Fed Chairman Ben Bernanke: How To Profit from the Fed’s Current Policy

by Dr. Mark Skousen, Advisory Panelist
Wednesday, February 07, 2007: Issue #637

Behind the facade of every dry-speaking Fed chairman is a man whose stomach is churning, for fear that some crisis is around the corner. Then they panic.

Not too many know this, but Alan Greenspan, who was the “maestro” at the Federal Reserve Building for more than 18 years (1987-2006), panicked at least seven times and reversed policies. The October 1987 crash and the September 2001 terrorist attacks are two examples. The Asian financial crisis in 1997 and the Y2K computer glitch in 1999 were two others.

Typically, whenever the Fed chairman sees a crisis ahead, his solution is always the same: increase liquidity and flood the system with money. And maybe cut interest rates, depending on the situation.

Let’s see why Fed Chairman Ben Bernanke is no different, and how we can profit from the Fed’s current policy…

Ben Bernanke’s Silent Fear

At a luncheon I attended with Bernanke last month, he used the terms “crisis,” “risk,” “panic,” “threats,” “stress,” and similar words 36 times. Now we know why.

The new chairman is fearful that the housing slump and increasing mortgage defaults will cause a fearsome snowballing effect on the economy. (Let us not forget that the Fed caused this housing bust when it encouraged irrational exuberance in the real estate market, cutting short-term interest rates to 1% in 2003-04. What goes up too far must come down.)

What to do? So far, the Fed has not cut interest rates, and it doesn’t need to. Long-term bonds and mortgage rates are still low by historic standards. Instead, it is increasing liquidity. The monetary base is growing, and the broad-based money supply (M2) is now approaching double-digit rates. See the chart below.

In short, Ben Bernanke has panicked.

A Good Time To Be Long Stocks and Gold

In the short run, easy money means:

• No recession; and
• Rising stock prices.

I’m bullish on Wall Street. Expect the Dow and other indexes to hit new highs.

But in the long run, 10% money growth is highly inflationary, and that means a recovery in gold, silver, and other commodities in general, as well as real estate.

If the Fed is too easy for too long, however, it could spell trouble for the traditional stock and bond markets, and the dollar, which is already near all-time lows against the euro. Inflating the money supply is always a risky gamble. Better to hold onto some gold. It’s currently around $652 an ounce, and could move higher.

Good investing,

Mark

Today’s Investment U Crib Sheet

• In January, Ben Bernanke announced that the Fed has set up a “crisis center” to handle potential global financial problems – to anticipate them, and to deal with them if they occur. Read Investment U #627: An Imminent Financial Crisis? Find Out What Fed Chairman Ben Bernanke Is Saying.

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