noworldsystem.com

Why This “Bernanke Put” Could Make for the Scariest Halloween Ever
“And when you consider the subprime mortgage mess, the spillover effect that financial catastrophe has had on the global credit markets, and the sorry state of the U.S. housing market, well, those “facts” aren’t especially pretty.”

Keith Fitz-Gerald
Money Morning
October 31, 2007

The markets are clearly counting on the “Bernanke Put,” which is how market insiders refer to the Federal Funds rate cut nearly everyone is hoping for today (Wednesday).

I have to say that I’m dumbfounded.

I simply can’t understand why investors believe that another rate cut will somehow bail out the stock market and sweep away the nation’s housing and credit problems – as if Federal Reserve Chairman Ben S. Bernanke were the second coming of Harry Houdini.

Nor do I understand why millions of investors who have no rational belief in the tooth fairy, Santa Claus or any other creatures of myth and mirth, are willing to wager their hard earned money on nothing more than an assumption (with some folks, it’s more of a blind hope) that Team Bernanke will cut interest rates

What I think, though, really doesn’t matter leading up to the announcement that Federal Open Market Committee (FOMC) policymakers will make at around 2:15 this afternoon.

In reality, what does matter are the facts. And when you consider the subprime mortgage mess, the spillover effect that financial catastrophe has had on the global credit markets, and the sorry state of the U.S. housing market, well, those “facts” aren’t especially pretty.

The bottom line: No matter what the Fed actually does today, there are three key factors that underscore why it is crucial for you to “go global” – as always, the dominant theme here at Money Morning. Let’s take a look at just why this is the case:

• First, the Fed usually bases its interest-rate decisions on inflation. Right now, inflation is running at an annualized rate of almost 2.5%, meaning it is well above the central bank’s well-established “comfort zone” of 1% to 2%. (If you really want a Halloween scare, check out http://www.shadowstats.com/cgi-bin/sgs which tracks unadulterated versions of the CPI that are tracking north of 6% at the moment).

• Second, the Bernanke-led Fed is right now engaged in the shell game of its monetary life. The central bank desperately wants to create the perception that inflation will take a breather. Not surprisingly, much of the commentary it has provided recently is oriented around the notion that oil prices will stop rising and that the credit crisis will ease. In other words, Bernanke & Co. are trying to get us to focus on an “inflation-free” future – ignoring what’s right in front of our noses. I find that worrisome at best, and troublesome at worst, for it leaves me wondering just what they really know. Hmmm….

• Third, Team Greenspan – and now Team Bernanke – has created and then perpetuated what is probably the most massive asset bubble of all time [and given the Godzilla-sized bubble Japan created back in the 1980s, we’re really saying something here] by allowing real interest rates to slip to unprecedented lows. Greenspan dropped rates in the late 1990s to stave off an implosion of our financial system because of the Asian Contagion and the collapse of the Long-Term Capital Management hedge fund – only to inflate the money bubble that created the “dot-bomb” debacle. When Internet stocks imploded, we merely shifted what was left of our excess capital from stocks and into real estate – creating a housing bubble fueled largely by a barrage of hazy “liars’ loans.” I mean, to borrow under some of those subprime- and “no-documentation” mortgage loan programs, prospective borrowers essentially only needed a heartbeat and they could obtain money to buy a house, or car, or some other hard asset. That ill-advised credit policy finally came home to roost this summer, as banks realized they couldn’t accurately value the asset-backed debt and the credit markets seized up. Now we’re left with a greenback so tattered that it looks like something a Depression-era hobo would wear while hopping a westbound freight train.

After reviewing all this “evidence,” I reach two inescapable conclusions – both of which point to higher inflation:

• First, there’s still too much easy money available [in technical terms, the money supply is still way too high], an inflation-inducer if ever I’ve seen one.
• And, second, judging from the fact the global economy is still accelerating – even as the U.S. market slows – real interest rates are far too low to slow inflation down.

So when the Bernanke and the policymaking Federal Open Market Committee end their two-day meeting with a public pronouncement this afternoon, it will take one of the following three forms:

• First, the Fed could cut rates again. Given the way the markets reacted to the Sept. 18 “Bernanke Surprise,” you can almost bet the ranch that a rate reduction of any magnitude would fuel an immediate rally in U.S. stock prices. However, it will simultaneously make the dollar weaker than it already is. And that’s going to mean more pain for American consumers because foreign made goods will be made more expensive. So will fuel. However, this will likely point to more big gains for investors holding shares of companies deriving a substantial portion of their sales and profits from outside U.S. borders.

• Second, Fed policymakers could actually raise interest rates – although that’s about as likely as the Air Force holding a press conference to say that a UFO really did crash at Roswell. This would make the U.S. dollar more valuable to overseas investors, but U.S. investors and consumers would suffer as U.S. stocks plunged. The only domestic beneficiaries might be the cardiologists called in to treat patients who’d suffered coronaries over the unexpected news. Globally, this might actually fuel growth, since investors worldwide would have more confidence that all markets would advance.

• Third, the Fed could stand pat, and do nothing. The decision alone would not affect the greenback’s value in either direction. However, global traders would likely take the dollar down anyway as companies begin raising prices to keep up with the inflationary pressures being felt around the world. And as you probably guessed, global growth – sans the U.S. market – would continue unabated.

No matter what the Fed decides to do, make sure to pay close attention to its commentary, and especially to its near- and long-term outlooks. Given that they’re being issued on Halloween, they could well be scary as anything for investors – especially if they’re expecting one scenario but end up getting another.

And no matter what the outcome is for the U.S. economy, nothing will change the green light for global growth. And that’s yet one more example of the American consumer, for so long the integral cog in global growth, becoming increasingly irrelevant on the world stage.