It’s been less than two weeks since I first discussed Richard Fisher’s “darkest moments”, but the markets have made some incredible moves since then so I wanted to revisit the piece. After the FOMC meeting yesterday Ben Bernanke released an op-ed for the Washington Post. His comments were incredibly important. Not only did he say that he was directly attempting to prop up equity markets (that’s right America – we have resorted to officially admitted that our central bank is running a ponzi scheme), but he also admitted that the Fed’s actions are not inflationary. Why you ask? Because, as I’ve emphasized in recent weeks this operation does not add net new financial assets to the private sector. It does not boost lending. It does not create jobs. It does not boost wages. Bernanke essentially admits as much:
“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.
Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”
He’s hoping to create an equity market “wealth effect” that is unsupported by the underlying fundamentals – Greenspan 101. So, we’re in this situation where end demand remains very weak in the United States. But Mr. Bernanke knows this operation is unlikely to result in any real lasting inflationary impact. But his commentary alone is having an astounding impact on markets. In essence, he is herding investors into equities and commodities as investors believe that the policy is inflationary. Unfortunately, the assets that have rallied the most since August are important inputs in every day products:
- Cotton + 68%
- Sugar +66%
- Soybeans +23%
- Rice +29%
- Coffee +15%
- Oats +31%
- Copper +16%
Some people are wondering if Mr. Bernanke is attempting to blow a bubble in the equity market? It’s not necessarily the equity bubble he should be worried about. He is already blowing bubbles in segments of the commodity world (hello summer of 2008). Charts like these should scare the living daylights out of a fed chief, but Bernanke appears oblivious to the unintended consequences here:
(December Cotton Futures)
The one thing Mr. Bernanke has gotten right in all of this QE nonsense is that it won’t be inflationary. A weak U.S. consumer can only open their wallets so far. In the meantime, Mr. Bernanke is putting an unnecessary burden on corporations by reducing their margins. This will not result in higher wages and it will not result in more jobs. It will only result in more uncertainty and weaker fundamentals. Investors are buying into the idea that this is somehow all good for equity markets and the economy. Blowing bubbles has never been a strategy for economic prosperity. But we’ve been down this road before. Some people just never learn from history. Even people who clam to be history buffs.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.