Well, that didn\u2019t take long, did it?<\/p>\n
It\u2019s been less than a month since tough-talking Ben Bernanke threatened to pull the rug out from under the stock market by scaling back on his $85 billion per-month liquidity program called QE, and now, he\u2019s done a complete reversal without batting an eye.<\/p>\n
On Wednesday, Chairman Flipflop announced that Central Bank monetary policy would be \u201cHighly accommodative\u2026for the foreseeable future.\u201d This is a shocking about-face from his June 19 announcement it \u201cwould be appropriate to moderate the monthly pace of purchases later this year\u201d.\u00a0 There\u2019s a world of difference between stepping on the gas and tapping on the brakes.<\/p>\n
Naturally, traders were euphoric about Bernanke\u2019s change of heart. In a wild\u00a0and festive\u00a0day of trading, the Dow Jones gained 169 points while the S&P 500 zoomed skyward to 1,675, a new record. Here\u2019s more from Bloomberg:<\/p>\n
\n\u201cThe S&P 500 gained 1.4 percent to 1,675.11 at 4 p.m. in New York. The index topped the closing record of 1,669.16 reached May 21, erasing losses since Bernanke first suggested the Fed might curb stimulus this year\u2026<\/p>\n
Central bank stimulus has helped fuel a rally in stocks worldwide, with the benchmark U.S. index surging 148 percent from its March 2009 low. The S&P 500 has advanced for six straight days, the longest winning streak since March 11. \u2026<\/p>\n
\u201cEverybody\u2019s hanging on the Fed\u2019s every word,\u201d Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by telephone. \u201cEven though Bernanke\u2019s comments after the last FOMC meeting really weren\u2019t hawkish, the market has wanted more clarity in terms of what he meant. Bernanke was as clear as one can be, saying \u2018We\u2019re not going to step on the brakes. We\u2019re just going to let up on the accelerator.\u2019\u201d<\/p>\n<\/blockquote>\n
Don\u2019t kid yourself, Fearless Ben is not going to take his foot off the accelerator until they physically remove him from the Captain\u2019s chair at the Eccles Building and cart him off for retirement in sunny Boca Raton. He\u2019s already been burned once, he\u2019s not going to try it again. No way. It\u2019s going to be pedal-to-the-metal until the bitter end, until the myriad financial bubbles start bursting one-after-the-other like a string of firecrackers tossed into an incinerator. By then, Chairman Wussman will be long-gone, ensconced on some quiet Florida beach, spritzing water on his tanning pate, and thumbing casually through his wife\u2019s tabloids. Not with a bang, but a whimper go former Maestros.<\/p>\n
Now a number of analysts think that Bernanke did NOT do a 180. They still cling to the idea that the notorious \u201ctaper\u201d will begin sometime in late September. But this is ridiculous. Bernanke\u2019s over-arching message is unambiguously clear; the Fed is going to keep flooding the financial markets with liquidity until Kingdom come. (Repeat: \u201cHighly accommodative monetary policy for the foreseeable future\u201d) Sure, the Fed might insert all kinds of meaningless mumbo-jumbo in the minutes to bamboozle the pointy-head nerds who parse every word like it\u2019s holy scripture, but that doesn\u2019t mean anything. The Fed is just trying to shore up its threadbare credibility and make it look like monetary policy is based on an objective, empirical assessment of economic data. (Righto!) The fact is, the markets know what they heard, and what they heard was what Bernanke wanted them to hear. How can there be any doubt about that? If Bernanke did not get the reaction he wanted, he would have dispatched his lieutenants to the various media \u2013 the same way he did after the June 19th fiasco \u2014so they could \u201cclarify\u201d (Re: reverse) what he\u2019d said. But that hasn\u2019t happened nor will it because Bernanke achieved precisely what he wanted to achieve; he pushed up stock prices, stopped bond yields in their tracks, and made quite a few rich investors, even richer.<\/p>\n
Mission Accomplished!<\/p>\n
It\u2019s worth noting that Bernanke\u2019s original statement turned out to be a bigger trainwreck than any of the Fed governors had anticipated. The members of the FOMC thought they were just stating the obvious, that is, that the $85 billion per month \u201cemergency\u201d stimulus program would gradually be reduced if the economy got better. That sounds innocuous enough, doesn\u2019t it?<\/p>\n
So, they were surprised by the reaction. They were surprised that ructions in the bond market sent long-term rates up a full percentage point ravaging bank balance sheets, REITs, bond funds and the housing market. Check this out from the Wall Street Journal:\u00a0<\/em><\/p>\n
\n\u201cA swift, steep rise in long-term interest rates since early May, stoked by comments from the Fed chairman, is presenting challenges .. for the largest U.S. banks as they struggle to overcome lackluster loan demand, a weak economy and a slew of new regulations that are crimping profits\u2026<\/p>\n
The full percentage-point jump in long-term rates, the sharpest increase since 2010, already has eroded $31 billion in accounting gains from banks\u2019 securities portfolios through late June, according to Federal Reserve data\u2026.<\/p>\n
U.S. banks are highly sensitive to rate changes, since any shift can affect how much it costs them to borrow money and how much they can charge to lend that money to customers.\u201d<\/p>\n<\/blockquote>\n
Ouch! $31 Bil. That\u2019s gonna leave a bruise! Then there\u2019s REITs (Real Estate Investment Trusts) debacle. Here\u2019s the rundown from Bloomberg:<\/p>\n
\n\u201cSince the May 2 comments, shares of the companies, which use borrowed money to make $400 billion in credit market bets, dropped about 20 percent and the value of their assets has plunged after the Federal Reserve triggered a flight from bond funds by signaling plans to slow its debt-buying program\u2026.<\/p>\n
REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth, according to JPMorgan Chase & Co. Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds and fueled a jump in home-loan rates to a two-year high. \u2026<\/p>\n
Annaly Capital Management Inc. (NLY)\u2019s Wellington Denahan, head of the largest mortgage real-estate investment trust, told investors less than three months ago that reports REITs could threaten U.S. financial stability were as misleading as the media frenzy over shark attacks in 2001.\u201d<\/p>\n<\/blockquote>\n
How do you like that; the bloodbath in REITs could \u201cthreaten U.S. financial stability.\u201d And if the system does crash, who are people going to blame?<\/p>\n
Professor B.S. Bernanke, that\u2019s who! I\u2019m guessing that old Ben would prefer a retirement party that doesn\u2019t involve tar and feathers. But that\u2019s just a guess.<\/p>\n
And then there\u2019s the carnage in the bond market. Once again, Bloomberg sums it up pretty well:<\/p>\n
\n\u201cInvestors are finding no shelter from the worst corporate-bond losses in almost five years as debt plunges for the most creditworthy to the riskiest borrowers in every industry worldwide\u2026.<\/p>\n
All 16 industries in the index lost during the period, from a 0.7 percent decline for the debt of automakers to a 3.5 percent drop in energy-company bonds. \u2026.<\/p>\n
U.S.-listed bond mutual funds and exchange-traded funds posted record monthly redemptions of $61.7 billion through June 24, surpassing the previous record of $41.8 billion in October 2008, according to an e-mailed statement last week by TrimTabs Investment Research in Sausalito, California.<\/p>\n
The bond-market selloff accelerated after Bernanke said June 19 the Fed may start dialing down its $85 billion monthly bond purchasing program this year and end it entirely in mid-2014 if growth is in line with the central bank\u2019s estimates.<\/p>\n
There has been no safe haven,\u201d said Jeroen van den Broek, head of credit strategy for ING Bank NV in Amsterdam\u2026 \u201cWe\u2019re seeing a complete focus on rates and everything surrounding Bernanke.\u201d<\/p>\n<\/blockquote>\n
And, finally, there\u2019s housing, a market that has become addicted to Bernanke\u2019s low interest-crack. The recent uptick in mortgage rates \u2014from 3.35% on the 30-year \u201cfixed\u201d in early May to 4.64 percent today is a big enough bump to put the kibosh on new and existing home sales while putting serious downward pressure on prices. Check this out from Marketwatch:<\/p>\n
\n\u201cRising mortgage rates will make home-buying more expensive, and some buyers will have to scale back purchase plans. Goldman Sachs analysts estimated that recent mortgage-rate gains mean that for a median-priced single-family home, which costs about $200,000, borrowers who put down 20% face an increase of about $100 in their monthly mortgage payments.<\/p>\n
Mortgage News Daily, which closely tracks the market, described Friday as \u201camong the worst days in mortgage rate history,\u201d and said some lenders\u2019 rates rose as high as 4.875%.\u201d<\/p>\n<\/blockquote>\n
And here\u2019s something else to mull over; it\u2019s from a survey conducted by the folks at Urban Turf who found that \u201c38% of Prospective Home Buyers Halt Search Due to Rate Shock\u201d. Here\u2019s an excerpt from the text:<\/p>\n
\n\u201cTwo weeks ago, long-term interest rates spiked to 4.46 percent to reach their highest level since July 2011.<\/p>\n
While there have been media reports that state rising rates will not deter people from looking for a new home, we have heard differently. So, UrbanTurf polled prospective homebuyers to see if the jump in rates had resulted in a delay in their housing search.<\/p>\n
The results were revealing. Of the several hundred buyers who answered the poll, 38 percent said that they would be putting their search on hold because of rising rates, while 57 percent said that they would keep looking. (5 percent were unsure how the rate spike would influence their decision.)<\/p>\n
While rates dropped back down last week to 4.29 percent, all signs point to them remaining above 4 percent for the foreseeable future, so it is interesting to see how many buyers have put their search for a new home on hold.\u201d<\/p>\n<\/blockquote>\n
And this is just part of the trouble Bernanke unleashed when he announced his \u201ctaper strategy\u201d in late June. He also wiped out an estimated $2.7 trillion in global market cap. and sent the Forex (currency markets) into a catatonic seizure.<\/p>\n
So\u2014the truth is\u2014 Bernanke\u2019s turnaround has less to do with monetary policy than it does with damage control.<\/p>\n
He\u2019s just trying to stop the bleeding.<\/p>\n
MIKE WHITNEY<\/strong><\/em>\u00a0<\/strong>lives in Washington state. He is a contributor to\u00a0Hopeless: Barack Obama and the Politics of Illusion<\/a>\u00a0(AK Press).\u00a0Hopeless is also available in a\u00a0Kindle edition<\/a>.\u00a0Whitney\u2019s story on declining wages for working class Americans appears in the\u00a0June issue of CounterPunch<\/a>\u00a0magazine.\u00a0He can be reached at\u00a0fergiewhitney@msn.com<\/a>.<\/em><\/p>\n