Sunday, November 21, 2010

Run Ben, Run

What was behind Fed Chairman Ben Bernanke's $600 billion QE2? The general economy and jobs, as he said? "Does he know something the rest of us don't?" Andy Kessler asks in The Wall Street Journal.

Perhaps he's thinking about:

Deflation. “In the short run, disinflationary forces in Western economies, especially the U.S., appear too powerful to be overwhelmed by the recent loosening of monetary policy,” said Richard Batty, an investment strategist at Standard Life Investments, a Scottish firm.

Core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made. Here's a picture from The New York Times:

Or maybe Ben's worried about the banks, Kessler's guess.
Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff. 

Like it or not, banks are still weak, and another panic may be on its way. Bank of America is the best example. As of Sept. 30, its balance sheet claimed a book value (assets minus liabilities) of $230 billion. But the stock market values the company at just $118 billion. Who's right? Usually the stock market is ahead of bad news and write-offs. Citibank is selling at 20% below its book value.
Perhaps it's both. Buckle your seat belt.

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