

Let’s do a brief review of the “policies” he has endorsed or helped promote over the last three years.

  • The Federal Reserve cutting interest rates from 5.25-0.25% (Sept ’07-today)
  • The Bear Stearns deal/ Fed buys $30 billion in junk mortgages (March ’08)
  • The Fed opening various lending windows to investment banks (March ’08)
  • The Treasury buying Fannie/Freddie for $400 billion (Sept ’08)
  • The Fed taking over AIG for $85 billion (Sept ’08)
  • The Fed dishing out $25 billion for the auto makers (Sept ’08)
  • The Feds’ $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
  • The Fed’s commercial paper (non-bank debt) purchasing program (Oct ’08)
  • The Fed’s $540 billion backstop for money market funds (Oct ’08)
  • The Fed’s backstops up to $280 billion of Citigroup’s liabilities (Oct ’08).
  • Another $40 billion to AIG (Nov ’08)
  • The Fed backstops up to $140 billion of Bank of America’s liabilities (Jan ’09)
  • The Fed’s $300 billion Quantitative Easing Program (Mar ’09)
  • The $1.25 trillion I mortgage backed securities  purchases (Mar ’09-’10)
  • The Fed buying $200 billion in agency debt (Mar ’09-’10)
  • Opening up currency swap lines with foreign central banks (Spring ’10)

The Fed and various economists like to dress these moves up in fancy language and financial terms, but in reality they all boil down to one of three strategies:

  • Printing money
  • Letting bankrupt, failed institutions stay in business via handouts
  • Buying garbage debt no one wants at 100 cents on the Dollar from said bankrupt institutions

Now, all three of these are anti-Dollar/ pro-inflation. The fact that Bernanke can’t figure out how these policies would produce a flight from paper money (and rise in Gold prices) spells out in clear terms that he is unfit to be Fed Chairman.

Again, this is not like some guy at the food store admitting he doesn’t know where the eggs are, this is THE guy in charge of US MONETARY POLICY admitting he doesn’t understand the basic tenants of economics.

Bernanke’s explanation for why he’s puzzled is that Gold is rallying while other commodities fall in value. Of course, it wouldn’t occur to him that other commodities are falling in value because the whole world has figured out that the so-called economic “recovery” is in fact one giant accounting gimmick.

Which brings me to the second mass realization: that the only weapons the world central bankers have to counter the guaranteed double dip DEPRESSION are… more money printing, junk asset purchases, and monetary backstops.

You don’t have to be a genius to see how all of this leads investors to understand that it’s a good idea to buy Gold. After all it:

  • Cannot be printed
  • Cannot be used to prop up bankrupt banks
  • Is going up in purchasing power (compared to most paper currencies)

These are the missing pieces to Ben Bernanke’s “puzzle.” Put them in place and it’s clear that everyone should own at least some bullion if for no other reason than it’s outside the scope of the Federal Reserve’s understanding/ control.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. If you’re worried about the future of the stock market, I highly suggest you download my FREE Special Report detailing SEVERAL investments that could shelter your portfolio from any future collapse. Pick up your FREE copy of The Financial Crisis “Round Two” Survival Kit, today at: http://www.gainspainscapital.com/MARKETING/roundtwo.html

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2010 Copyright Graham Summers - 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.

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