A Lapse of Judgment

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A Lapse of Judgment

Posted on 09/25/2006 16:39:17 | Link | Post Comment

0400 EDT Wednesday May 24, 2006

The 'Fed Curse' wherein each new incoming Fed Chairman is tested in a way as never before looms closer for Ben Bernanke. When Greenspan handed over the reins to Ben Bernanke we likened it to handing him a powder keg or a ticking Time Bomb

Ben Bernanke's Big test and Destiny is unfolding -
The most dramatic market movements in history still lie Immediately ahead.

Good Morning: Last week, in our special report entitled: The Trillion Dollar Killing™, we attributed the selloff in part, to miscommunication by Fed Chairman Ben Bernanke to a CNBC anchor that actually created what turned out to be the last gasp rally of this bull to new highs and in doing so, it set the market up for the fall that in reality, took most of Wall Street completely by surprise, in the severity of its selloff.

"Politicians, Presidents and Chief Executives and especially Federal Reserve Board Governors and Chairmen have to be especially careful about how they communicate financial aspects, such as US Dollar and Interest Rate policy and most importantly they have to maintain an arms length consistency or say as little as possible, lest it be misunderstood or misinterpreted. What went wrong two weeks ago, was the market may have felt let down by Dr Ben, because he miscommunicated or indicated a possible pause in interest rate hiking policy back in mid-April that sent many stock markets around the World soaring to new highs. And in doing so, he did potentially set the market up as somewhat expectational that a pause might in fact be imminent, or would signal so in the accompanying May 10, Press Release, perhaps in the form of a lack of unanimity as was recently revealed as promising in earlier Fed minutes. Regrettably: The final paragraph containing this statement may have provided the additional catalyst that spooked the market into an immediate selloff from the opening bell Thursday"

That mis-statement, which we highlighted right here last week, became a major news story yesterday, as a Senator grilled Ben Bernanke and emphasized as our theme also did, how even a single word, can exert tremendous pressure on markets often with dire consequences:

Bernanke Regrets "Lapse of Judgment" Remarks to CNBC Reporter
Tuesday May 23, 6:47 pm ET
By Jeannine Aversa, AP Economics Writer

Ben Bernanke Says He Regrets Making Comments to CNBC Reporter That Caused Stock Market to Dip

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke said Tuesday he suffered a "lapse of judgment" by talking recently to a CNBC anchor, a conversation that caused the stock market to tank when his comments were reported.

Sen. Jim Bunning, R-Ky., asked Bernanke about the episode during a Senate Banking Committee hearing on financial literacy.

"Senator, that episode you refer to was a lapse of judgment on my part," Bernanke replied. "In the future, my communications with the public and with the market will be entirely through regular and formal channels."

Bernanke took over the Fed job on Feb. 1. In a congressional appearance on April 27, he had raised the possibility of the Fed pausing its two-year, credit-tightening campaign. Stocks rallied that day.

But on May 1, CNBC reported that Bernanke had told CNBC anchor Maria Bartiromo investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. Stocks -- which had been up for most of that day -- slumped.

Bernanke had actually talked to Bartiromo a few days earlier -- on April 29 -- at the White House Correspondents Association's annual dinner.

Besides raising questions about Bernanke's communications skills, the incident underscored the fact that a single word uttered by a Fed chief can move stock and bond prices.

At Tuesday's hearing, Bunning, who opposed Bernanke's nomination as Fed chief, said: "I warned you to be careful about what you say because people are going to follow your words very closely."

Bunning also took issue with the Fed's decision to push interest rates higher to fend off inflation. The Fed's last rate hike, on May 10, left a key rate at a five-year high of 5 percent. It marked the 16th increase since June 2004.

Bernanke defended the action. He pointed out that he and his Fed colleagues at the May meeting noted there were some inflation risks to the economy. In terms of the Fed's next rate decision in late June, though, Bernanke said the Fed will rely heavily on what incoming barometers say about inflation and economic activity. Between now and then, "we'll be watching that data very carefully," Bernanke said. __________________________________________________________________________________________________________________

We also highlighted these facts and William Seidman's assumptions, wherein almost every recession past, the blame could be laid at the door of the Federal Reserve and it seems this also began to weigh heavily on investors as they were gripped by the reality of 16 rate hikes.

In light of the above, we are inclined to believe that Bernanke looked spooked enough in his recent admissions that he might actually come to accommodate those fears of many investors including ourselves and at least pause, at the next FOMC meeting June 28 and 29 and this might actually give rise to an anticipatory rally that could unfold at any time over the next few days and weeks from an oversold condition...

It is also our view, that even if the Fed were likely to raise rates even one or two more times, that investors may once again return to their previous mode and already be looking beyond it and this may be influenced in how the GDP figures may come out this week. What many investors have failed to realize is the economy is actually growing at an accelerating pace and this is essentially why the Fed is hitting the panic button in continuing their rate hiking cycle, that has many parallels with the late 1970's, as inflationary pressures were out of control.

Back then, the Fed really panicked and short term rates hit 21% and long term rates around 14% before Gold and Silver prices could really be tamed and even one well known commentator, Gold bull and author of the best selling "Hot Commodities" in somewhat of a whispered tone on air last week: "That rates could actually soar to as high as 20%". Since Jim Rogers is one of the shrewdest long term forecasters around, having already offered the World one of earliest heads up on what's happening now in commodities we take his new call on interest rates as seriously as his recent call for $1,000 Gold and soon... In fact, as we observe the unfolding mosaic of a super-powerful emerging trend in Precious and Base Metals generally and the possibility that first quarter GDP could be upwardly revised as high as 5.8 % to 6.0 % plus, we have to be prepared for the possibility of additional big rate hikes, that just like the last time around is akin to throwing gasoline on the inflationary fire, only this time around, we have the added dynamic of a World running out of resources as an insatiable demand grows.

That is one reason we believe this Commodity Bull Market may be bigger than us all and may go well beyond most investor's imaginations that simply put, cannot impose any limits on any potential upsides at this time, because we are in uncharted territory in terms of demand.

Perhaps the easiest way to put Gold and Silver into perspective, can be drawn from a brilliant analysis that was written several years ago, around the time that we first started warning that the world really is running out of Gold and that barely 13 or so years of supply now exists and since our target price for Gold in 2019 is a very credible $3,900 based on historical norms and actual comparable market performance, we are really only 13 years away from a new description for Ground Zero: Something approaching zero Gold production, if this does unfold.

"Gold is cheap, while stocks are expensive. In January of 1980, both the Dow Industrials and the price of gold were at the same level: 800. Now, nearly 24 years later, the Dow is near 10,000, while gold is less than half its January 1980 value". That was then, and even 2 more years later, Gold is still under $800 and even $700, but for how much longer...? We just got a taste of what $700 Gold looks like and even more dramatically, bearing out our prediction of several months ago, that Gold in the outer months would soon hit all time record highs... it has already happened with December 2010 Gold setting a new all time record high close in Gold of $914.5 and an intraday high of $930.

By inference, the power of the above statement alone, leads one to conclude Gold is not only extremely undervalued, it could hit $10,000...

Demand for gold is now close to 4,000 metric tonnes per year. The supply of gold is declining and is currently about 2500 tonnes per year. As we all know, declining supply and increasing demand leads to increased prices. 85% of gold ends up as jewelry right now. Investment demand will increase in times of economic turmoil. When we consider the likelihood of increases in both jewelry and investment demand the price of gold is very likely to go up. On top of that, Gold is now viewed as an investment and a hedge against bad times not only by the World's richest, but by the faster growing economies, especially those that are overflowing with petro-dollars looking for a safer home, than the increasingly declining US Dollar and other currencies over the past few years. The Middle Eastern nations have seen this movie before when Gold soared 20 fold and Silver 50 fold in less than a decade, following Oil price hike shocks of the 1970's. But the real unknowns that has only just started to strongly influence the tidal wave of buying that lies ahead for Gold, is the increasing credibilitization and viability of Gold as an important component in every investors portfolio, that is now being enabled through the convenience of exchange traded funds.

In 1980, the average daily volume on Wall Street was 100 to 200 million shares. Today, share volumes are 20 to 30 times that when double multiplied by Nasdaq's emergence and the tremendous monetary power of derivatives. Today, values of stocks traded are many multiples of what occurred when the Dow was trading at 800 along with Gold at $800 per ounce. So now in this whole new World there is perhaps 50 times the buying power of 26 years ago when factoring in all exchanges and Global growth, versus what appears to be a finite amount of Gold in existence and a finite limited number of credible mining companies with proven reserves. The tidal wave of buying has yet to be felt on Wall Street that will be many, many times what occurred back in 1980 and any inklings of a true Gold mania where greatly increasing amounts of capital are deployed to Gold related assets have yet to be seen on Wall Street, although we just recently got a first taste of it.

Not so long ago, the total market capitalization of Gold Mining stocks was not much over $100 Billion going on $200 Billion and we made this prediction, perhaps as long as 18 months ago, that we could soon see a Gold sector, with a Trillion Dollar Market value as Gold soars.

As we've said before, there is little that can be done to stop this advance in Precious and Base Metals anytime soon. There are too many powerful forces at work and the genie is already out of the bottle. If it took the Fed raising rates to 21% to stop the last advance at $875, it might take a lot more to stop this one which is eminently more powerful and undervalued in the extreme by any and all historical measure.

The fact is, this emerging bull is bigger than us all and will make the 1980 experience look like a dress rehearsal for what is truly emerging here: "The Greatest Bull Market of Our Time". Our predictions of the most dramatic market moves in history have yet to come, but we have seen the early signs of this and even though we broke some 26 year records not quite as we expected, the more telling divergence and the rebound of Gold and Silver this week, versus the continuing decline in stocks may be a harbinger of things to come down the road. While we are not ruling out a rebound in stocks in the weeks ahead that could still surprise on the upside, the more likely scenario going forward will likely be the surprises on the upside that Gold, Silver, Platinum and Palladium may bring... Just look to the awesome rebound in Base Metals like Copper, Lead and Zinc this week, to get an idea of what may lie in store for Precious Metals. The biggest mistake many made in 1979-80, was calling highs too soon. Since this market by historical measures has a good 15 years to run, that too could be foolhardy...

Trade Well

From the Desk of Savant