So, Dec. 11 is behind us. For the last 30 days, it has been for investors one of the most anticipated days that I can recall for a very long time.
Bond traders ran hot and cold in their speculation about what the Federal Open Market Committee (FOMC) would do to interest rates. The weirdest move was by bond traders when they ran the price of 30 year bonds so high that the yields were down to nearly 3 percent! Come on! There was no chance that was going to happen!
But, I guess the bond traders must have thought by sending this message to the Fed, they actually could influence how the central bank would treat the upcoming FOMC meeting's outcome. Fat chance.
As I see it, it has taken nearly 20 months, but traders are just now beginning to get the drift of the Bernanke tenure as Fed Chairman. So far, they have learned that he is one tough cookie. They have learned he is a man of deep conviction and principle.
And I do hope they have learned that they should have read his book, something I have been saying since the first day I began to write this column.
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As we all know, on Tuesday this week the Fed lowered the Fed funds rate by 25 basis points. The stock market had heart failure!
Up went the cry, "Why in heaven's name didn't that dolt Bernanke drop rates to at least 4 percent or even 3.75 percent! Doesn't he realize that without lower rates we are all about to die out here!"
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Then to make their point, they sold shares like water going over Niagara Falls — very, very fast! The Dow dropped 300 points in about an hour. "Now," they all said, "see what you have done, Dr. Bernanke? You have sentenced us all to a recession and, possibly even worse, a depression. Just look at the market now! Woe is us! Woe is us!"
Ahhhh, but another day always dawns. Guess what? The next day the markets got one huge, huge surprise. After believing that the Fed was all washed up, that it had run out of "tricks" to save us all, the Fed announced that it was about to inject $64 billion dollars into the banking system, $40 billion directly into the U.S. banking system and another $24 billion into the international system via what are referred to as "currency swap lines of credit."
I won't go into any long explanation of the details concerning the second method, except to say it is like directly inserting an additional $24 billion into our banking system, since the world's banks today are nearly operating as one entity, in many respects.
Now, you also need to know one other incredible fact! During the previous two weeks, the Fed had already added nearly $58 billion to the banking system! That means in less than a month, there has been $122 billion added to the banking system! Huge!
This realization by the world's banks of the presence of this titanic flood of money had an immediate and stunning effect on world credit markets! The Libor rate, which had been suffering from a major disconnect from our Fed funds rate and was in the process of heading for 6 percent, is now, albeit at a measured pace, approaching an "in sync" status again.
Suddenly, banks all over the world are beginning to talk to other banks about lending deals that, until the Fed spoke up, were dead in the water. In other words, the near-frozen stream of banking credit began to thaw and thaw fast today!
You know, if you are a regular reader of this column, that none of this surprised me at all. I fully expected the Fed to flood the U.S. markets with money, and I have told you so time after time. I also knew they would find a way to do the same for the foreign markets, though I must confess the currency swaps had not occurred to me as the easiest and quickest way.
Why did I know all this? Well, you see, I read Dr. Bernanke's book. Folks, it is all right there, if you will allow me to repeat this mantra on the subject for the umpteenth time. Sorry to sound like a broken record, but Dr. Bernanke has laid all this out very carefully in the 301 pages of his book, "Essays on the Great Depression," published in 2000.
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And why didn't Dr. Bernanke just make the $64 billion surprise announcement when the Fed announced the rate cut? To me, it is very simple. Had he announced it then — and, of course, he knew he was about to add the $64 billion — the markets might not have tanked like they did. Investors might not have thrown in the towel and figured the Fed was totally out of contact with reality.
Without this sense of futility and doom hanging over most investors, they would never have felt the true effects of the $64 billion bombshell! It is all about perception and confidence, something Dr. Bernanke addresses in detail in his book!
By waiting 18 hours, Dr Bernanke showed the world two key things. Key item one, the Fed's potential tool kit is huge and has tools in it no one (except Dr. Bernanke, of course) has ever dreamed of using before.
And key item two, yeah, the Fed can run rates up and it can run rates down — that was the modus operandi for the last 18 years — but, listen up all you investors: Rates are not and never have been the key. Money supply is the key. Got it? Money supply is the key! Maybe it takes a shock like the sequence of events Tuesday and Wednesday before traders learn to never sell the power of the Fed short again!
I can only hope this two-pronged message was not lost on investors — or for that matter on the "seasoned" market analysts that are sending their doubts and concerns to all the world, decrying how this "disconnected" move by the Fed just won't help avoid a supposed coming recession.
Sadly, I think that most of them will completely miss the thrust of the Bernanke move. But, I guess I should not be surprised since they are mostly experts educated by the last 18 years of the Greenspan routine, and as such are trained to expect that only rates will do the trick. Oh, I do hope these analysts get and read his book!
To me, how could you possibly miss the connection? The mild rate dip sent the market into a true nosedive. Then, the huge cash injection literally turned the banking system on a dime from a "moated fortress" state of mind, keeping everyone else out, to suddenly being open-door institutions ready to do some serious business with other banks and commercial financial houses! How can you possibly miss that sea change?
I hope this event is heeded by the market's power players. Money supply is the answer for stable markets, controlled inflation, and a sharp moderation in economic swings from recession to boom, boom to recession, and so on, ad infinitum. If you don't believe me, please don't be so bull-headed that you still refuse to get Dr. Bernanke's book and read it yourself. It is all in there!
Now, I am not going to take you much farther today, for this is the main message I want you to get from this week's column: The Fed knows what it is doing and because of that this market is, and will remain, a long term bull, not bear, market.
We started this bull market in June 2003. I clearly expect to see the Dow ranging from 19,000 to 20,000 points by mid-2010 or mid-2011. I wrote all about that prediction in my May 18th column.
The only caveat I added to this prediction, and again repeat, is the one I repeat every week: So long as my Super Chart Keyline is not broken to the downside for six weeks consecutively, we are going to make that goal. So, be a buyer, especially on weakness!
Not since the first (1913-1927) and smartest Fed Chairman (the personal assistant to J.P. Morgan ) has anyone, with the possible exception of Paul Volcker (who didn't really want the job in the first place), really understood the truth. It is the money supply, not interest rates, that governs the health of the financial systems of the world.
Let us hope the lesson was brought home by Bernanke's $64 billion surprise! Good going, Dr. Ben! I never doubted you for a second.
Well, that is all for this week. I have given you a huge bone to chew on today, and if you are wise, you will get Dr. Bernanke's book and read it through for your own financial health. It is time you will never regret having invested. And as ever, I hope your coming investing week is a good one. In the meantime, you keep in touch. I do! See you next week.
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