Bernanke: Chumps!

I got a laugh out of the $600b number. The dealers were polled on their expectations last week. The response was an even half trillion. So with that as a bogie the Fed does 600 large. They wanted to do just a bit more than was actually expected. So they added on an extra 100b. They gave the market what it wanted and a little bit of extra cream on the top.

It’s like we are in Disney Land. Everything is orchestrated. For six weeks the Fed has been dishing out its intentions. Public speeches have all been planned and edited to make it appear there was a robust debate at the Fed on the merits and risks of QE. At least a half-dozen news articles were planted in major newspapers.

There was no debate. This was scripted from the beginning. The only issue was how much should be announced at this meeting. The choice of $600b proves that they are managing expectations down to hourly market reactions.

Cramer at the CNBC summed it up for me:

“Only a chump or an idiot would hold money in a bank CD or money market fund”

He went on to add:

“Bernanke will get the job done by any means necessary.”

When Cramer referred to, “getting the job done” he was referring to the Fed’s exclusive objective; raising the price of stocks. That is Bernanke’s solution to our problem. Bernanke believes that the wealth effect will drive consumption higher and spur the economy to create jobs.

Bernanke is going to rig the stock market in order to sucker folks with 401k’s to put up every dime they have in high beta stocks. As the markets rise they will borrow some money and spend it as they will feel richer. But really they are just borrowing against unrealized gains. When the music stops on Bernanke’s madness those same folks will get trampled on their holdings. And they will be deeper in debt. That’s Bernanke’s plan.

Any financial planner that was truly looking out for a client who was saving for retirement and managing an unpredictable world would give the following two pieces of advice:

A) Always have some cash available in case of emergency. Two months of expenses at a minimum. If you have six months of your nut covered outside of your equities you can sleep at night.

B) Take the number 100. Subtract your age from that. The result is the percentage that you should have in growth oriented equities.

Bernanke just blew those guideline away. Anyone who followed that advice would be an idiot. Or even worse, a chump.


IMHO there is not much consequence from QE-1 Lite. This is just a top off of the MBS book. As that goes down the Treasury book goes up. In the massive Agency/Treasury swap market the changes in supply and demand are netted out.

However, QE-2 does have significant impact on total liquidity. When I say total liquidity I mean global liquidity. Not all of the beneficial impacts of monetization in the US will be retained in the US. For example, if one was cashed out of an investment in Agency bonds one might very well reinvest the proceeds in a very nice bond of a very nice steel company in Brazil. That would be an unintended consequence of QE, but what the heck. What’s good for CVRD, is good for America, right?

I could go on for a bit about where the QE money could go. And on that list would be equities. For myself, I would favor foreign equities. After all, why not take advantage of the weak dollar that comes with QE? Another of those unintended consequences. My point is that not all of the QE money is going into the US equity market. I will leave it up to the reader to estimate how much of QE-2 actually does go into US stocks. My guess is that it is tops 200b. The Wilshire is at 12.6T so QE-2 might add about 1.5%. How much of that is in the print over the past six weeks is anyone’s guess.

I think the Fed stuck its foot in the mouth with their plan. They gave us a very clear deadline. QE-2 will be done in 241 days from today. And you can bet the Fed will complete the mission on schedule.

Halfway (or so) through QE-2 the remaining residual impacts on pricing will be on the wane. The markets are pretty efficient about these things. "Halfway" happens to be the first week in March. “Sell in May” could take on some special meaning next year.

Bernanke’s plan is a short-term bet on the stock market. The bet can be measured in months. The aggregate benefits (if any) will be felt more outside our borders than within. In the final months of QE-2 the great debate will be, “Will Bernanke do a QE-3?” The new Congress is going to say “No” to an expansion and we are in for a showdown.

Cramer is wrong on the outlook. While Bernanke will attempt to, "get the job done by any means necessary", his hands will be tied. Bernanke blew his wad on this roll of the dice. A four-six month bet on the S&P is all we are going to get.

Just who are the idiots and chumps?