When Ben Bernanke speaks, the gold market listens - closely.
2013 Federal Reserve
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- Can the Fed Cause a Stock Market Crash?
- You can Figure out When the Fed Might Start Tapering
- Stay the Course with Gold as Mixed Signals Move Markets
- Top 5 Choices for the Next Fed Chief Leave Much to Be Desired
- The Fed Or the Fundamentals? What's Behind Stock Market Moves?
A recent article by Paul B. Farrell of MarketWatch said that there is a 98% risk of a stock market crash before the end of 2014.
He said in the article "bubbles are everywhere. . .ready to blow."
That's quite a statement. One key reason Farrell expects a crash? Federal Reserve policies.
He believes that the three major bubbles that have blown up in the past two decades were caused in large part by the Fed's loose monetary policies.
The three bubbles are: the Asian financial bubble that resulted in the Asian Financial Crisis of 1997, the Dot-Com bubble of the late '90s and early '00s, and the credit/housing bubble that resulted in the 2008 financial crisis.
For readers unfamiliar with the term bubble, it simply means a financial asset whose price has been driven far beyond any rational analysis of its true worth. And although they look like they will rise forever, since there is little substantial basis for the valuation, these asset prices will eventually pop just like a soap bubble.
The pop results in a substantial drop in price - in other words, a crash.
Farrell quotes SocGen's global strategist Kit Juckes as saying all these bubbles were "fueled by the Fed keeping policy rates below the nominal growth rate of the economy far too long." Juckes went on to call current conditions the "bubble with no name."
He may be on to something. Even members of the Federal Reserve are worried.
In the mid-May meeting of the Fed's Advisory Council, some members expressed "strong concerns" over the Fed's low interest rate policies and its bond purchase program, which some members said could result in an "unsustainable bubble" in the stock and bond markets.
Thus, we've had the talk in recent weeks about 'tapering' the Fed's purchases of bonds.
Although you might think the markets simply respond any time Ben Bernanke sneezes, his "cold cycle" is not one of the indicators that will spell the slowing
and eventual cessation of the printing press at the Fed.
There actually is a mathematical formula used by the Federal Reserve to determine when to stop the presses.
I could give you the formula and it would look like this:
POP2 = [1-(%∆POP) m*m] *POP1.
Or, I could share the link to the Federal Reserve's Jobs Calculator in Atlanta.
This is the same calculator used by the Fed to determine when the jobs market and the unemployment rate will align properly. And when they do, it will signal to the Federal Reserve that it might be a good time to start tapering its $85 billion a month bond buying program.
This is what needs to happen: The economy will have to show new job growth.
The Fed is looking for the creation of 150,000 to 200,000 new jobs each month for 6 months. This is how we look now:
Gold has become extremely oversold as it falls below $1,200 an ounce. But based on simple math, it’s due for a reversal… Read more...
After President Barack Obama all but fired U.S. Federal Reserve Chairman Ben Bernanke in a recent television interview, everyone's been trying to figure out who the president will name as the next Fed chief next year.
Of course, Money Morning has long been critical of the Bernanke-led Fed, and in particular its easy money policies of recent years -- namely its zero interest rates and waves of quantitative easing (QE) that have added trillions to the Fed's balance sheet.
That debt, the asset bubbles it has created and the Fed's too-cozy relationship with the Big Banks, has prompted the experts at Money Morning to question whether the Federal Reserve should exist at all.
"I believe the Fed is outmoded and should be disbanded," said Money Morning Chief Investment Strategist Keith Fitz-Gerald, who recently wrote about whether the Fed is necessary. "It's a financial body that has outlived its usefulness and is merely causing us to lurch from crisis to crisis. Barring any change in the notion of what it's there to do, get rid of it."
Still, for the time being, we're stuck with the Federal Reserve. And the next Fed chief - whoever President Obama appoints in January -- will be setting monetary policy for at least the next four years.
One thing's for sure: Anyone who dislikes how Bernanke has run the central bank probably won't be happy with the next Fed chairman either.
As confounding as it seems now, it was not the liberal Democrat President Obama, but Republican President George W. Bush who first appointed Bernanke to head the Federal Reserve in 2006.
That Obama re-appointed Bernanke in 2010 made sense, as they share a similar Keynesian economic philosophy. That is, they both think the best way to help a weak economy is through massive government spending no matter how much debt piles up.
So while Bernanke may be on his way out the door, you can bet that whoever President Obama chooses as the next Fed chief will be just as much of a Keynesian as Bernanke has been - and maybe more so.
Heaven help us.
What's driving the stock market - the Fed or company fundamentals?
The answer, of course, depends whom you ask.
Has most or all of the growth in the market over the past few years been due to the Fed's massive QE easy money stimulus?
Or is it fundamentals like earnings per share and the price/earnings ratio?
We asked three experts to weigh in: Money Morning Chief Investment Strategist Keith Fitz-Gerald, Money Morning Capital Wave Strategist Shah Gilani and Brian Wesbury, the chief economist at First Trust Advisors.
Here's their take.