Fed Chief Ben Bernanke must be pleased as punch that this is likely to be his last spring at the helm of the Federal Reserve. That’s because for five years now, an auspicious start to the new year has turned ugly by the time the cherry blossoms bloom along DC’s Tidal Basin.
Don’t be fooled by the headline-grabbing rally in stocks. Although the Dow and S&P 500 have been on a well-publicized tear, more disquieting signals are being flashed in the commodities markets around the globe — with everything from gold to silver to oil down more than double digits in percentage terms so far this year.
The carnage in the gold market was especially acute, with the yellow metal having its worst day in more than 30 years on Monday.
Why does it matter? While a swoon in gold hit billionaire gold bugs like John Paulson and David Einhorn particularly hard last week, investors who ignore swings that happen only once in a generation do so at their peril.
Gold and commodities weakness is “signaling concerns about global growth,” Mohamed El-Erian, co-chief investment officer of PIMCO, told Reuters last week. “Commodities have been sending the signal on growth for a while, and now even louder,” he said.
So what gives? China, for one. Its gross domestic product came in with a reading of 7.7 percent in the first quarter — not bad, but the country’s worst showing of the 21st century. The sub-par growth on the part of the Chinese, plus the mess in Europe, triggered valid concerns that Bernanke is losing the battle against deflation.
The situation in parts of Europe is so dire that some companies in Spain are seeing a 60 percent drop-off in sales from pre-crisis highs. Nothing like a depression to put pressure on prices.
Another red flag? The bond market has been defying all expectations in 2013 and has been rallying along with stocks. The bursting of the “bond bubble” that so many, including Warren Buffett, predicted has never materialized.
Instead, bonds have been rallying for four months with yields now comfortably around 1.7 percent — the biggest contrary play out there. As Lacy Hunt, bond maven extraordinaire at Hoisington Investment Management, sees it, no matter how he tries, ol’ Ben continues to be unable to speed up the “velocity” of money — i.e., get it into productive assets in the system so it can multiply and create jobs. “Inflation,” Hunt warns, “cannot exist in this environment.”
That leaves Bernanke in a tough position as he prepares to return to Princeton or points beyond and keeps open the very real possibility that the most famous student of the Great Depression will be unable to slay the deflationary dragon despite five years and a whole warehouse of tools at his disposal.
But don’t expect him not to try before his term is up in January 2014. It looks like more monetary tricks are in store from Bernanke, a summer’s worth of hijinks that may further juice the stock market and Manhattan real estate, but will do little to protect Main Street from an economy here and abroad that looks to be slowing yet again.