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Bernanke’s 180

by MIKE WHITNEY

Well, that didn’t take long, did it?

It’s been less than a month since tough-talking Ben Bernanke threatened to pull the rug out from under the stock market by scaling back on his $85 billion per-month liquidity program called QE, and now, he’s done a complete reversal without batting an eye.

On Wednesday,  Chairman Flipflop announced that Central Bank monetary policy would be “Highly accommodative…for the foreseeable future.” This is a shocking about-face from his June 19 announcement it “would be appropriate to moderate the monthly pace of purchases later this year”.   There’s a world of difference between stepping on the gas and tapping on the brakes.

Naturally, traders were euphoric about Bernanke’s change of heart.  In a wild and festive day of trading, the Dow Jones gained 169 points while the S&P 500 zoomed skyward to 1,675, a new record.  Here’s more from Bloomberg:

“The S&P 500 gained 1.4 percent to 1,675.11 at 4 p.m. in New York. The index topped the closing record of 1,669.16 reached May 21, erasing losses since Bernanke first suggested the Fed might curb stimulus this year…

Central bank stimulus has helped fuel a rally in stocks worldwide, with the benchmark U.S. index surging 148 percent from its March 2009 low. The S&P 500 has advanced for six straight days, the longest winning streak since March 11. …

“Everybody’s hanging on the Fed’s every word,” Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by telephone. “Even though Bernanke’s comments after the last FOMC meeting really weren’t hawkish, the market has wanted more clarity in terms of what he meant. Bernanke was as clear as one can be, saying ‘We’re not going to step on the brakes. We’re just going to let up on the accelerator.’”

Don’t kid yourself, Fearless Ben is not going to take his foot off the accelerator until they physically remove him from the Captain’s chair at the Eccles Building and cart him off for retirement in sunny Boca Raton. He’s already been burned once, he’s not going to try it again. No way. It’s going to be pedal-to-the-metal until the bitter end, until the myriad financial bubbles start bursting one-after-the-other like a string of firecrackers tossed into an incinerator. By then, Chairman Wussman will be long-gone, ensconced on some quiet Florida beach, spritzing water on his tanning pate, and thumbing casually through his wife’s tabloids. Not with a bang, but a whimper go former Maestros.

Now a number of analysts think that Bernanke did NOT do a 180. They still cling to the idea that the notorious “taper” will begin sometime in late September. But this is ridiculous. Bernanke’s over-arching message is unambiguously clear; the Fed is going to keep flooding the financial markets with liquidity until Kingdom come. (Repeat: “Highly accommodative monetary policy for the foreseeable future”) Sure, the Fed might insert all kinds of meaningless mumbo-jumbo in the minutes to bamboozle the pointy-head nerds who parse every word like it’s holy scripture, but that doesn’t mean anything. The Fed is just trying to shore up its threadbare credibility and make it look like monetary policy is based on an objective, empirical assessment of economic data. (Righto!) The fact is, the markets know what they heard, and what they heard was what Bernanke wanted them to hear.  How can there be any doubt about that? If Bernanke did not get the reaction he wanted, he would have dispatched his lieutenants to the various media — the same way he did after the June 19th fiasco –so they could “clarify” (Re: reverse) what he’d said. But that hasn’t happened nor will it because Bernanke achieved precisely what he wanted to achieve; he pushed up stock prices, stopped bond yields in their tracks, and made quite a few rich investors, even richer.

Mission Accomplished!

It’s worth noting that Bernanke’s original statement turned out to be a bigger trainwreck than any of the Fed governors had anticipated. The members of the FOMC thought they were just stating the obvious, that is, that the $85 billion per month “emergency” stimulus program would gradually be reduced if the economy got better. That sounds innocuous enough, doesn’t it?

So, they were surprised by the reaction. They were surprised that ructions in the bond market sent long-term rates up a full percentage point ravaging bank balance sheets, REITs, bond funds and the housing market. Check this out from the Wall Street Journal: 

“A swift, steep rise in long-term interest rates since early May, stoked by comments from the Fed chairman, is presenting challenges .. for the largest U.S. banks as they struggle to overcome lackluster loan demand, a weak economy and a slew of new regulations that are crimping profits…

The full percentage-point jump in long-term rates, the sharpest increase since 2010, already has eroded $31 billion in accounting gains from banks’ securities portfolios through late June, according to Federal Reserve data….

U.S. banks are highly sensitive to rate changes, since any shift can affect how much it costs them to borrow money and how much they can charge to lend that money to customers.”

Ouch! $31 Bil. That’s gonna leave a bruise! Then there’s REITs (Real Estate Investment Trusts) debacle. Here’s the rundown from Bloomberg:

“Since the May 2 comments, shares of the companies, which use borrowed money to make $400 billion in credit market bets, dropped about 20 percent and the value of their assets has plunged after the Federal Reserve triggered a flight from bond funds by signaling plans to slow its debt-buying program….

REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth, according to JPMorgan Chase & Co. Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds and fueled a jump in home-loan rates to a two-year high. …

Annaly Capital Management Inc. (NLY)’s Wellington Denahan, head of the largest mortgage real-estate investment trust, told investors less than three months ago that reports REITs could threaten U.S. financial stability were as misleading as the media frenzy over shark attacks in 2001.”

How do you like that; the bloodbath in REITs could “threaten U.S. financial stability.” And if the system does crash, who are people going to blame?

Professor B.S. Bernanke, that’s who! I’m guessing that old Ben would prefer a retirement party that doesn’t involve tar and feathers. But that’s just a guess.

And then there’s the carnage in the bond market. Once again, Bloomberg sums it up pretty well:

“Investors are finding no shelter from the worst corporate-bond losses in almost five years as debt plunges for the most creditworthy to the riskiest borrowers in every industry worldwide….

All 16 industries in the index lost during the period, from a 0.7 percent decline for the debt of automakers to a 3.5 percent drop in energy-company bonds. ….

U.S.-listed bond mutual funds and exchange-traded funds posted record monthly redemptions of $61.7 billion through June 24, surpassing the previous record of $41.8 billion in October 2008, according to an e-mailed statement last week by TrimTabs Investment Research in Sausalito, California.

The bond-market selloff accelerated after Bernanke said June 19 the Fed may start dialing down its $85 billion monthly bond purchasing program this year and end it entirely in mid-2014 if growth is in line with the central bank’s estimates.

There has been no safe haven,” said Jeroen van den Broek, head of credit strategy for ING Bank NV in Amsterdam… “We’re seeing a complete focus on rates and everything surrounding Bernanke.”

And, finally, there’s housing, a market that has become addicted to Bernanke’s low interest-crack. The recent uptick in mortgage rates –from 3.35% on the 30-year “fixed” in early May to 4.64 percent today is a big enough bump to put the kibosh on new and existing home sales while putting serious downward pressure on prices. Check this out from Marketwatch:

“Rising mortgage rates will make home-buying more expensive, and some buyers will have to scale back purchase plans. Goldman Sachs analysts estimated that recent mortgage-rate gains mean that for a median-priced single-family home, which costs about $200,000, borrowers who put down 20% face an increase of about $100 in their monthly mortgage payments.

Mortgage News Daily, which closely tracks the market, described Friday as “among the worst days in mortgage rate history,” and said some lenders’ rates rose as high as 4.875%.”

And here’s something else to mull over; it’s from a survey conducted by the folks at Urban Turf who found that  “38% of Prospective Home Buyers Halt Search Due to Rate Shock”.  Here’s an excerpt from the text:

“Two weeks ago, long-term interest rates spiked to 4.46 percent to reach their highest level since July 2011.

While there have been media reports that state rising rates will not deter people from looking for a new home, we have heard differently. So, UrbanTurf polled prospective homebuyers to see if the jump in rates had resulted in a delay in their housing search.

The results were revealing. Of the several hundred buyers who answered the poll, 38 percent said that they would be putting their search on hold because of rising rates, while 57 percent said that they would keep looking. (5 percent were unsure how the rate spike would influence their decision.)

While rates dropped back down last week to 4.29 percent, all signs point to them remaining above 4 percent for the foreseeable future, so it is interesting to see how many buyers have put their search for a new home on hold.”

And this is just part of the trouble Bernanke unleashed when he announced his “taper strategy” in late June. He also wiped out an estimated $2.7 trillion in global market cap. and sent the Forex (currency markets) into a catatonic seizure.

So–the truth is– Bernanke’s turnaround has less to do with monetary policy than it does with damage control.

He’s just trying to stop the bleeding.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on declining wages for working class Americans appears in the June issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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