Reply #1: WrapUp by Chris Puplava [View All]

VOLATILITY AND UNCERTAINTY CONTINUE TO BE THE THEME

Since Bernanke took the helm from Alan Greenspan he has been flip-flopping back and forth from hawk to dove. He began hawkish, reversed course back in April, and has become hawkish once again. Many commentators point out that Bernanke is “between a rock and a hard place” with the effects of interest rates and the economy and stock market. If he continues to raise interest rates he would crush an already slowing housing market, but if he finishes this rate cycle, the dollar stands to deteriorate even further.

Bernanke must choose the lesser of two evils: fight inflation and save the dollar, or save the economy and housing market at the risk of rising inflation. It appears that Bernanke is unsure of which to choose based upon his flip-flopping between dove and hawk. The Fed has an excellent track record of going too far as their interest rate raising has a delayed effect on the economy and ends up pushing the economy into a recession and sending the markets into a correction. This tug of war between identities has had a clear impact on the markets as the markets themselves appear to stage a rally that falters and can’t seem to get any legs under it.

To see the Fed’s record in action please review my previous article, “Caution is warranted!” back in April. When looking at the previous eight business cycles since 1957, on average the Fed Funds rate peaked four months before the business cycle did and the S&P 500 peaked three and a half months before the peak of the interest rate cycle. My conclusion at the end of the article was that based on the Fed’s record of going too far and the anticipatory action of the markets to correct prior to the end of the interest rate cycle coupled with the late stage rate cycle we are in, that “Caution is Warranted.”

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Bernanke’s wavering at the helm is causing many to bail out of the markets, and what worries me is that Bernanke’s indecisiveness or pushing rates too far will cause those still in the markets to jump ship and really send the markets lower and the economy into a recession. It could be that he is deliberately flip-flopping to shake out excess speculation in the markets and to bring down commodities and commodity related stocks to use as evidence that inflation is under control, to give himself credibility to go on pause, or end the string of rate hikes. Everything is up in the air until we know where he is going at the upcoming Fed meeting. Until then, expect uncertainty which should aid to health care sector’s relative performance.

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