The Bernanke Insurance Policy

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders! Very Happy

So who's your insurer? State Farm, Geico, All State....or maybe the Ben Bernanke Insurance Company? Yeah, it looks like he's "insuring" your stocks according to Thursday's speech to the Senate Banking Committee.

Bernanke said the ''more-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth.'' ''The outlook for the economy has worsened in recent months, and the downside risks to growth have increased.''

The Fed ''will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.''

In other words, look for the Fed to lower rates once again on March 18th...maybe by as much as another half a point.

Take It Easy on Bashing Poor Ben pale

Honestly, "good ole' Ben" is doing everything he can. The market is finally realizing this. So I believe the stock market will be sluggish and choppy in the near-term. But in the latter half of the year, this market should recover due to the amount of rate cuts that will start to work their way into the economy by then.

In the near-term, the Fed will worry more about the "downside risks to growth" more so than the upside risks to inflation. This is probably good if you trade in the short-term. But it's definitely bad news if you're a long-term investor.

When the economy is not allowed to fully "purge" excesses, and the Fed steps in to pump more money into the economy...it brings about inflation and asset bubbles in the long run.

It's like the Fed is trying to "inflate" their way out of hard times. It would be much better, if they would simply "suck it up" in the short-term for everyone's long-term benefit. Of course that will never float with politicians or the Fed.

Often doing what's right and what's popular are two different things. Basketball

However in the near-term (6 months to 2 years), the economy will be spared by the US$168 billion government stimulus package coupled with the huge rate cuts in the past several months.

The Real Chink in the Fed's Armor pirat

The chink in the Fed's armor is actually described by the managing director at the New York research firm Graham Fisher & Co, Joshua Rosner below:

Fed rate cuts are ''coming when banks already have a significant number of impairments and are trying to protect their own balance sheets,'' said Joshua Rosner. ''They aren't interested in passing on that cut to most borrowers.''

I couldn't agree more. He's hit the nail on the head. This is the one "bone I have to pick" with Warren Buffett. Buffett states that there is no "credit crunch" because money is cheap. However, you can make it as cheap as you want...but if you don't make it available to the borrowers, then it doesn't matter how ''cheap'' it is. It does the potential borrower no good. Besides, when is the last time Buffett had to go borrow money anyway? He is the bank.

As far as currencies go, it's going to matter which is worse - the U.S. dollar after the Fed cuts rates OR the euro after the Eurozone slows because of the spillover effect from the slowing U.S. economy.

Plus, everyone expects the Fed to cut rates. However, very few think the ECB will start slashing rates. If Trichet or his boys indicate that they'll have to cut rates in the upcoming months...the EUR/USD exchange rate will head lower. cherry

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Making 'Cents' of the Headlines
It's Now NEARLY Official:

Another Aussie Rate Hike is Coming cheers

What's Happening:

On Thursday night, Australia released its employment and unemployment numbers. These numbers were the best in 34 years. The unemployment rate fell for a 15th straight month to a low of 4.1%. Meanwhile, employment rose 26.800 vs. 15.000 expected.

What I Say:

This means that the Aussie central bank will undoubtedly hike rates at its March 4th meeting. They have to because core inflation is now at 3.8% which is well over their 3% ceiling. That's why Governor Stevens is quoted as saying that inflation is "uncomfortably high." And it doesn't look like things are going to let up anytime soon.

For instance, there are still ads for job vacancies all over the place according to the Australia and New Zealand Banking Group. Also, Retail Sales rose for a seventh straight month and home loans reached a six month high.

Obviously, the Aussies aren't experiencing the sub-prime/credit crunch problems that the U.S. and U.K. are having. That's a huge plus right about now.

Wages jumped 1% over the previous quarter also. So there's a huge amount of growth and inflation on most fronts right now.

Australia Will Hike Rates by at least 25 Points on March 4th rendeer

Expect the central bank to minimally raise rates by 25 basis points in March. They'll likely follow up the next meeting with a rate hike also. They are forecasting that inflation may not drop to 3% until the end of 2009 or early 2010. That's barely at the top of the Central Banker's inflation "comfort zone." So bottom line: More hikes are on the way for "the land down under."

No other industrialized nation on earth can boast higher rates right now. Also, they're possibly the only industrialized nation that appears to be unscathed by the sub-prime problems that are plaguing the U.S. and other nations right now.
What's the Inverse of the U.S. dollar? The Aussie dollar

Australia has the exact "opposite" situation that the U.S. has right now. That's why the Aussie dollar has been rising against the United States.

With high inflation, no sub-prime, high employment, low unemployment, and no housing problems...the Aussies' economy is looking pretty good when comparing it to the United States.
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