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- February 1, 2013
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We are in the midst of what I call the Bernanke Asset Bubble.
In the end, it could turn out to be the greatest bubble in American history. I expect nearly all assets will soar to prices currently unimaginable today.
Also, if you understand this idea, you don’t have to worry about what is going to happen or what the Fed is going to do. You’ll know.
Here’s the simple idea, fully explained…
Ben Bernanke is the Chairman of the Federal Reserve. He has a dual mandate… His goals are to deliver 1) price stability (no inflation) and 2) full employment.
In addition to these two goals, Ben Bernanke is known as a “student” of the Great Depression. The main lesson he learned from the Depression is that you shouldn’t raise interest rates too quickly, because you might not be out of the woods yet.
Given his mandate and his study of the Great Depression, Ben Bernanke will keep interest rates artificially low for longer than anyone can imagine. And that, in turn will create an asset bubble… in just about everything.
In practice, Bernanke’s main lever to make adjustments is short-term interest rates. If inflation heats up, Bernanke raises short-term interest rates until inflation cools. And if unemployment is high, Bernanke cuts interest rates until employment improves.
Right now, inflation is not an issue… So Bernanke has no need to raise interest rates. And right now, unemployment IS an issue, so Bernanke wants to keep interest rates low.
The government expects this situation to remain through 2014… The Fed currently predicts inflation will be below 2% in 2014. And it predicts unemployment will still be above 7% in 2014.
The Fed is staying on script… Last week, Bernanke’s No. 2 in charge, Janet Yellen, said, “I consider a highly accommodative policy stance [low interest rates] to be appropriate in present circumstances.”
The world’s most influential bond managers are betting the Federal Reserve will do even more to boost the economy and keep interest rates low. On Friday, Bloomberg wrote:
Bill Gross, Jeffrey Gundlach and Dan Fuss, whose firms collectively oversee about $1.5 trillion, expect the Federal Reserve to conduct a third round of bond purchases as signs of strength in the U.S. economy fade and Europe’s sovereign-debt crisis returns.
As long as unemployment remains high… and as long as inflation is subdued… the Fed will continue to “juice” the economy.
The “juicing” won’t stop once the economy appears to be back on its feet, either… Bernanke’s worries about the Great Depression will keep him from raising interest rates until it’s too late… which will inflate the Bernanke Asset Bubble to its greatest heights.
So please, for now, stop worrying so much.
We are only partway through the Bernanke Asset Bubble. It should last another two years… at the very least. And asset prices have the potential to soar in this environment.
Stop worrying. You’ve got a “free pass” to make money in your investments through 2014…
– Steve SjuggerudSource: Daily Wealth
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