Tuesday, December 7, 2010

Bernanke on 60 Minutes --

I was glad to hear that Mr. Bernanke noted in his 60 Minutes interview this past Sunday that the central bank is NOT printing money.  Most video stories would be showing the government printing presses running full bore when commenting on Bernanke and the "Fed".   John Q. Public is made to believe that this is what has happened currently.  In this instance, there appears to be no additional printing of money. 

While there is no doubt the government printing presses stay in action overtime, this action is different.  When the Fed buys treasuries and thereby creates new bank reserves, it increases the size of its balance sheet on both sides.  The banks that are counterparties to those transactions exchange a risk free asset with a moderate term and some interest for a risk free asset payable immediately with an even smaller interest amount -- a federal reserve bank deposit.

The fact is that the Fed is buying tangible Treasury securities with something they print on a press.  While this may not have been a big deal in the past, there is great concern by the public today.  However, the idea behind the distinction Bernanke makes when he said the Fed is NOT printing money is this.  Central Bank guys view money as currency in circulation that is far removed from the multi-billions of dollars of "bank reserves" they are creating.  As long as there is separation and the newly created "bank reserves" stay put, there will not be inflation.  The danger is if it gets out into the economy.

Bernanke's fear is deflation.  With regard to inflation, Ben says the Fed can act in 15 minutes and is confident at a 100% level.   I hope he is right!

So, in seeking financial stability today, where, according to Bernanke, our greatest concern is deflation, what are the stable investment themes we should be looking for:
  • In deflation, debt is the enemy.
  • Risk is to be avoided.
  • Cash is raised.
  • Treasuries are sought out as a safe haven.
  • Gold, acting as money does well.
  • Select equity shorts or PUTs are a standout.
  • Currency plays

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