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Bernanke's op-ed



November 05, 2010 – Comments (10)

Bernanke's op-ed in Washington post was usual boring stuff, but one part of it is very important. For the first time ever, the Printing Press chief mentioned inflating a stock bubble as an important goal. 

Thus spoke Zaratrhustra:

"And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. "

This amazing statement provokes several contradictory mental reactions at once. 

1. Bernanke is dead wrong because most of the $15 Trillion of equities are owned by people who don't want any consumer goods because they already have everything and the only thing they do want is just more money. And although some equities are also owned by the public through 401K plans, these plans are not considered by people as real money because the first 401K distribution is typically years away and because market gyrations have taught people that such gains can be very fleeting. So don't expect the stock bubble to produce much extra spending.

2. This is a very sudden change of course on Bernanke's part. Until now, equity speculators got about as much attention from the Fed as houseflies.

3. In one sense it restores justice. I am sick and tired of discrimination we stock speculators have to endure when all the funny money goes to other speculators.

4. At the same time it tramples the asset-less lower classes deeper into the ground. At valuations targeted by Bernanke, stocks lose their ability to lift the small retail investor out of poverty, and in fact, acquire a dangerous tendency to wipe out rookie investors during occasional sell-offs as we witnessed quite recently.

5. What caused this sudden change of heart? Does Bernanke play golf with some bankers whose interests have now changed from bearish to bullish, or was it just honest, sincere stupidity?   

6. Savers will be happy to watch the risk-taking types zoom by, earning 20% a year from Bernanke's generosity. Talk about the mother of all moral hazards.  

7. Fighting unemployment by boosting stock portfolios of the people who are also unemployed but for the opposite reason is asinine. 

8. Is it safe to rely on Bernanke's put? Probably not. Speculators's interests have not gone anywhere and they still need flash crashes as well as flash spikes.

9. The most important question is, will it succeed? I still think it will be hard to take the market above 1400 because when earnings disappear, people may not want to buy the stock even with free money. Even today valuations of many companies make me wonder what kind of s..head is buying them. But the risk of a nasty upside surprise (S&P 1550? 1800? 2100? 5000???) is increasing.

10. I must revise my forecasts slightly upward. Instead of reaching 1400 and crashing, we might see 1350-1500 as the new normal, if Bernanke gets serious about supporting this bubble.

11. Investing has just become more difficult.



10 Comments – Post Your Own

#1) On November 05, 2010 at 7:23 PM, FreeMarkets (40.90) wrote:

BIG +1

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#2) On November 05, 2010 at 7:35 PM, Varchild2008 (84.35) wrote:

Awesome read!

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#3) On November 05, 2010 at 10:23 PM, ChrisGraley (28.69) wrote:

Very good stuff zloj!

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#4) On November 05, 2010 at 11:08 PM, davejh23 (< 20) wrote:

"For the first time ever, the Printing Press chief mentioned inflating a stock bubble as an important goal."

+1, but this isn't the first time he's mentioned this.  He actually recommended that Japan directly manipulate markets years ago.  Japan also recently noted that they will be buying Japanese stocks directly in order to inflate their market.  When the stock market is manipulated in this manner, it is no longer a market.  At least we know the next time the market crashes it will be by design.

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#5) On November 05, 2010 at 11:20 PM, starbucks4ever (88.71) wrote:

Good points, davejh23. I meant, it's the first direct reference (rather than hint) with regard to US market. Of course he's been peddling his advise to the Japanese and to their credit, they didn't listen, but they still stagnated for a host of other reasons.

Oh yes, and I would not state as a fact that the previous market crash was not by design :) 

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#6) On November 06, 2010 at 12:02 AM, whereaminow (< 20) wrote:

Fantastic overview of the implications of direct manipulation of capital markets.  No matter what role a person feels the government should have: from my position of no role at all to the more progressive position of regulator and referee, no one can advocate the direct manipulation of the allocation of capital in a market economy.

Because at that point, it ceases to be a market economy.  So what the BOJ has done, and Bernanke is contemplating, is replacing the market economy with something else. What's the "something else?"

David in Qatar

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#7) On November 06, 2010 at 12:24 AM, starbucks4ever (88.71) wrote:

"What's the "something else?"

An injection of socialism that keeps the existing system from collapsing. Do you have an alternative definition? 

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#8) On November 06, 2010 at 5:34 AM, whereaminow (< 20) wrote:


LOL, my point was that Bernanke and Bros. haven't clearly defined what that "something else" is before they start down that path.  Evem if you think injecting socialism is the correct course, this would be socialism-by-stealth conducted by people who haven't defined socialism as the goal or the solution.

David in Qatar

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#9) On November 06, 2010 at 9:26 AM, Valyooo (33.93) wrote:

Great blog

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#10) On November 06, 2010 at 9:33 AM, starbucks4ever (88.71) wrote:

Sure, they have a different name for it, but socialism it is. True, it's for asset owners only, but that doesn't change the essence. It was socialized banking and credit, socialized housing market, socialized bond market, and now they are socializing stock market capitalization. 

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