Have No Fear the Bernanke Put is Here!
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We spend a lot of time talking about the fear trade, the current phenomenon of money being so fearful of the gyre of Europe spinning out of control that investors pile, pile and pile again money into U.S. Treasuries to protect what they can from being destroyed in a puff of defaulted asset smoke. The fear trade is the only trade that matters right now and that trade has a necessary and proper limit.
2 Year Treasuries are yielding 0.21%. The 5 year note is yielding 0.56%. How does one find yield in a yield-free world?
Those bond investors that got on the fear trade train early certainly figured it out, as they have been handed an enormous windfall in the form of ZIRP and, in some areas of Europe NIRP (Negative Interest Rate Policy), mixed liberally with European Union incompetence or maliciousness, depending on your perspective.
If you think U.S. Treasury holders have it bad, think about the Swiss. They’ve gone negative. While only TIPS investors in the U.S. are willing to go negative, quantifying how much money they are willing to lose because they don’t know where else to park it.
Or are not allowed.
But, since investing in gold or any of its proxies like the SPDR Gold Trust ETF (NYSEMKT:GLD) is seen as trustworthy as buying the Brooklyn Bridge, the gold market remains right around 1% of the world’s investable wealth.
The trials of the Euro because of all of this have been well-documented as it stares $1.20 in the face while regions of Spain fall like dominoes giving up the illusion that they will ever pay back any of the money they’ve been loaned. And still the fear trade train rolls on.
But to where?
The Fed can’t allow rates to go negative or the money markets will implode. But he can’t let interest rates die because the economy will die. Nor can he print money to oblivion in the face of rising oil prices. Brent Crude (NYSEMKT:BNO) is back over $103 per barrel and rising food prices because of both increased demand from emerging markets that can afford to eat better and a huge drought that threatens the entire food supply chain of the U.S. The iPath Dow Jones UBS Agriculture Total Return Sub-Index ETN (NYSEMKT:JJA) is up 32% since the beginning of June over the weather and its heavy exposure to corn and soybean prices.
And yet, to this point in time the Bernanke Put is still in place. It is on life support? Does it matter?
Because in the end as much as we talk about the fear trade it is just that. Talk. As long as the banks keep buying bonds pushing yields lower, the Ponzi scheme of reinvesting bond profits into new bond offerings continues then there really is no fear in evidence at the margin. There are still just people acting rationally in their best interest while Bernanke and the Fed wage financial terrorism on anyone else not playing the game.
What scares me is when the game ends.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.