Ben Bernanke Lessens Popularity, Value of US Bonds
Money goes where it’s treated best. If you’ve got the Fed chair’s number on your rolodex, you may want to give him a call and let him know. How else can you explain the rise in the Aussie dollar and the string of new highs in Aussie resource stocks like Woodside and BHP?
Bernanke meant to calm financial markets by appearing decisive. But central banking is not simply a matter of acting with conviction, like some over-caffeinated existentialist philosopher on the Left Bank of Paris. By lowering the interest rate on US dollar denominated assets, Bernanke has set off a chain of unintended consequences. What are they?
As we mentioned, money goes where it’s treated best. By lowering the rate of return on US bonds, Bernanke has made a massive shift in global capital flows that much more likely. Global investors like themes. They also like capital gains. Popular themes generally lead to capital gains.
Bernanke has made dollar-based assets an unpopular theme, unpopular because the total return on US investments is compromised the dollar’s decline. Imagine for a moment you’re the manager of $1 billion in institutional funds. Where do you invest the money? Do you buy US blue chips because you think the Fed’s rate cute will spark growth in the US economy?
You might consider waiting for reports on new and existing home sales this week, to see if the housing market in America has bottomed and a recovery is on the way. Or, you might see the mounting tally of housing-related job losses in America as a sign that further Fed rate cuts are ahead. America faces a recession and Bernanke is determined to prevent it from becoming a Depression. Only reckless money would go to a party like that.
Dan Denning
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). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by Alan on 24 September 2007:
Not all bonds are created equal and the Fed has found it increasingly difficult to control the critical long bond in both up and down cycles.Bernanke fears deflation far more than inflation and he does not see the Reserve has a role in determining the value of the dollar.If necessary he would cut to zero and then intervene directly to
Comment by Alan on 24 September 2007:
......support medium and, if necessary,long dated treasuries.Still,the game has yet to run.The ECB may cut, too, soon.