Thank-you Again, Ben Bernanke
Are the words "Thank you, again, Ben Bernanke" proof positive that Stephen Roach dove off the deep end of any semblance of sanity?
Following are some snips to consider Jun 09, 2006 article entitled Tough Love.
After years of excess accommodation, the US central bank may be trying to reclaim the "tough-guy" image that a credible monetary authority needs.
It's been a long time since I said something positive about the Fed. That saddens me. The Board -- as insiders call the Washington-based Board of Governors of the Federal Reserve System -- was my first place of gainful employment after grad school. I spent seven wonderful years there in the 1970s, and there will always be a soft spot in my heart for this great institution. It has pained me no end to write of a Fed that lost its way in the bubble-infested waters of the past seven years. But now, for the first time in a long time, America seems about to get a meaningful dose of monetary discipline. Ironically, it could be tougher on the markets than on the economy. For investors, that's a painful wake-up call, to be sure. But in the end, it's absolutely essential in order to put an unbalanced, asset-dependent US economy on a sounder and more sustainable course. Three cheers for Ben Bernanke!
Of course, he hasn't really done anything just yet. The Fed could disappoint -- and end up being all bluster and no action. Or there is always a chance it's too late -- that America's imbalances are so advanced, the only way out is the dreaded hard landing. But in my new role as the optimistic pessimist, I am willing to give Bernanke & Co. the benefit of the doubt. By talking tough in the context of only a fractional overshoot of inflation -- an overshoot that may be more statistical than real -- the Fed is sending an unmistakably clear message of a move to policy restraint. And by delivering that message in the context of down markets, the rhetoric of monetary discipline has an even stronger ring. If there's ever been a time for America's central bank to take on the markets, this must surely be it. Former Fed Chairman William McChesney Martin put it best in his legendary quip: "The job of the Federal Reserve is to take away the punchbowl just when the party is getting good." For years, the Fed has provided more than its share of refreshments at the biggest party of them all. Those days could now be drawing to an end.
This sudden outbreak of monetary discipline around the world very much fits the script of my newfound optimism on global rebalancing. The world's biggest imbalance -- America's current account deficit -- is a direct outgrowth of a property-bubble-induced shortfall of income-based saving. Lacking in domestic saving, the US must import surplus saving from abroad in order to grow -- and run massive current account and trade deficits in order to attract foreign capital. To the extent central banks have promoted asset-bubble-related global imbalances by overly accommodative monetary policies, an emerging bias toward monetary discipline is a very encouraging development on the road to global rebalancing. While it's "tough love" for bruised investors, this may well end up being the requisite correction that clears the decks for the next upleg in the markets. Thank you, again, Ben Bernanke.
Quite honestly the fact that anyone is thanking the Fed for anything at this point makes me gag. Where were the Bernanke dissents to the Grenspan Fed over the last 18 years? Was there a single one? No, of course not. Nor are there any dissents today. Within the last couple of weeks all of the boys in the boys club suddenly got religion and spoke of the dangers of inflation. Please, this all makes me sick. There is no praise to be given. If Bernanke had any religion he would not have been kowtowing to Greenspan for his entire career then to Bush where he was monitored before his appointment. Bernanke is a coward in my opinion, acting out of fear of his reputation as "Helicopter Ben" rather than what he is facing as the Fed chairman today. At any over the past few years he could have voted to hike by 50 basis points or more. But the wimp that he is decides to talk tough just as the bubble is busting. Not only that but he has gotten at least 4 other sheep at the Fed to ring the bell on inflation worries, right as the biggest inflation bubble in the history of the world (housing) is busting.
Compare and contrast the nonsense from Roach with a piece written today by James Grant entitled Glitter.
Gold is an August monetary asset but an undependable investment. Producing no income, it is inherently speculative. I am a value investor, but I am also a gold bull. I ought to try to explain myself.
Value investors buy stocks or bonds by the numbers. They compare price with value and buy if the discount is suitably deep. They turn a deaf ear to macroeconomic theorizing. Whether the gross domestic product is rising briskly or not at all is immaterial if a particular company is priced at less than its readily ascertainable net asset value.
Gold is something different. You buy it solely for macroeconomic considerations. I buy gold as a hedge against the stewards of paper money. I buy Krugerrands, the metal itself, suitable for burying in the turnip patch. I expect the price of the South African gold coins to keep going up, but I don't know how high.
There is much I don't know about gold. There is much that nobody can know--critically, for example, what the price ought to be. It's guesswork. If this is a cockamamie way to invest, I draw courage from the theory of central banking, which is more cockamamie still. These days it boils down to picking an interest rate and imposing that rate on the market. Some would call this "price-fixing." Can you name a single successful government price-fixing operation?
Let's stop right there.
For all the self serving praise of the Fed by Roach, can anyone anywhere name a single successful government price-fixing operation? If you can please step to the plate and hit this pitch out of the ballpark.
For now, I sense goldbugs are playing gold for the wrong reasons. That reason is inflation and monetary expansion. Bernanke simply may have no choice here. He is in an economic zugzwang of sorts. Because of past Fed policies (decisions he himself participated in), his choice is now between a severe recession now and a depression later. To the extent that banks have offloaded much of their exposure to Fannie Mae, various pension plans, foreign bagholders via agency debt, and the public at large, Bernanke is likely making a rational choice (if he has the guts to see it through). Is that really worthy of praise?
By taking the hit now, Bernanke also preserves the balance sheets of many major US corporations. Face it folks, the carry trade is unwinding. How far and how fast it goes depends on the resolve of Bernanke. Yet unlike Roach, I fail to see how the Fed is doing anything other than self preservation.
Of course we are a long ways away from seeing whether or not Bernanke is going to follow through with his threats. To the extent that corporate balance sheets are in far better shape than they were in 2001, he has that ability. For now, the gold market and various carry trade plays seems to believe him.
That carry trade unwind has much further to go. In essence gold has been rallying this year for the "wrong reason". Let all of the inflationists be shaken out of their gold on this pullback. My thesis is that gold will eventually start acting like money (an asset to be hoarded in the upcoming deflationary times).
For those that missed the latest run-up, another chance may be nearby. A $100 pullback is not exactly peanuts but seasonality is an issue as well. You pay your money and you take your chances. For the record (which could change anytime soon and without notice) I am still on the sidelines. Most assuredly gold is a better buy than it was $100 ago. If Bernanke follows through with his threats, gold will likely get cheaper yet. If he does, then you can then buy gold for the right reason: deflation. Gold will act as money to be hoarded and the implosion of the housing bubble will force his hand to reverse course, furthering the advance of gold for the right reason: fighting deflation. Those that missed the latest runup have only one thing to say "Thank you, again, Ben Bernanke".