Bernanke's Conundrum

By: Captain Hook | Sun, May 14, 2006
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Below are excerpts from commentary appearing at Treasure Chests for the benefit of subscribers on Friday May 12th, 2006.

As anticipated, the Fed maintained it's official party line Wednesday. And although many are confused about what the future holds, not the least of which is Mr. Bernanke himself, it should be noted that Greenspan's Fed is still fully operational because he left no other choice in the matter. That is to say not only was he holding a gun to your head in terms of having to play the inflation game (think haste economy) when he was in office, but because of the increasingly risky credit related practices Easy allowed in overextending an already exhausted larger degree business cycle, Ben has no choice but to follow (inflate) or die now too until the jig is up on a more permanent basis. Again, that is why when we compare the post equity market bubble environment of the 30's to present, and as pointed out to you on these pages long ago, one should not expect to see any meaningful corrections in stocks, commodities, or any other kinds of equities until 2008 if history is a good guide. This hypothesis will now be put to the test in observing whether or not Mr. Bernanke will be able to navigate us through the conundrum we all face.

This means that Bernanke is forced to play the game the Maestro set in motion back in 2002 in engineering equities higher once again. Of course most market participants don't know this, many of them with their own agendas to fulfill. What's worse, with Bernanke spouting off the Fed will be 'data dependent' in terms of future policy changes, which even a first year business student should know is dangerous if using backward looking measures, the market(s) are growing increasingly confused. This is not a good situation with regard to the future, as once conditions are right, noting after wildly inflationary times it's almost impossible to get participants thinking down again until the mania has already collapsed, equities will be setup for a big fall. That would not be good considering global economies have become increasingly dependent on pushing paper around in maintaining commerce as opposed real world endeavors. All of this will change in time, with the big questions being "when' and "how fast'?

Not knowing the answers to these questions, but realizing the Fed continues to allow expanding credit at breakneck speeds, it appears to me that given the continued lack of respect for gold we see today, the best course of action appears to be attempting to accumulate precious metals in the most value conscious manner still possible. We have been providing what we consider good ideas in this regard for some time now, where just over the past few days Durban took off in what appears to be a run at overcoming the $2 threshold. I would hold onto your shares if you bought the other day because DROOY is good for a move up into the $4 - 5 range in my opinion.

Based on the price action in the broad markets yesterday it appears a larger audience has finally woken up to Bernanke's conundrum, where if he does not demonstrate that he actually understands what he is doing, gold will be at $1,000 soon, the dollar ($) will be pushing 80, and he will be compelled to either raise rates a half point, or it will collapse. This would not play well with the refi ATM machine moving forward, not that things are necessarily going well in this department right now. One thing that would take pressure off this untenable situation is for stocks to fall, where based on similar situations in terms of market internals / sentiment from the past, an approximate 5 to 7-percent correction in the S&P 500 (SPX) would be about right. Note the CBOE Volatility Index (VIX) is also set to breakout right now as well, supportive of this conclusion, and possibly more. Now you know why I was pounding the table on ensuring you are accumulating your physical metal allocations so vehemently in the past. One day you will wake up, and because of one reason or another, the little guy will have a heck of a time getting any.

If things go worse than the 5 to 7-percent correction in stocks mentioned above, it could be because we are finally at that point where the consumer is exhausted in terms of his borrowing capabilities. In reviewing the attached Credit Figures, you may have noticed that overall credit in the States has been growing at an increasing pace over the past few years, presently running at an approximate 8-percent clip. Further to this, it should be noted that most of this growth has been coming from mortgages, along with high risk commercial and foreign bonds that are sold to unsuspecting widows and orphans at ridiculously low rates given their actual risk profiles. So, with Bernanke's conundrum in our collective faces now, and the fact it appears he doesn't understand what he is doing, maybe SPX index put writers (the banks) will be paying this time around in a market meltdown, as conditions are very similar to those seen prior to the 1987 crash. Nobody knows for sure obviously, but the fact Blair is in trouble (along with a few copper speculators over there), where it maybe increasingly difficult to justify taking on US Treasuries at current rates, if the Chinese and Japanese do not step back into the picture in a bigger way, things could indeed potentially get ugly in the bond market, and in turn stocks.

This would aid Bernanke with the decision making process in terms of whether he will be more hawkish moving forward or not, an experience Greenspan just missed by the skin of his teeth. But of course there is the lesson we all learned last year concerning the Caribbean Banking Centers, where Ben could also make credit available to the primary dealers, all with operations offshore to help out. Not having to report M3 will come in very handy with this in mind, not that the Fed will mind having world players seeing other M's rise, as postulated the other day. That is to say if you think of possible policy action on the part of the Fed as being similar to playing a game of poker, it's now likely time for the Fed to play the accelerating currency debasement card considering so many will be concerned about a potential deflation scare with Joe Average tapped in the credit creation department. If I'm not mistaken that's what gold is suggesting, where a run up to $1,000 would be confirmation Pandora's box is wide open in this regard.

With this in mind, and as always, concerned participants with the goal of buffering impact(s) associated with radical change must do a great deal of forward thinking. Knowing from my own experience this can be much more difficult than it first sounds, one should then also realize not only is determining an educated course of action for the future necessary, but that implementing this plan is essential if all this thinking is to do you any good. What I am referring to here is ensuring you have your physical gold and silver in hand as soon as possible, as process is set to accelerate if the above postulated currency debasement scenario turns out to be the next card played by authorities of the day. Heck, who am I kidding, what else are they going to do?

In leaving you now, we invite you to visit our site and discover more about how an enlightened approach to market analysis and investing could potentially aid you in protecting your finances into the future. And of course if you have any questions or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Note: Special thanks to Jesse's Roadhouse Café for all of the wonderful images comprising many of the buttons one can view above.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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