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In New York, bond investors sold U.S. Treasury bonds, corporate bonds and municipal bonds. This morning in Australia and Japan, they did the same. They drove bond prices down. They drove interest rates up. And through their actions, they raised an urgent question for all investors: What’s the Beast Bond Investors Answer: Bond investors see the same inflation monster I introduced to you eight days ago. They see the doubling of U.S. consumer inflation in the last 12 months … the double-digit annualized inflation in September … plus the rapid inflation surge in Europe and Asia. They know that inflation is public enemy number one. They know it is about to strike with increasing force.
And they fear that Fed Chairman Greenspan himself is ill-prepared to go to battle against it. That’s why they’ve been selling bonds steadily since the end of August … why bond prices have recently hit their lowest level in six months … and why bond yields are making new highs. Now, to Add Insult to Injury, The evidence: Exhibit A. Precisely while Greenspan and several Federal Reserve governors around the country were warning the world about the dangers of inflation this month, Ben Bernanke has been pooh-poohing the severity of the inflation, still blaming it on energy. Just last week, for example, he said: “The evidence seems to be that it is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations. … My anticipation is that’s the way it’s going to stay.” Exhibit B. Worse, Bernanke seems to believe that money-printing is a great tool, not a great danger. His own words: “The U.S. Government has a technology, called a printing press. … The Fed could even implement what is essentially the classic textbook policy of dropping freshly printed money from a helicopter. … “A little parable may prove useful … suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost … Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the … printing press (or, today, its electronic equivalent) allows it to produce as many U.S. dollars as it wishes at essentially no cost.” The implication … While Bernanke may pay lip service to inflation fighting, his real agenda seems to be to push for more economic growth — one reason stock investors celebrated his appointment yesterday. That means inflation-fighting takes second fiddle. Worse … For the first time in history, we may have a Federal Reserve Chairman who seems to believe that running the money printing presses is a viable solution to our nation’s economic problems and that a vastly devalued dollar is an acceptable result. What about Ben Bernanke’s Vow to It’s not enough. In fact, the same old policies may be the last thing bond investors want right now. The fact that bond investors have been steadily selling bonds implies a message to Mr. Greenspan — and now to Mr. Bernanke — that goes something like this: “Interest rates are far too low, and more-of-the-same quarter-point hikes will hardly be enough. The only way you can defeat inflation is by letting rates go sharply higher. That doesn’t mean pursuing past policies. It means making a critical policy shift at this critical juncture in the inflation cycle.” The Ever Tougher As I wrote yesterday, the upcoming battle against inflation is going to be a tough one, even for Greenspan. In all of his 18 years as Fed Chairman, he has never had a single duel with an inflation threat of this magnitude. And now, precisely when the war is about to be waged, we have the prospect of a new Fed chairman who is even less able and less willing to go to battle against inflation than Greenspan?! For Greenspan, this may leave only one alternative: Before the outgoing Fed chairman leaves office, he will have to establish a new pattern of firmer action against inflation with sharper rate hikes. If he doesn’t, he will leave an even larger bomb to explode in his successor’s hands. No Matter What Mr. Bernanke or Wall Street In the days ahead, you’re going to hear a lot of chatter about Mr. Greenspan’s newly appointed successor — some confirming what I’ve just told you, some expressing an opposing view. You’ll see many on Wall Street continuing to celebrate. You may even see some bond investors cheering. Don’t let all that noise distract you. Instead, stay focused on the facts I wrote you about yesterday — facts that are driven by forces beyond the control of Greenspan, Bernanke and any individual or institution on the planet: Fact #1. The era of cheap energy is over. Indeed, the world’s smartest analysts are now warning consumers they face new price spikes. They’re also warning that low pump prices are gone, while scarce, expensive energy is here to stay for years to come. Fact #2. The era of cheap money is also ending. Bernanke may try to postpone the inevitable. But he won’t be able to change the force of history. And as I stressed yesterday … Fact #3. The U.S. government’s own official rate of inflation, based on the last 12 months of consumer price increases, is now running at 4.7%, nearly double the pace of a year ago. Fact #4. The government’s official inflation tally excludes the rising cost of housing, one of the most virulent forms of inflation in recent years. The true inflation rate is probably closer to 6%. Fact #5. The actual monster Mr. Greenspan and his successor are facing is current inflation. And based on September’s numbers, it’s now racing along at double digits — an annualized rate of over 14% based on consumer prices and an annualized rate of more than 20% based on producer prices. Fact #6. There’s only one weapon at the Fed’s disposal to fight the inflation: Sharply higher interest rates. Fact #7. With inflation already surging much higher than interest rates, if the Fed does not voluntarily jack up rates, bond investors will take matters into their hands and force rates higher. How? By continuing to do precisely what they’ve been doing in recent weeks — selling bonds. The Impact on Investors The trends in motion before the new Fed Chairman takes the helm are powerful. Even with a policy shift, it will be difficult to reverse them. However, by his action or inaction, Mr. Bernanke could easily accelerate those trends: 1. Bonds: All you have to do is take a look at how the bond market reacted to the news of Bernanke’s appointment yesterday. The yield on the 10-year Treasury note jumped from 4.39% to 4.45%; and the 30-year bond yield climbed from 4.61% to 4.67%. So listen carefully. Because the bond crowd is telling you clearly that Bernanke could be bad news for bonds. Your action: With the possible exception of inflation-indexed notes or bonds, stay away from long-term bonds of all shapes and sizes. Make sure you keep all your cash short term. Example: Treasury bills or a Treasury-only money fund like …
2. Oil and gold: The corrections you’ve seen this month may continue a while longer. But the long-term picture has not changed. The appointment of Ben Bernanke to the Fed can only help drive demand — and prices — higher. Your action: Wait for a further modest decline or for a clear sign that the current correction is over. Then get ready to add to your positions. 3. Stocks: More inflation and more Fed money-printing may be good for stocks based on commodities and natural resources. But it could be terrible for the stock market as a whole. Remember: During the inflationary 1970s, the Dow went nowhere. It wasn’t until the Fed finally began to tame inflation that stocks took off. Your action: Take advantage of any near-term rally to unload stocks that are vulnerable to rising energy and interest rates — autos, airlines, home construction. To help determine which are vulnerable to rising inflation and interest rates, don’t hesitate to consult with an investment adviser. Plus, also check the Weiss ratings at www.WeissWatchdog.com. 4. Protection: The new uncertainty raised by a change of leadership at the Fed makes the need for protection even more urgent. Make a list of every asset you own — not just your stock and bonds, but also your investment real estate, cash-value insurance policies, pension funds, retirement accounts and business interests. Your action: For any vulnerable bonds, stocks, real estate or other assets you want to hold, buy at least some protection with hedges. (See Money and Markets of Friday 10/21 for details) 5. Most important: Hedge against rising interest rates with specialized mutual funds designed to appreciate as long-term rate rise. Example: The Rydex Juno Fund. And if you have money you can afford to risk, turn the near certainty of higher interest rates into your opportunity to build $4,500 into as much as $50,000. (Click here for details.) Good luck and God bless! Martin P.S. We survived hurricane Wilma with no major mishaps. All our back-up systems — including generator, computer network and off-site phone center — are working as planned. However, if you encounter some glitches in reaching us online, please call 1-800-815-2917. Or if you can’t reach us by phone, try on line. About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. 2005 by Weiss Research, Inc. All rights reserved. |
Ben Bernanke and Public Enemy #1
While stock investors celebrated the appointment of Ben Bernanke as Greenspan’s successor yesterday with a 170-point rally in the Dow, bond investors recoiled in fear. 
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