Central banking isn't all grim and sober. These are my top one-liners for 2010 from Fed Chairman Ben Bernanke, who really saved the best for last by delivering three of them during a single, exceptional set on CBS' 60 Minutes at the beginning of the month.
"I don't fully understand movements in the gold price."
Gold came up a bit short compared to stocks in 2009, but investors in the SPDR Gold Shares (NYSE: GLD) or the iShares Gold Trust (NYSE: IAU) had another banner year in 2010, smashing the S&P 500.
Recently, I argued that gold is a bubble. In a market in which prices are largely driven by investor psychology, only a fool or a madman would claim to fully understand the price action. In that regard, Bernanke's statement can't help but be true. However, it's ironic to hear him utter it since gold bulls are constantly highlighting the Fed's actions as the primary reason for the yellow metal's new luster.
With negative real short-term interest rates and the Fed continuing to print money, is it any wonder that investors are concerned about the longer-term risk of inflation? While I don't think gold is the right hedge -- particularly at these prices -- the gold bulls' logic is hardly mysterious. Of course, the chairman sees no risk of runaway inflation thanks to his supreme confidence in the Fed's ability to control inflation. In fact, in the 60 Minutes interview, he estimated his degree of confidence at:
"One hundred percent."
I can't write a better rejoinder to this lamentable answer than Albert Edwards, the contrarian strategist at Societe Generale, so I won't try. Here's Albert:
Very little surprises me anymore in this business. But even I was surprised by Ben Bernanke's comment on CBS's 60 minutes that he has 100% confidence that he can act quickly to stop inflation getting out of control. Surely if there is one thing Ben Bernanke should be 100% confident about, it is his own fallibility. Remember this is the man who was not only adamant that US house prices would not decline, but refuted the very notion that there was even a house price bubble in the first place!
But why worry about inflation even occurring in the first place, since the Fed's money printing is just a myth?
"One myth that's out there is that what we're doing is printing money. We're not printing money."
Is it necessary to refute this statement? Quantitative easing is printing money. I think our chairman is trying to wiggle out of this one on the basis that the newly printed dollars the Fed is crediting to banks' accounts aren't leaving bank balance sheets to be lent out into the economy. In other words, his argument sums up to, "I'm not printing money because the money printing isn't working."
Even the avowed goal of QE2 -- lowering longer-term interest rates -- hasn't panned out, with the yield curve steepening instead. That's great news for commercial banks including Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC), since they borrow short and lend long and earn the spread between the two (another reason to like these banks for 2011).
Anyway, if things do go pear-shaped again, Mr. Bernanke already has an excuse lined up for missing the rise of the next bubble/crisis. It's the same one he used with regard to the crisis we're only just exiting:
"I wish I'd been omniscient and seen the crisis coming."
Our good chairman uses a neat rhetorical sleight of hand to divorce himself of any responsibility in failing to avert (or even spot) the credit crisis. Here's the fallacy implicit in his statement:
(1) One would need to be omniscient to have seen this crisis coming;
(2) I'm not omniscient;
Therefore:
(3) I could not have seen the crisis coming.
Who will cast the first stone and blame Obi-Ben Bernanke for not being all-knowing? No one could have predicted the crisis, so he bears no responsibility here. These aren't the droids you're looking for. Move along.
Unfortunately for Obi-Ben, there are people who predicted the housing/credit crisis, including Jeremy Grantham (GMO), Christopher Wood (CLSA), and James Grant (Grant's Interest Rate Observer), to name but three. None of them had better credentials in economics or access to superior information or analytical resources than Mr. Bernanke.
What concerns me most about our monetary Jedi Master is not that he made a mistake in the first place, but that he rarely, if ever, shows a glimmer of doubt concerning his past actions (or inactions, as the case may be). That's a big red flag in an environment that remains exceptionally uncertain.
Keep 'em coming
I'm looking forward to some more jokes of the same caliber next year, Mr. Bernanke. There should be no shortage of material to inspire you.
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