New face, old thinking for the Fed?
When Ben Bernanke hands over command at the Federal Reserve, it likely won't be to someone who'll change policy and solve our problems. Only a revolt in the bond market is likely to force real change.
Now that the election is past, I am looking for the market, the media, and (if we're lucky) even politicians to focus on different -- if not more important -- things.
More likely, however, is that the news will now become dominated by the political posturing, bickering, leaks, brokering of agreements, accusations and brinkmanship surrounding the upcoming automatic tax hikes and spending cuts otherwise -- and inaccurately -- known as the fiscal cliff.
The logrolling should certainly get interesting. But it is nearly impossible to see how the twists and turns in this process will work out, other than to say it will probably result in a last-minute kick of the proverbial can down the road, with most of the tax hikes sticking but few of the recommended spending cuts taking effect.
In other words, thinking about this will be a waste of time for investors until we get closer to the final compromise, as the outcomes will be uninvestible until then.
She has such small shoes to fill
Second, with the election decided, there is no longer any angst that Federal Reserve Chairman Ben Bernanke will be replaced by someone who tends toward tighter monetary policy. And based on stories we've seen, he most likely will not seek another term.
I suspect current Fed board member Janet Yellen (read her Fed bio) or perhaps William Dudley (read his Fed bio), the president of the New York Fed, will be his replacement. Both are potentially even more reckless than Bernanke.
At this juncture I would say the leading candidate would be Yellen, and I bring this up because on Tuesday she gave a speech in which she said that the Fed ought to tie its zero-interest-rate policy to hitting its targets on inflation and full employment, rather than just picking some date. I would not at all be surprised if that is the direction the Fed goes, even before she has the chance to become the first female Fed chief.
Of course, the inflation that is a consequence of unbridled money printing, both here and around the world, has so far been ignored as folks continue to worry about some sort of deflationary accident in Europe, or perhaps even in America.
Meanwhile, inflation is making headlines, as I have noticed in Election Night exit polls as well as recent headlines about the inflation rate in Great Britain, which is running at about 2%, while their 10-year bonds yield not much more than ours, at 1.75%.
It's time to play 'The Price Is Wrong'
I cannot imagine that this situation of inflation outpacing bond yields will go on indefinitely. At some point, bond markets here and around the world will crack under the weight of inflation or stagflation. But there is a psychological component to how either of those problems is perceived, and for the moment it would appear that most folks think inflation is temporary.
Thus, bonds continue to price in a substantial bona fide decline in prices, otherwise known as deflation, which has not happened and will not happen. The only real question is when psychology will change, and that is not knowable in advance.
Nonetheless, I have decided to take advantage of the recent spike in the bond market by getting short a modest amount of 10-year bonds. I will risk a small loss to see if the bond market is actually in the process of having a "failed rally." But I will use a stop order to limit my losses if I'm wrong, because this is all guesswork.
As for the postelection economy, there is one thing I do know: If you liked the last four years, you're going to love the next four.
King World News
My latest interview with Eric King covered a lot of ground, from class warfare, to the fiscal cliff, to real estate, to the prospects for precious metals miners. Interested readers can listen to it here.
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ABOUT BILL FLECKENSTEIN
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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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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