Oh Ben, You Did It Again: Investors Hang on His Every Word
At a recent high-profile speech, Federal Reserve Chairman Ben Bernanke defended the latest two rounds of the Fed’s large asset purchases that he explained helped force stocks to go higher, stimulated financial markets and produced over two million jobs, leading to more easing of the economy.
As usual, as soon as Bernanke started talking, U.S. stocks stalled out, but then they took off again when investors absorbed his words of confidence that more stimulus is on the horizon. The chairman, who was unusually upbeat, also dropped some clues on the potential of the Fed’s interest in conducting a third round of asset purchases, which most refer to as quantitative easing, also known as QE3. This article examines this recent speech, what it means for the U.S. stock market, and how it will impact investors worldwide.
All rise for the President, well actually it is the Federal Reserve Chairman Ben Bernanke that we are talking about, but you do have to wonder sometimes about his elevated and revered status. Rather like the smiling “Uncle Ben” on those microwavable rice pouches (no relation), investors seem willing to trust that nod and a wink that seems to convey trust and confidence, when he says “The road to healthy meals starts with a single grain of rice, sorry wrong one again.
He Has Previous
So what are we to make of his latest comments? Well to gauge the degree of confidence that we should apply to his latest speech aimed at steadying the ship and convincing investors, perhaps we should look at his “previous”, when it comes to predictions. The one that readily springs to mind was January 208 where he said “The Federal Reserve does not expect a recession”. Well maybe a little bit out on that one but what about the housing market? Well in February 2006 he said “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will continue to rise. He also retains the prize for optimist of the year yet again for his shrewd assessment that Fannie Mae and Freddie Mac “will make it through the storm”, less than two months before they, well, didn’t.
Rest assured that Mr Bernanke has got this one covered. As he pointed out "One myth that’s out there is that what we’re doing is printing money. We’re not printing money." He went on to clarify "The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.” This is the same man that said in 2002 "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."
Despite his previous observations, Mr Bernanke appears to have had a strong whiff of coffee under his nostrils and stated "the stagnation of the labor market is in particular a grave concern," reiterating that the Fed is prepared to do more to stimulate stronger growth. His words of wisdom sparked an initial sell-off, no doubt thinking that if the man that actively practices anti-pessimism, now thinks the market resembles a knackered donkey then we must be in trouble. Have no fear, the wise old sage promised action and lots of it, and even promised to bring out a range of new one-minute meals, sorry wrong one again. Amazingly, a nod and a wink together with a comforting smile seemed to persuade investors that he was a changed man and everything that hadn’t worked before was now going to, so get investing again.
If “Uncle Ben” Bernanke finally runs out of quotes and followers, he has a ready- made replacement, we already like his rice.