September 23, 2011
Ben Bernanke, Chairman of our Federal Reserve System, announced the other day that the Fed will attempt to stimulate the economy and drive interest rates even lower through a series of bond market maneuvers that traders have dubbed "the Twist." In the Twist, the Fed will invest $400 billion (yes, nearly half a trillion tax dollars) in an effort to push bond prices higher and interest rates lower. From a purely financial standpoint, there is no reason why Bernanke can't accomplish his objective. And low rates are good, right? People can more easily afford homes, cars, appliances; businesses can borrow and expand and hire; that's all good. So how come financial markets around the world yesterday reacted to news of the Twist as if Bernanke were serving up a plate of snakes?
I suspect the reason is that investors have little confidence in another round of government stimulus. After all, the last big push to bail and stimulate did pretty much one thing: it kept our biggest banks in business and gave them enough cash to pay bonuses, but not enough, apparently, for the banks to want to lend. We still have uncomfortably high unemployment, and lately headlines have suggested that half a billion dollars went to stimulate a solar-power company, Solyndra, that has recently filed for bankruptcy.
I am sure that I am not as smart as Ben Bernanke. I am less sure that he can help the economy by dishing up another big stimulus package. And I am downright certain that investors worldwide see the prospect of our debt-burdened federal government throwing bags of cash into the breach as a signal to head for the hills. When everyone sells, prices go down.
Corporate earnings are still rising, modestly, despite the best efforts of the earnest folks in Washington and Brussels. If we have a hope to see unemployment drop, it is that earnings will continue to rise.
GTC
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).