STOCK MARKET WATCH -- Wednesday, 28 March 2012

[Demeter]

8. Hitler’s Blackberry By Dan Denning

http://dailyreckoning.com/hitlers-blackberry/

Poor old Ben Bernanke has a deflation phobia. He sees it everywhere the way the kid in The Sixth Sense saw dead people. And Bernanke is equally terrified of falling stock prices (and their effect on consumer confidence). Falling stock prices are what some people call deflation, or asset price deflation. Bernanke, the governor of the US Federal Reserve, believes the Fed made the Depression a Great Depression by raising interest rates too soon during the US recovery. He won’t make that mistake again! He will simply not allow stocks to fall...The Fed chairman’s recent speech to the National Association for Business Economics lit a fire under US stock prices. All the US indexes charged ahead. And even gold got off the mat to close higher. Stocks are addicted to lower interest rates and yesterday they got a nice satisfying hit. Bernanke is on the record for saying he’ll keep US rates low until 2014. Yesterday he repeated his willingness to keep rates low, saying,

“Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

It’s a bizarre world. The Fed chairman thinks lower rates are needed to produce more economic growth. Growth will produce jobs. Jobs will lead to spending. Only then can interest rates — the price of Fed money — be raised. It’s a shame he can’t understand that the US rate policy is unsound. And since the rest of the world more or less keys off from US interest rates, an unsound US monetary policy leads to an unsound global monetary policy. By “unsound” we mean a policy that keeps interest rates too low, leads to asset price inflation, and a giant boom in debt.

This is all well-worn territory to long-time Daily Reckoning readers. If there’s anything comforting about the tenacity of Bernanke’s stupidity it’s that you have time to narrow down your stock holdings in a rising market. It’s much better to exit the market when stocks are floating along on a sea of liquidity than when they are crashing down. But then that’s the issue now, isn’t it? As scared as Bernanke is of the 1930s, he and his central banking colleagues around the world are even more scared of another Lehman Brothers. This was a point we made at our Sydney conference. The lesson of Lehman is that central bankers will simply not allow another major financial institution to fail. They can’t afford to.

The financial system is still so leveraged and interconnected (mostly through the derivatives market) that regular infusions of credit and the monetization of government debt are required to keep it at a steady level. In some ways, the deflation you’d normally expect at the end of a credit bubble is actually happening right now — it’s just disguised by the huge growth in central bank balance sheets. In other words, stock markets have become a giant charade. The indexes don’t communicate useful or accurate information. Prices have become more influenced by the supply of credit in the system than the underlying earnings of the businesses on listed exchanges. The whole thing looks suspiciously like a racket designed only to benefit the banks, the brokers, and the bureaucrats who nominally regulate them. It’s kind of refreshing to say that, although we concede we could be wrong. It’s refreshing because once you acknowledge that the game you’re being asked to play is rigged, you can choose not to play the game. This makes your asset allocation decisions a lot easier. For instance, we bought more gold bullion this morning...