Bernanke uses his words

The Fed chief reinforces the notion that, in the wake of the central bank's zero-percent interest rate policy, the 'verbiage standard' is all that remains.

By Bill_Fleckenstein Jul 12, 2013 4:48PM

Ben Bernanke on Capitol Hill in 2013 - Source: © ZUMA/Rex Features
I'm sure that everyone reading this knows that Federal Reserve Chairman Ben Bernanke's speech July 10 moved markets. The Wall Street Journal's headline -- "Fed affirms easy-money tilt" -- says it all.

 

When you are on the "verbiage standard," as we now are, the noise level can be quite high. 


However, I think the fact that all markets responded (and all accounts I have read regarding Bernanke's comments interpreted them as the remarks of someone very reluctant to taper) means that was the message he wanted to deliver.

 

As I said in my July 10 column on my website (subscription required) before Ben's speech: 

"If by some miracle the economy strengthens, the Fed will cut back the amount of bonds it is buying, but remember, that will not be anything that could remotely be considered tightening, and between now and then our central bankers will try to jawbone longer-term interest rates lower. So they may have a game plan to be slightly less 'accommodative,' but they are liable to talk a whole lot easier than whatever they pretend their policy is going to be. And as those last two sentences should make clear, the noise factor is liable to be exceedingly high."

 The predicament the Fed is in is that it is in the process of "losing the bond market," and it is trapped. It can't even hint about reducing its buying by a measly $20 billion (which used to be a big number but is a rounding error nowadays, when it comes to monetization) because of how bonds -- and, at some point, stocks -- misbehave whenever the subject comes up.

 

As far as the eye can print 

The takeaways of what our Fed chairman had to say were that "highly accommodative monetary policy" would be needed for the foreseeable future, and that he finally made a point that I think many of us could agree with, which is that the unemployment rate of 7.6% might "overstate the health of the labor market." Bernanke also made it clear that the Fed would not raise rates for some time, even after we hit 6.5% unemployment.

 

In short, Bernanke corroborated all of the points that have been espoused by those of us who have felt that we understood the DNA of the Federal Open Market Committee doves. They really don't want to stop printing unless the employment gains are very strong. Which means fretting over taper talk is silly, for two reasons:

  • The economy will not be strong enough, I don't think.
  • And even if it is, the kind of tapering Fed officials are talking about is really quite small.

 However, I don't want to lose sight of the fact that while Bernanke (and many others) thinks the bond market is declining because the Fed appeared to talk tough, some of us believe that the bond market is actually in the early stages of taking away the printing press from the Fed. If market participants finally get it through their heads that tapering, let alone any sort of tighter money conditions, is off the table and bonds can't make a substantial rally back near the old highs, then we will probably be able to conclude that the Fed has "lost" that market. (If bond holders begin to discipline the Fed, we will be on our way to the funding crisis I have long warned of.)

 

It's his way or the high-yield way 

This is all very subjective, and we will have to see how it plays out. But what Bernanke made clear is that if the Treasury market doesn't cooperate with him (or the stock market, for that matter) he will respond.

 

This is the Bernanke quote that I think really got people's attention: "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places, that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives, then we would have to push back against that."

 

So there you have it. The Fed is essentially trapped. If the financial markets don't continue to go higher, or if the bond market doesn't stay where the Fed wants it, it will fight that. Therefore, down the road, if interest rates move higher and the Fed thinks they shouldn't, it will take action (i.e., "push back against that"), which will only reinforce the idea that the Fed has indeed lost control of the bond market, and the ramifications of that will be quite ugly. Said differently, the Fed will conclude that any rate rise against its wishes is unwarranted and resist that, which will make matters worse.

 

To be sure, taking action premised on that outcome is not today's business. For now, markets are joyous and, at this point, stocks have really set themselves up for disappointment as we go through earnings season. Of course, now that Bernanke has promised stock bulls that he has their back again, the response to negative news will be that much more informative.

 

The two points I think we want to take away are that the Fed can't even talk about tapering, and the question of at what interest rate will the bond market really fail. 

96Comments
Jul 12, 2013 10:00PM
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Know what the stock market looks like???  A JUNKIE!!  If it NEEDS $85,000,000,000 a MONTH to stay afloat, guess what THAT means?  It's ADDICTED to counterfeit money that the FED is printing every month.  The FED has two and ONLY TWO choices, now.  It can continue on like it has, and we're going to go into HYPERINFLATION eventually, or it can stop this stupid stimulus [which is ONLY helping the rich, who own most of the stock now], but if it does THAT, the stock market is going to crash. The FED SHOULD stop NOW, let the market crash to where it SHOULD be, and let deflation take its course. By the way, what would be so bad about deflation?  At least our cost of living would be DECREASING instead of INCREASING, but since deflation would help the poor more than the rich, the FED will NEVER agree to it.  God forbid the poor be helped in THIS country 

Jul 12, 2013 7:40PM
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If the economy recovers?  Please....as long as US corporations take advantage of slave labor in asia, there will be no more jobs in the US.  Only jobs left in the US are service jobs, restaurents, Walmart, Kmart, fast food chains, etc.  The engineering jobs and manufacturing jobs will not come back to the US.  Also the US has the highest corporate tax in the world...no incentive for corporations to come back to the US.  Bernanke you can kiss my royal ****!!!!!!!!!!!!!!
Jul 13, 2013 5:40AM
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It has always seemed a little nuts to me when a few carefully rehearsed words can manipulate the financial climate of this country and the world for that matter. It's a very fragile state of affairs. 
Jul 12, 2013 8:01PM
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Well Bill thanks for stating what Schiff, Faber, Celente and a few others have been saying for the last year or more. The fed is stuck and it has no way out. The bond market is showing signs of rising and soon it will take off at light speed. Inflation is starting to grow faster as well as taxes and insurance. Food has risen over 20% in the last year with more room to grow. Pretty soon we will all be working and then sitting on our duffs because all our disposable income will be gone. When all that money finds it's way into the system the inflation time bomb will finally go off and nothing is going to stop it.
Jul 12, 2013 9:01PM
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You forgot to mention the multi-trillion pound gorilla in the room... all that fiat CANNOT leak out into the economy or it trashes it instantly. Think it through... paranoid psychopaths suddenly liquidate and in a panic- buy anything that was considered an asset in the 20th Century. Gold would temporarily shoot to the Moon then crash from the massive sell-off of original holders (who wouldn't?). Real estate and all sorts of shelters would skyrocket then cra**** the Midas Touch gone wrong. We all know that this road was taken because somebody put Bernanke up to it. The who may surprise us all (but I doubt it). Wealth loses all in every possible next-case scenario. The remaining option- do we shoot the Fed dog to put it out of it's misery; or force the crash and tumble corruption (that then shoots the dog). Really Ben... where DO you go once you've screwed the whole world?
Jul 13, 2013 12:35AM
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We are truly watching history unfold. The actions of this Fed Chairman will be studied for many years to come.

Jul 13, 2013 2:17AM
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Uncle Ben is smart enough to leave the Job just before the Massive Bubble he created Bursts. I pity the fool that follows in his footsteps. I see my buddy Bill is onboard with what I and Rick Santelli have been stating, sooner or later, the FED will lose control. Uncle Ben will be retired, FAT, and Rich by then. The rest of us will be punished for the Monster he created.
Jul 12, 2013 7:49PM
Jul 13, 2013 10:51AM
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The Fed will stop printing money if the economy improves....guess they will print money forever.  Face it...most US corporations will not come back to the US as long as there is slave labor in Asia.  The US is on a downward spiral and no way out of it.  16 trillion in debt, 50 million americans on food stamps, high energy prices, high food prices, high taxes, high health care, etc.  We have become a nation of part time workers because of Obamacare....Employers don't have to pay Obamacare penalty if employees work 29 hours per week or less.  One great nation is now on the verge of become a third world nation.....very sad indeed.
Jul 12, 2013 9:58PM
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For those of us who have managed to have a few assets, I see nothing good in the future.  For those up to their butts in debt and living on the government dole, all will be fine. 
Jul 12, 2013 10:18PM
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As for corporate taxes, if ANYONE thinks that the corporations are paying them, then they're STUPIDER than I thought,  Hell people!!!!!  YOU are paying the corporate taxes in the form of higher prices and lower wages. Another reason the corporations aren't increasing jobs in this country:  Try and start your own business and see how many FAT-SSED do-nothing [I'm going to screw YOU over until YOU bribe me] bureaucrats come out of the woodwork.  I think their numbers are more than the number of COCKROACHES in the Florida swamps, but I really don't want to insult cockroaches.

 

You REALLY want more jobs in this country??  Get rid of EVERY government idiot [federal, state, and local] including the IRS, and see how fast the economy recovers. Also, BURN the federal register, which is ILLEGAL and UNCONSTITUTIONAL, too.  Hell we'd NEVER would have had an energy crisis if they burnt the federal register [since the paper used to print it, probably uses about 10,000 square mile of forest]

Jul 13, 2013 12:13AM
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Every time Ben opens his MOUTH LIES FALL OUT!!!
Jul 13, 2013 12:40AM
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hey weld387

 

Yup, just like a politician.

 

As the old joke goes:

 

Q: How do you tell when a politician is lying?

 

A: His lips are moving.

 

Jul 12, 2013 10:40PM
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When the time comes.I truly hope tar and feathering are back in vogue.

Jul 12, 2013 10:24PM
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Bottom Line: those who grow tomatos will eat.
Jul 13, 2013 10:54AM
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This is not just an Obama or democrat thing. While Obama has added speed, what we are experiencing was going to happen anyway. Both parties for many years have been allowed to govern in ways to assure staying in office rather then the voters demanding a return to the constitution which would force control over things that are taking place.................MOST OF OUR COUNTRIES ILLS HAVE BEEN A RESULT OF NOT FOLLOWING THE CONSTITUTION. Instead we have law makers with opinions for answers that are loaded with greed. They take an oath to uphold the constitution & do not...... what a show, means nothing
Jul 12, 2013 10:05PM
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You're right, Jackson, and I've been seeing this coming for YEARS, too bad Bennie the IDIOT, CAN'T or WON'T see what's going to happen.
Jul 13, 2013 2:35AM
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Be smart prep! Watch Europe to do Cyprus move on banks take pensions and replace w/worthless bonds. Then it's comes USA political elite and foreign banks take your wealth w/capital controls. Check your banks terms of agreement your probably now a creditor and assume risk liability if your bank fails. Don' worry you'll get some of their worthless stock in return.
Jul 12, 2013 11:26PM
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Where's the "Fat Cat" on this one? Perhaps his mommy sent him to bed early or is limiting his computer time.
Jul 13, 2013 11:56AM
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"the fact that all markets responded"

 

We should all stop using the word Market’s to describe what's happening. It’s insulting to people who understand what true Market’s are, how they behave, and the purpose they are supposed to serve. This is just Ben Bernanke’s big video game now which he controls with one lever that only goes back and forth. The only people who have any chance of winning this game in the long run are the largest insiders in the financial industry who have access to play along with him. Like just about everything else in the financial industry, markets have been bastardized to meet their needs at everyone else’s expense.

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This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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