Banking on Bernanke’s Bow-Out

Todays top stocks to buy“The controversial Fed Chair is hinting resignation. Find out what asset is set to go gangbusters when he finally calls it quits” —

Love him or hate him, he arguably has the toughest job in America after our President.

Tapped as chairman of the US Federal Reserve back in 2006 under then-President George W. Bush, Ben Bernanke navigated the central bank through a deep recession in 2008, followed by a series of recovery efforts.

I won’t go into too much detail regarding the current economic crisis, but Bernanke fans would say that much of the financial calamity he inherited was due to his predecessor, Alan Greenspan.

Greenspan has adamantly attributed the 2008 housing bubble meltdown to a myriad of causes including: overseas regulators, US credit rating agencies, mainstream economics and the big banks.

But there are some like Stanford economist John Taylor, who simply blamed Greenspan for keeping short-term interest rates too low for too long.

Nonetheless, with Bernanke at the helm for the last seven years, the progress in whipping America back into shape has been anything but.

And now that he’s nearing the end of his second term, Uncle Ben is looking to ride off into the sunset with the dust still swirling.

Though the economy remains in a volatile state, it hasn’t been all bad news.

Actually, thanks to Bernanke, investors have had an incredibly profitable run in the markets.

And yes, that was a backhanded compliment to the Fed Chair.

Certainly commodities have taken a hit this year, but more on that later.

Despite how the markets have performed during his tenure, he’ll likely be remembered more for the piles of debt (aka quantitative easing) that he’s obtained over the past few years in a bid to kickstart the economy.

When some of America’s largest financial institutions fell into hot water, Uncle Ben acquired their troubled assets…and significantly inflated the Fed’s balance sheet in the process.

In turn, he pumped billions into a broken banking system that was anchored down by the infamous collapse of Lehman Brothers Holdings Inc.

But the printing press didn’t stop there.

In the last round of QE, Bernanke initiated a monthly asset purchase program worth $40 billion in mortgage-backed securities and $45 billion in Treasury securities…without an end date.

As of June, the amount of federal debt held by the Feds has reached nearly $1.8 trillion.

Todays top stocks to buysource: Federal Reserve Bank of St. Louis

With QE-infinity a constant threat to the US dollar, and a near-zero interest rate that’s given next to nothing for people’s savings…it’s not hard to see why the only positive outcome has been in the markets.

Stocks have been on a tear, with both the Dow Jones and S&P 500 reaching new highs almost week in and week out.

Precious metals on the other hand, have tumbled hard during the first half of 2013 after a spectacular rise of their own.

The reality is, despite the inflationary pressure which should come with nearly five years of Fed debt purchases – there’s still no inflation to speak of.

And for that simple fact, the majority of investors have grown skeptical and turned their backs on gold and other inflation ‘safe-havens’.

But after taking a beating, metal bugs can now thank Bernanke once again.

Recently he began to hint that the Feds could taper the amount of debt purchases.

And chances are, with Uncle Ben on the way out come January, his successor will more than likely turn off the tap completely.

But how is the Fed going to wind down its balance sheet without triggering inflation?

According to Federal Reserve website:

“The Committee has the tools it needs to tighten monetary policy at the appropriate time and will adjust its policy tools as necessary to achieve its mandate.  The ability to pay interest on reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve) is an important tool that the Federal Reserve can use to help raise the level of short-term interest rates, even with elevated levels of reserves.

For example, if the Federal Reserve raises the interest rate it pays on reserves, then banks should generally be unwilling to lend to their customers at a lower rate.  In addition, the Federal Reserve has developed new tools such as reverse repurchase operations, designed to aid in reducing the large quantity of reserves currently held by the banking system.”

The problem here is that all of these strategies have never been attempted and are largely experimental.  Couple that with the TRILLIONS in assets the Fed must unload, and we’re talking about a high-risk operation that could lead to rampant inflation.

That’s why even if we are seeing long-term improvements in the making, we could all be in for a major shock once QE ends.

All the talk of a post-QE America could create an incredibly bullish environment for precious metals if inflation rears its ugly head.

Precious metals investors should pare down their positions and wait for prices to bottom out.  If Bernanke’s wild experiment goes off the rails, the smart money will make a move on precious metals once again.

Yours in profits,
Todays top stocks to buy
John Holt
for Top Stock Millionaire
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