Big News of the Day - Bernanke Reappointed

We were going to post a video, but what's the point? The news is straightforward enough: Bernanke is being reappointed as Chairman of the Federal Reserve for another four years.

In our opinion, this is positive for the stock market and negative for the economy.

Why?

Well, in a nutshell, we're confirmed believers in the "There's no free lunch" concept.

Bernanke has pulled some amazing stunts to reliquify a market that was crashing because the banking system was so strongly leveraged to over-the-counter derivatives that were imploding. What started as the "subprime mortgage crisis" has shown the reality of the problem--the banks themselves have such massive risk associated with individually structured derivatives contracts that if those contracts were allowed to execute, the entire banking systems of the world would collapse. It's the equivalent of you borrowing all of the money you can against your assets, borrowing from your friends and family, and placing it all on "red 22" on the roulette table. Actually, it's worse than that. It's like you taking all of your assets and the assets of the planet Earth and placing them on "red 22." Odds are, after the wheel is spun, you've bankrupted the planet.

So Bernanke took many of these "bad assets" off of the balance sheet of the banks and used them to back the US dollar. Note that the bad assets didn't go away, but they were instead shifted to the Federal Reserve's balance sheet.

Sounds good, huh? Of course, all this has done is move the insolvency problem from the banks to the United States. Not so good if you think about it that way.

But, for the time being, it has prevented the global markets from crashing to zero. Bernanke has created some confidence in markets, and without him you can just about guarantee a crash. Confidence is not, however a permanent fix. It is only the appearance of a fix. The game is to manage your perception by making you believe that things will get better.

Of course, this little "solution" now also requires that an infinite amount of money be created to cover the losses of these contracts. That's probably not good for the currency. Perhaps most importantly, if there's ever a lull in the monetary stimulus of any consequence, the whole house of cards will start to fall apart. Let's not forget that new derivatives are being created even as we speak...

You see, there is no real economic recovery. There is only money printing (ie, devaluing the currency) and management of your perception. There is another round of mortgage resets beginning this month which will get larger next year. There is no consumer spending because inflation has destroyed the money over time and consumers have no assets to borrow against.

You can create money, but it will only drive up the cost of living as it devalues the debt. If that is carried too far, a currency collapse may result.

You cannot print money and believe it will create prosperity. There is no free lunch, even though it may appear right now that the bill will not come due.

No, dear reader, this is only eye of the hurricane and we see the gray clouds approaching on the horizon. The next leg down of this event will make the prior one look meek.

Stay alert. Don't buy the hype. Work with the market and let it tell you when the next crash period is about to begin because it is coming at some point.