This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Bernanke Strangle

NEW YORK ( TheStreet) -- By now everybody knows the Bernanke Put, and it's been the best thing since sliced bread.

Of course, nobody with any self-esteem would think the Federal Reserve can solve all the problems. But whenever there's any problem, everybody remembers the Bernanke Put is there and the problem disappears. If it doesn't, Fed Chairman Ben Bernanke can double down until it does.


However, as the Fed balance sheet stands at $3 trillion and is set to increase by about $1 trillion a year (plus a few percent of interest payment and minus an unknown and varying amount of maturing debt), the risk associated with the inevitable and eventual shrinking of the balance sheet increases.

Even before economic strength approaches the Fed limits outlined in QE3/QE4, all bond yields would start to increase in anticipation of the end of quantitative easing. Borrowing costs would increase for everybody, from governments to businesses to home buyers to consumers. This would put the brake on economic recovery and, depending on severity of the bond bubble bursting, may very well kill it.

This is the flip side of Bernanke Put -- the Bernanke Call. The two combined makes the Bernanke Strangle because it literally strangles the economy in limbo.

The unprecedented Fed transparency in publicizing clear and fixed targets for QE has the unfortunate consequence of telegraphing the end to the world. Ambiguity can be a beautiful thing, as Bernanke will one day learn. It's the golden rule of all central banking.

Of course, transparency has its merits, too. But losing flexibility is too big a price to pay, unless one buys into the thinking that the health of economy can be sufficiently defined by two numbers.

Perhaps the Fed thinking is that such transparency allows the bond bubble sufficient time to deflate in a manageable way rather than going bust in a hurry.


This is, at the least, a huge gamble. Nobody can predict how bubbles behave with any responsible certainty. But even if it does deflate slowly, it will damp or possibly kill the recovery. Then the Fed would be forced to delay the bond unwinding.

Hence my prediction that the Fed can only unwind too late and, in the end calculation, inflation risk is certain.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
SPY $208.25 1.22%
GLD $113.75 -1.14%
AAPL $126.37 2.53%
FB $83.20 -0.13%
GOOG $552.03 0.67%

Markets

DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs