How to Profit From Ben Bernanke & a Volatile Federal Reserve
President Bush has nominated Ben Bernanke, his chief economic
advisor, to replace Alan Greenspan. Bernanke has the credentials
to be a good Fed chairman, and the market spoke favorably of him
on the day of his appointment. (More on Bernanke below.) Wall
Street has given high marks to Alan Greenspan as a "maestro" in
the all-important world of money and banking. Under his
leadership, he has guided the U.S. economy through two bear
markets (1987 and 2000-03) that flanked the longest sustained
expansion in our history. But that does not mean that
speculative opportunities for profit haven't existed during his
near 20-year reign in Washington...and we might see more of the
same in the Ben Bernanke era. The fact is that beneath the thin
veneer of Alan Greenspan's monotone voice is a man whose insides
have sometimes been eaten up with worry about an Asia currency
crisis, a Russian economic collapse, Y2K, and threatening
inflation. And he often overreacted to perceived threats,
causing opportunities to make a lot of money. Today, we'll
review the Greenspan era, see just how many times the Fed
changed policy during his tenure, and get a take on where we're
headed under Ben Bernanke...
Alan Greenspan's reign will have lasted from 1987 to 2006.
Amazingly, during that period, Fed policy has changed seven
times, moving between easy and tight money. That's a change in
monetary policy every two to three years!
From the crash in 1987 to 1990, Greenspan & Co. raised rates as
inflation picked up. Then from 1990 to 1991, they sharply cut
rates during the recession. In 1994, Greenspan overreacted to a
fear of inflation by raising rates and generating a bear market
on Wall Street. The inflation fear never materialized.
Over the following five years, the Fed panicked three times
The Asian currency crisis in 1997 The Russian economic collapse
in 1998 The Y2K computer threat in 1999 In each case, the Fed
injected new money into the global economy. From here, a gradual
decline in rates masked the huge increase in liquidity Greenspan
had engineered to avert trouble during the late 1990s. As a
result, a massive bubble developed in high tech, and the stock
market in general. In many ways, Greenspan may have been in part
responsible for the "irrational exuberance" on Wall Street,
adding some gasoline to the booming fire in tech stocks, to use
Steve Forbes' phrase from my interview with Steve last week.
When the Y2K crisis never developed, Greenspan quickly reversed
position and decided to quickly increase rates and curtail
liquidity in 2000. Not surprisingly, the stock market
(especially the tech-ladened Nasdaq) collapsed and entered a
three-year bear market - the Dow losing up to 40% of its value,
the Nasdaq almost 80%.
Later in 2000, Greenspan embarked on a road of reducing rates
all the way down to 1%, far below the "natural rate" of
interest. Greenspan said he feared a Japanese-style deflation.
It's worth mentioning that Ben Bernanke was a member of the Fed
board during this time, and was a cheerleader for this
easy-money policy. Once, when asked if there was anything else
the Fed could do to stimulate the economy, Bernanke bluntly
replied, "Print dollars!" But America is no Japan, and the fear
of deflation was overblown, even after 9/11. Fortunately, the
United States has enjoyed a vigorous recovery since 2003, thanks
in part to Greenspan's efforts.
Meanwhile, the Fed's artificial low-interest rate policy created
all kinds of new profitable ventures. This was especially the
case in real estate and on Wall Street, where investors bid up
mortgage REITs, and other interest-sensitive investments, to
astronomical levels. Now, the Greenspan Fed has embarked on
another campaign to dampen a recent spat of inflation, and they
are raising rates every six weeks. As a result, the mortgage
REITs, muni bonds, and other interest-sensitive investments have
Conclusions and Bernanke's Direction In short, the Fed's actions
can be a huge source of profit for quick-minded investors. I
suspect that the new Fed chairman, Ben Bernanke, will offer
similar opportunities over the next few years. Bernanke is a big
promoter of "inflation targeting," a policy adopted by many
other countries, including Canada, Australia and the European
Union. That could be one reason the stock market is rallying,
because low inflation favors traditional stock and bond markets.
But I wouldn't count out future dramatic changes in policy under
Bernanke, similar to the ones we experienced under Greenspan.
Good trading, Mark
About the author:
Dr. Mark Skousen is a professional economist, financial advisor,
university professor, author of over 20 books, and
Chairman/Editor of Investment U. In the IU e-Letter, Dr. Skousen
helps nearly 300,000 readers become better investors with
actionable investment advice, including the
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