"Is Gentle Ben Bernanke a hero or a goat? It depends on your perspective," writes our friend and Chicago-based commodities trader Steve Belmont. "If you are a fat-cat, Wall Street type whose year-end bonus depends on a bull market in stocks, a banker burned by bad subprime paper, or a CNBC stock market cheerleader, then it's probably the former. (Note: we say "probably" because the jury is out on whether the Fed's eight-day, 1.25% rate cut will actually cause stocks to rise.) If you are a retiree, or a saver whose tastes run toward the more conservative, risk-free portion of the investment pyramid, or a taxpayer who makes your living from income rather than dividends and capital gains, then the answer is almost certainly the latter.
"Make no bones about it, Ben Bernanke and Company panicked. The real rate of return from 'safe' investments such as Treasury bonds, notes and bills is now less than zero. Inflation and taxes will eat up substantially more than 100% of the paltry yields on these investments, making them guaranteed losers. Lower rates down the road will make them even bigger guaranteed losers. This is being done to force American consumers to spend rather than save and American investors to take bigger risks (like buying stocks) in search of a positive real return. The Fed has resurrected the infamous "Greenspan put" in a misguided attempt to re-instill confidence in the economy, despite the fact that the Greenspan "put" did not work when used by the former Fed chair himself.
"Overly-easy Fed policy under the "Maestro" led to at least two bubbles that popped with devastating results: the NASDAQ collapse of 2001 and the subprime housing collapse (still in progress) of 2007-2008. Stocks, as measured by the broad-based S&P 500, are no further ahead now then they were at the end of 1999. On December 31, 1999 the S&P stood at 1485. It closed Friday at 1397. That's a loss of roughly 6%. The NASDAQ fared even worse, losing a whopping 50% over the same timeframe. So what makes Gentle Ben think his even more extreme, plunge protection strategies will work any better? They say that the definition of insanity is repeating the same action over and over and expecting different results. Are Ben Bernanke and Company certifiably insane?"
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.