Today (10/24/05), President Bush appointed Ben Bernanke to succeed Alan Greenspan as the new chairman of the Federal Reserve. Bernanke is currently serving in the White House as the chairman of the Council of Economic Advisors. The stock market immediately responded favorably to the appointment. How much of the market response is a result of the approval of the appointment or just the removal of uncertainty -- the stock market hates uncertainty -- is a matter of conjecture. Bernanke is best known for a speech he made in November of 2002 in which he said "Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." His "printing press" comment was viewed by many as a signal that the U.S. would adopt inflationary policies. In fact, shortly after the speech, gold began a bull market move that is still intact today. And significant inflation has reared its ugly head for the first time in many years as the price of crude oil trades over $60 a barrel. The reaction of Wall Street to Bernanke's appointment seems mixed. But it is generally conceded that he will be less concerned about inflation than Greenspan has been. So the stock market has responded with a big rally as the fear dissipates among market participants that the Fed would overshoot in raising interest rates and spark a recession. There may not be much change at first in Fed policy. The Fed has already signaled that they intend to continue to raise interest rates until January. After that, Bernanke takes over and it's anybody's guess. I think the stock market euphoria will be temporary. The real winners will be hard assets -- gold, silver, commodities, and oil. The investment themes that have worked in the past will not be the ones that will work in the future. Plan accordingly. Copyright 2005 |
