Wednesday, March 28, 2012

The Bernanke bubble

Ride the Bernanke bubble

On March 26, 2012 an article by Cody Willard appeared on Market Watch, it was titled "Ride the Bernanke bubble". Willard mentioned some of the previous articles he has written like: Bernanke says "lets inflate the biggest stock market bubble in history" in July of 2011 and "Shut up and buy the tech bubble" on may 26,2011. Willard then fast-forwards to today. Where he points out that Ben Bernanke is again in the headlines and stoking up stocks. Some of today’s headlines, include:
Stocks Gain on Bernanke Comments U.S. stocks rose, rebounding from the year’s biggest weekly declines, after Bernanke said additional accommodative policies are necessary to create jobs. 
Buying into Bernanke rally U.S. stocks rise sharply Monday, rebounding from last week’s losses, after Fed chairman Ben Bernanke signals the central bank is committed to a monetary policy that’s helped buoy stocks for several years.
No Quit in This Market JAMES “REV SHARK” DEPORRE MAR 26, 2012 | 10:48 AM EDT  | 14 COMMENTS With the words ‘quantitative easing’ in the air, who knows how much higher the market can go.
Willard writes that this isn’t your grandfather’s or your father’s stock market. Basing our savings allocation and balancing our portfolios is not supposed to be an endless exercise in gaming the Federal Reserve. But the reality of our domestic and political economies has been revolutionized by changes in the underlying principles of what used to be our “markets”. He ask that we interpret what Bernanke has said to the various elements of our markets:
  • Fast Money traders heard: “Ben’s got our back. Buy stocks.”
  • Bloomberg economists heard: “The Federal Reserve Chairman is pushing the risk-trade again.”
  • Investors heard: “Stick with stocks.”
  • Grandma and Grandpa heard: “You will probably never find any safe interest-bearing account in your life again. Deplete your savings or find somewhere to risk your money and hope you get some gains.”
  • Long-time unemployed and frustrated middle American heard: “You can forget about getting a job but Goldman Sachs needs 0% interest loans and balance sheet guarantees or things will get even worse for you.”
He goes on to say that we’re likely to continue seeing the stock market bubble right before our eyes because traders, investors, economists, grandparents, Goldman Sachs and even the unemployed and broke know that money is likely to chase stocks — tech stocks and other growth stocks in particular, because where else can you hope to catch the kind of gains that you’re likely to need to overcome the loss of value of your money as Bernanke continues to pump new money into the pockets of the worst banks.

The question of course now is — when does the tech stock bubble pop?  Willard goes on to predict that the bubble will probably pop when these bubble-inducing policies finally reverse themselves — which he claims will be too late to help mitigate the ultimate damage and losses to the economy that all bubbles have. But that’s probably not today’s worry and  from a broader perspective, it sure looks like the tech stock bubble that we’ve been investing for continues on track.

NOW FOR MY TAKE ON THIS BUBBLE------------- I agree with the fact that we are looking at a speculation bubble in equities and commodities driven by loose money, and the promise of even more. I think much of this is based on the desire to make everything appear well and stable. The one ugly fact that many investors choose to ignore is that money is concentrated and flowing towards areas where people feel they can cut and run quickly if the economy fractures and turns south. Investors are avoiding long term investments in less liquid assets like real estate, and what we might call the "real economy". People are buying paper and promises.

Bottom line Governments are running huge deficits and giving or, if you like loaning banks money for next to nothing. All the banks have to do to dip into this pile of freshly printed money is to agree to buy Government bonds at a slightly higher rate, thus guaranteeing  themselves a profit. Don't look to closely or it might look like some kind of Japanese style Ponzi scheme. The myth might be that one can move quickly enough not to be badly damaged if markets collapse, and it can occur, for the most flimsy of reasons, and at any time.

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