One of my favorite expressions is "another county heard from." It beautifully captures the drip-by-drip nature of opinions on a variety of topics, and the markets are certainly full of differing opinions as of late. After I savaged New York Fed President John Williams in my RM column yesterday, I was not pleased to read comments from former Fed Chair Ben Bernanke that hit the tape around 3 pm Thursday. According to Mr. Bernanke, "So my sense is as long as nominal neutral rates are 2.5%-3%, that the Fed will be able to do most of what it could do at any point in history."
Another county heard from.
Veteran recession fighter Ben Bernanke arrived at the Brookings Institution just in time to deliver his two cents on the outlook for a company that has been painted in a negative light by two reports from the Institute of Supply Management this week. Thank goodness.
What Helicopter Ben and his former colleagues just never seem to grasp is that recessions are normal, healthy parts of the economic meta-cycle. Recessions help fight inflation, especially of the wage-push variety, and allow businesses to bring inventories in line by cutting production. This is not a popular view, especially with a presidential election 13 months away, I would readily concede, but it is the reality of the situation.
The other upside of recessions is the impact on interest rates. As demand for money slows, rates decline, and thus the economy self-corrects. Or it did in the 21 recessions from the beginning of the 20th Century to the beginning of the 21st. That all changed when Helicopter Ben and his cronies at overseas central banks took over and tried to lift the global economy out of what has come to be known as the Great Financial Crisis.
In cutting short rates to zero, The Fed created an economic externality that was massively compounded by the expansion in the Fed's balance sheet brought forth via the Quantitative Easing programs. I know they are legendarily the four most expensive words on Wall Street, but this time is different.
The yield on the 5-year U.S treasury is 1.34% now, for goodness's sake. It can't get much lower, and thus the stimulative effect from lower rates is not possible this time. Helicopter Ben thinks the Fed could just flip on the spigot of QE again and jump start the system by pouring trillions of dollars into it. I think he's wrong.
I think the global economy is heading for a pronounced slowdown, and the massive leverage in certain corners of the globe (China, not the U.S.) is going to lead to another credit crunch. You can give Google a break and not even worry about searching for "stocks that performed well in the last recession." None of them did. Every single one of the S&P 500 sectors (there were 10 then, now it is 11) was eviscerated from September 2008 to March 2009.
If there is indeed a global credit crunch on the horizon, sovereign bonds are the only safe haven. I realize that it can be difficult to justify reinvesting funds into newly-issued bonds at such ridiculously low coupon rates, but it is what it is. There are no safe stocks in a recession. Gold and the other precious metals performed well in the aftermath of the Lehman collapse on September 15th, 2008, and could be a decent hedge this time, as well. But a bar of gold doesn't pay a coupon, and that is ultimately how to create value in a global economy of slowing growth. Invest in bonds. Reinvest the interest. Then do it all over again.