Friday, December 18, 2009

Big Ben

Ben Bernanke, the chairman of the U.S. Federal Reserve, is Time magazine's 2009 person of the year. I have been thinking about the significance of this cover. Here are my conclusions.

First, I think that this marks the high point of the public awareness of Bernanke's economic role in the U.S. and world economy. If I'm right about this there will be no more financial or economic crises that require the Fed's emergency intervention for the foreseeable future, i.e. for the next several years. This means that the March 2009 low is in all likelihood a once-in-a-generation low point for stock prices.

It also means that interest rates are about to return to more normal levels, levels which reflect expectations for average economic growth and growing employment in the U.S. and the world. In particular, the gap between short term rates and the 10 year note yield should start to shrink significantly and the yield curve should start to flatten a great deal.

Finally, since interest rates are likely to rise in the U.S. and since the Fed is likely to scale back its support for the securities markets, I think the U.S. dollar is likely to begin a long and extended bull market, one which will carry the dollar index to the 100 level. In this connection I would bring your attention to the background for the cover image of Bernanke you see above. It is an image of the U.S one dollar bill with Bernanke's picture in place of George Washington's.

Sell your villa on the Riviera and buy one in Palm Springs!


  1. I don't doubt the crisis won't reoccur. Bernanke understands how to fight deflation. But isn't a flattening yield curve really bad for all our banks (being kept alive in a very Japanese) manner? Worse, we're still in a deflationary cycle. Latest bakc of napkin calculations shows M3 contracting...

    What really makes our debt/deflationary problem difference from all of the past ones that took 15 years to resolve?

  2. seems like a bit of a stretch to me.. this contrarian news stand non-sense is getting a bit out of hand.

    Carl - did you really think about this cover's real significance? or just how you could make it fit into your previously stated market beliefs?

    I am certainly not a follow the crowd type of investor, but I am all but convinced that the markets is still standing on a very weak foundation with much more mean reversion to go.

    What are your thoughts on the household debt to disposible income ratio? Came down from 140% to only 125%, with the century average sitting at around 60%.. credit is only going to continue to contract for years to come (with extremely dangerous consequences not yet seem by anyone that breathes air today).

  3. Carl, I think youre half-right. As emerging markets in Europe begin to default early next year, and the carry trade shifts back into the yen, the dollar will begin a massive rally that will last the duration of next year, resulting in equally massive drops in equity and commodity prices. But the magazine cover marks the pinnacle of complacency in the broad market and general public. What problems have been solved since fall of 08? We are destined to revisit the lows of this past march, our problems have only gotten worse, papered-over losses with all the toxic garbage transfered back to the Fed balance sheet. With the TARP funds paid back, there is NO WAY the public will tolerate another bailout, even though the banks are still undercapitalized and insolvent. 2010 will be a reality check for those who've bought into this phony rally.

  4. With respect, given that the title of this blog is "The Art of Contrarian Trading", this post only makes sense if one interprets it as extreme sarcasm.

  5. A possible interpretation, a pessimistic one, is that this cover marks the end of central governments' ability to effectively intervene in financial markets and the economy.

  6. Carl,
    I looked at the dollar move more carefully, over LT charts. It does seem to signify a trend change, or at the very least a warning signal. If the dollar is starting a big bull market, hopefully it won't hurt U.S. industry too much. I continue to believe a relatively low dollar is necessary for us to increase exports (our consumers aren't going to support GDP growth any more), grow again, and repay debts. It also helps us to remain an attractive destination for industry.

    A higher dollar will hurt at least larger cap equities directly -- large exporters have benefited from the falling dollar: more dollars for the same goods.

    Like a few others here, I can't see a sharply higher dollar without negative repercussions for equities, at least in the near-term. I don't see new lows for the U.S. indices.

    As you imply, rates must go higher for the dollar to rise. The carry trade exists because rates in other countries are higher than those in the U.S. Without higher rates, we can have a ST flight to safety move to the dollar, but not a large move.

    It looks as if we'll soon see a correction in the dollar's up move, which could mean new highs in the SPX. But if we are to have a more sustained 1-3 month move in the dollar, we should see a nice correction in equities.

    Unless I see something to change my mind, I plan to go long the Euro/dollar at about 143 for a quick 2-3 day move to 144 or 145 and then, probably, to short it to 140 or so.

  7. Not only do I find Carl's explanation of Chairman Bernanke's Times cover amazing, but also his forecast for the US$ rally is coming true while stocks stay on the bull track. Now, let's be honest here - who would have thought that??? This is plain brilliant.

  8. Carl,
    You were also correct about the cover on Al Gore. Not only did the Kopenhagen Climate Summit produce nothing but hot air, but also did we have powdery snow for the first ime in 15 years in the Calais, France region causing the Eurostar English Channel tunnel-trains to fail miserably. My parents in Germany say they have not seen that much snow in 20 years. The climate is cooling and the Kyoto treaty on so-called "greenhouse gasses" is dead.

    I must say, though, that being a contrarian investor and thinker has its downside in that you will never be recognized other than by the few other contrarians out there. The big crowd will always despise you as you challenge their deep-routed believes and group-think. Look at the nasty comments on your blogs or on Mark Hulbert's column. Really ugly. It took me several years to convince my wife of the approach and now finally she believes in me after seeing it work for herself the whole time and she had positive feelings towards me to begin with (at least I hope so). Well, try to convince a stranger of this. Good luck. But I sure treasure your blog like no other on the internet. It shows how you have perfected the art of contrarian thinking. It also shows a long time of experience and independent thinking. Nobody is not born a contrarian, but you have to work hard and over a long period of time to reach this level of understanding. I hope I can say that about myself at some point. What I know already is that the markets never reward the easy thing (when everybody thinks so, when everybody does it...). That's a good foundation.

  9. I disagree. Just because the fed may intervene and raise the interest rate does not mean the economy is actually healthier. A higher interest rate means the construction, real estate, and financial industries will all suffer as less investment and borrowing will occur.

    The Fed will probably raise interest rates sometime in Q2 to combat the inflationary effects brought on by the devalued currency and low interest rates.

    I believe the market is starting a rally on thhe usd that may continue into q2 of next year, but the long term trend is still down.