Is Mr. Bernanke good news for equity and bond markets?
In the intermediate term, Mr. Bernanke - in order to improve hisreputation as a money printing advocate and gain some credibility - maytighten monetary conditions a tad more than Mr. Greenspan might havedone.
by Dr Marc Faber/ Sunday, November 20 - 2005 at 15:59
The growth of foreign official dollar reserves is still declining, whichis negative for global economic growth, emerging stock markets,industrial commodity prices, but favorable for the US dollar.
Therefore, when it will become more obvious - even to the eternallyoptimistic Fed - that the US economy is slowing down, as a consequenceof tighter money, bonds could rally from the current somewhat oversoldposition.
But make no mistake! Once Mr. Bernanke realizes that the world's mostproductive economy is not as sound as he believed and sees that risinginterest rates depress asset markets - in particular home prices andstocks -he will print money like there was no tomorrow. Certainly,recent weak auto sales and collapsing consumer confidence indices wouldargue that the US economy is already far weaker than is generallyperceived by the investment community.
So, at latest by the middle of next year, I would expect the Bernankemoney printing press to shift into high gear. This should lead to moreconsumer price inflation, a weakening US dollar and tumbling bondprices. From a longer term perspective, I expect Mr. Bernanke will bethe greatest disaster that has ever hit the US bond market in the 200years of capitalistic history.
Portfolio adjustments
So, how should investors adjust their portfolios, in light of Mr.Bernanke's nomination? I am usually asked what the best investmentopportunities are. Sometimes, it might be more useful to ask what theworst investment will be. I believe that the worst long term investmentwill be to own a 30-year US treasury bond with the view to hold it for30 years.
Granted, long term treasuries could rally somewhat from here for thenext few months for reasons explained above, but new interest rates lowsare most unlikely. With Mr. Bernanke at the Fed disaster will strikesooner or later and long term bonds will plunge precipitously once themarket realizes Mr. Bernanke propensity to print money and ifextraordinary conditions warrant it, to drop dollar bills from ahelicopter onto the US in order to keep the by Mr.Greenspan initiatedirresponsible and by ultra easy money and credit policies driven assetinflation party going.
After all it was the by excessive credit growth driven asset inflation,which, since 2001, fueled the consumption related economic recovery. Byshorting long term US government bonds an investor is shorting a fixedinterest security that will lose value as the purchasing power of the USdollar declines, in a - due to the country's external deficits -structurally very weak currency, and in a country whose government mustbe regarded as a living disaster in every respect. What better shortcould one expect to find?
Depending on the quantity of money that the Fed will print, equitieswill in the long term rally, but as will be the case for home prices,decline in real terms. So, should the forecasters be right, who in 1999predicted the Dow to rise to 36,000, 40,000 or 100,000 it is almostcertain that the Dow will decline against gold. So, if we were to assumethat the Dow will rise to say 36,000 thanks to the money printing press,we could also expect the gold price to rise to $3,600 or even higher.
A flat earth policy
But what about Mr. Bernanke's 'formal inflation target' as a monetarypolicy tool? Mr. Bernanke is the epitome of US economic thinking. He islike a navigator in the 16th century who did not believe the earth to beround. There is no such a thing as an 'inflation target' except theincrease in the annual supply of money, which the Fed does control. Theincrease in the quantity of money is inflation and not the consumerprice index, which in the case of the US is doctored anyway.
So, how would the good Dr. Bernanke wish to target inflation? Are risingoil and commodity prices, which are conveniently excluded from the coreCPI, not inflation? Mr. Bernanke 'targeting of inflation' centers in myopinion around a flawed theory and is one of economic theory's greatestsophism.
Will Mr. Bernanke try harder than Mr. Greenspan to address globalfinancial imbalances via US monetary policy? This is wishful thinking.Since the formation of the US Federal Reserve Board in 1913, the USdollar has lost 92% of its purchasing power. This after the US dollarmaintained its purchasing power between 1792, when the Mint Act waspassed, and 1913, when the Fed was formed. Since 1980, US householdwealth, driven by easy money and credit has risen from $7 trillion to$49.8 trillion while total credit market debt has exploded from 120% ofGDP, in 1980, to now over 320% of GDP.
The US has no other option but to print money. Otherwise theirillusionary wealth collapses and drags down the economy in adeflationary apocalypse. So, Mr. Bernanke will print money. That aside,Mr. Bernanke has expressed the view that deficits do not matter or arerelated to a global savings glut.
All the president's men
Will Mr. Bernanke and the US government clash over fiscal policy as aresult of Mr. Bush huge increase in spending and tax cuts? Not at all!Last June, Mr Bush removed Mr. Bernanke from the Board of Governors atthe Fed to become the Chairman of the White House Council of EconomicAdvisors.
This brought Mr. Bernanke inside the White House for a while so that thePresident could become comfortable with him and be certain that he wasserious about printing money to finance the administration's ill fatedmilitary follies and alarmingly rising debts that are fueling assetinflation and financing the excessive US consumption. Mr. Bernankeobviously passed his test and will now become Fed Chairman.
Will Mr. Bernanke adopt more pre-emptive monetary policies in order toward off asset inflation? I regard this assumption also as wishfulthinking. Mr. Bernanke has himself expressed the opinion that the Fedshould not try to target asset price increases. Moreover, neverover-estimate the intellect of central bankers. Here we have a group ofpeople who could have sold gold in 1980 at more than $800 and boughtbonds yielding 14%. But no, instead they waited for almost 20 yearsbefore selling gold below $300 to buy bonds at less than 4.5% yields.
At the same time we had asset inflation for the last 24 years and bingo,suddenly, at Jackson Hole - having through easy monetary policies and bytolerating declining lending standards fueled the asset inflation likenobody before him, and this on a world wide scale - Mr. Greenspantouches on the subject of asset inflation. It would be comical, if nottragic, because the consequences of paper money becoming worthless willbe politically and socially dire. In fact, if it were a crime forcentral bankers to destroy the value of money, Mr. Greenspan and all theBoard Members of the Fed would be sentenced to death.
Japanese equities attractive
So are any assets worthwhile buying? As expressed over the last twoyears, I think that the Japanese stock market will significantlyoutperform US equities in the next five to ten years. And, whereasrising consumer prices will be negative for US financial assets, a whiffof inflation will be favorable for Japanese equities, as individuals andfinancial institutions will be forced to move out of bonds intoequities.
In fact, there seems to be a close correlation between the Nikkei Indexand both Japanese and US interest rates. The Japanese stock marketbottomed out in April 2003 at less than 8,000 and both US and Japaneseinterest rates bottomed out in June 2003.
Since then the Nikkei and interest rates have been in a rising trend. Weexpect this trend to continue whereby near-term the Japanese stockmarket appears to be over-bought. So, we advise investors to wait for acorrection to buy Japanese shares.
