In this morning’s Financial
Times we said Bernanke’s appointment would reinforce the idea of a
“Greenspan put.” But this is easier said than done with real yields
at all time lows.
Greenspan’s put
worked during a 20-year period of disinflation when rising productivity
then the China phenomenon drove “core” prices lower. Now headline
inflation is spilling into core rates and that will put a policy of
targeting core inflation directly at odds with the so-called “Bernanke
put.”
The main reason a
Bernanke put is unlikely to work is that long term yields adjusted for
gold are turning up from all time lows. This leaves little wiggle room
for the new Chairman (top chart) to soothe the markets as Greenspan has
so often done.
If Bernanke is to be as
successful as the Maestro, he will have to pull off a Houdini to put
gold back in the bag.
With the spread between
gold prices and bonds at record highs (bottom chart), the 30-year yield
should be above 6%. This is likely to happen now that headline inflation
is spilling into the core rate. Therefore, we think targeting only
“core” inflation won’t work like it did for Greenspan and would
thereby neutralize the effect of any “Bernanke put” the equity
markets are wishing for.
Recall that gold began
to rally sharply in 2001. Now note that the Gold/T-bond ratio (bottom
chart) had moved perfectly in line with the 30-year yield for two
decades until the very month Mr. Bernanke gave his now famous
“helicopter
money” speech. The reason is that Bernanke’s speech lacked the
assurance that a Fed could combat a drop in the market without
increasing inflation expectations.
© 2005 Jes Black
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Jes
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FX Money Trends, LLC
One Henderson Street
Hoboken, NJ 07030
646.229.5401 Tel
201.222.5577 Fax
www.fxmoneytrends.com
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