Services d'Investissement Ferique


September 2012


Title: The Bernanke “put”

Subtitle: Investors believe that central banks will continue to support equity markets.


Global equities markets continued to do well throughout August despite low volumes and the absence and clear good news that would indicate a sustained rally.


In fact, uncertainty abounds. US investors wonder what Congress will look like in November and who will take over the oval office. Europe, is mired in recession and doubts persist about whether governments will give yet another set of handouts to the Greek government, which is struggling to get its spending in line. China, which recently revised downwards is GDP growth forecasts, is also slowing, at a time when the ruling CCP is heading towards major leadership changes at its upcoming 18th party congress.


With all of this edginess, the question is why have stocks been doing so well in recent weeks?


One answer may be answer may be what some are calling the “Bernanke Put” – an implicit guarantee that the Fed chairman will use monetary policy measures if stocks threaten to drift too low.


The “Bernanke Put” is nothing new. Although the current Fed chairman has long been known as “Helicopter Ben,” for his policy of printing money to keep the economy moving, the “Put” moniker comes from his predecessor Alan Greenspan, who acted similarly at key moments throughout his term.


For example after Black Monday in 1987 when the Dow Jones Industrial Average crashed by a record 508 points Greenspan was quick to cut interest rates, to boost market confidence, and improve the relative attractiveness of stocks. Greenspan did the same thing following the collapse of Long Term Capital Management in 1998, the 911 attacks in 2001 and in the early 2000s as America remained mired in the Iraq War.


Greenspan’s consistent policy of cutting interest rates every time the economy look set to slow and markets set to slip led to the rise of talk of the “Greenspan Put,” which continues to this day.


That said there is one key difference. These days, the combined actions of Greenspan and Bernanke to avoid or to ease recessions during the past quarter century, have led them to cut rates to near zero.


As a result, Bernanke has been relying on “non-traditional measures” to juice up the money supply, such as the “quantitative easing,” asset purchases and  the “Operation Twist” exchange of short term for longer term securities.


It was likely the prospect that Bernanke would hint at more such measures at his appearance at the Federal Reserve’s annual conference in Jackson Hole Wyoming at the end of August that accounted for market strength that month.


Bernanke did not disappoint, announcing that the US economy is “far from satisfactory,” and indicating that asset purchases remain an effective monetary policy tool, that he would re ready to use.


Whether those statements are true is an open question. Many observers feel that such moves have declining efficiency if used too often. Others add that juicing the US economy just before the November elections would taint the Fed’s independence, as it would increase the chances of a Barack Obama victory (Republican candidate Mitt Romney has said that he would fire Bernanke if he was elected).


The important thing right now is that financial markets appear to believe Bernanke. That is why stocks have likely been doing so well during a time of so much global uncertainty.






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