Keith Fitz-Gerald: Bernanke’s actions last week – failing to taper, yet still trying to maintain the illusion that QE is a good thing – are setting up a one-two punch that’s not unlike boxing champion Mohammed Ali’s famous “float like a butterfly, sting like a bee” approach.
If you recall, Ali was a master of the combination – some say the best ever. He loved to bring his opponents in close. Ali could see through the duplicity of his opponents’ strategy and land punches that won decisively.
Ali did that using combinations that were based in fighting terms on two contrasts: high-low or short-long, or even left and right. He pressed every advantage he could find, even when others thought there were none to be had. Knowing he wanted to go the full 15 rounds, Ali developed a strategy that would become known as the “rope-a-dope” as a means of tiring out his opponents early on, then vanquishing them in later rounds when the fight really began.
I think we should take a page from Ali’s playbook and split the “fight” Bernanke’s presented us with into two distinct time zones: the current “round,” and those that happen down the line. One short. One long.
Is that possible?
Absolutely. What’s more, it’s easy to do.
First, though, put yourself in Bernanke’s place…
Losing His “Final Round” Would Crush You, the Markets, and Bernanke Himself
For all the lip service he pays to wanting growth, in reality, Bernanke’s game is all about defense… from the moment he wakes up to the moment he goes to bed.
Why is pretty simple.
Right now, he has to keep a lid on everything from the looming budget battle to the Middle East. His risk is that the consumer gets crushed if he doesn’t. So he’s going to keep buying, lest he create a market crash that goes down on his watch, destroying his reputation and vaporizing the rumored $10 million advance for his memoir.
Longer term, he’s got trillions of reasons why he doesn’t want to pop the bubble, the most important of which is that he doesn’t want to lose control over the bond markets and, by implication, interest rates.
The rub is that he will anyway. And I think Chairman Bernanke is acutely aware of that now, because derivatives traders are beginning to circle like sharks sensing blood in the water.
Factor in trillions of dollars, and there’s enough fuel to drive rates higher for decades after he’s gone, especially if you look at how far rates have fallen.
Since 1981, they’ve plummeted from 15% to a mere 3.46%, as of Monday.
The far more likely course of action is that they rise like they did from 1950 to 1981… especially when you look at the bigger picture and understand that interest rates move in multi-decade cycles.