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Bernanke Put? Maybe Not

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.


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