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June 13, 2011

Do Fed monetary policies and an erratic stock market suggest diversification?


''Chairman Ben Bernanke's recent speech in Atlanta produced wild discrepancies in markets.  This suggests hedging in anticipation of sharper stock-market volatility, though you wouldn't know that by watching the Chicago Board Options Exchange's Volatility Index (VIX).  The fear gauge remains subdued even with the Standard & Poor's 500 Index down some 5% in recent weeks.

Media responses were also all over the place.  Bloomberg's June 7 headline: 'Bernanke Says 'Uneven Recovery Still Needs Stimulus.' '  The June 7 Financial Times': 'Bernanke signals no new round of easing.'

Bloomberg had Mr. Bernanke saying accommodative policies are needed as the economy is operating below its potential, but the Fed would do what is needed to control inflation.  That means the Fed will keep rates low to encourage economic growth but raise them should inflation surge higher in response to a weak dollar.

The FT had Bernanke soberly invoking history: 'The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional head winds ranging from the effects of the Japanese disaster . . .  In this context, monetary policy cannot be a panacea.'

Though the FT said Bernanke's comments dashed hopes for QE3, the next day (June 8) brought different news.  Reports were filled with comments like the one from Jeremy Batstone-Carr, director of private client research at Charles Stanley, a London broker, telling the Associated Press that the chances of another money injection -- but of a different type -- were at 75% to 80%.

Batstone-Carr says deteriorating financial-market conditions, especially 'a sudden period of equity-market weakness should be sufficient to provide Congress with the ammunition to give the Federal Reserve the go-ahead.'  Indeed, an Englishman who understands the role of the U.S. stock market in congressional policy making!

THE ONLY POSSIBLE UPSHOT worthy of high odds is that sooner or later, widely divergent interpretations of important macro-economic trends will roil markets, and when this happens, investors will need a strategy.''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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