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Posted 2/20/2006
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Bernanke is no inflation fighter
The new Fed boss is most scared about deflation, not inflation. And when the markets figure that out, precious metals prices will scream.
By Bill Fleckenstein
When Fed Chairman Ben Bernanke delivered his congressional testimony last week, he indicated his willingness to tighten interest rates, should inflation appear to be a threat. This is the same individual who also told the legislators that the Fed's consumer price index projection for 2007 is 1.75% to 2%. Now I would just ask you, if you believe inflation is that under control, how much tighter do you think you have to be?
In my opinion, the only thing Bernanke is really concerned about is deflation -- as Jim Grant and Marc Faber have demonstrated, via excerpts from his old speeches reprised in the most recent issues of "Grant's Interest Rate Observer" and Faber's "The Gloom, Doom and Boom Report."
Thus, I find it odd that so many people think "Helicopter Ben" will try to stake out his credentials as an inflation fighter. 
Ben Bernanke
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Let's remember (as these folks have obviously forgotten) that this is the Fed head who once said: "The U.S. government has a technology, called a printing press, which allows it to produce as many dollars as it wishes at essentially no cost." (Might he occasionally utter a few words so that guys like me will stop calling him Helicopter Ben? Sure. But will he back those words with action? No way.)
Fedofobia
While in the Fed-words-in-lieu-of-action department, I heard from a knowledgeable friend who expressed surprise "that Ben expects investors to hold firm to the concept that 12%-plus growth in short-term credit and 8%-plus growth of M3 is evidence that the Fed has reined in its past accommodations." The Fed has, of course, not reined in its past accommodations, and, in my opinion, has no intention of doing so.
Related news and commentary on MSN Money
For the moment, though, some folks seem to think the Fed is actually tight and inclined to be tighter -- a notion that I find almost laughable. (Recall that restricting the availability of money is far different than raising the cost of money. Think Paul Volcker vs. Easy Al.)
The fear of a "tough" Fed has precipitated the recent shakeout in commodities, where it's now become fashionable to call that market a "bubble." (Of course, most of the folks reaching for that label -- and "reach" is what it is, by my reckoning -- are the same ones who couldnt see the stock bubble or housing bubble as such.)
Debunking commodity-bubble talk
Let me explain why I don't happen to think the commodity market is a bubble. Over the last few years, we've seen any number of shakeouts in this asset class. Every time one occurs, the same stories make the rounds about deflation or the end of the "reflation trade."
What these shakeouts have really been about is too many people on the same side of a trade. Then the thing tips over, feeding on itself en route down. At the margin, that's what I believe happened in the first half of February in all forms of commodities.
It's no secret that lots of hot money is invested in commodity-oriented ideas -- some for fundamental reasons and some simply because the prices have been going up. Yes, some commodity prices have risen significantly, and yes, there is investment demand in those markets.
But let me just ask you this: If you feared for the value of this piece of paper called the dollar and you put it into a hard asset, does that de facto constitute a bubble? Of course not. That constitutes a bull market. To be a bubble, in my opinion, behavior in and around the asset class under discussion has to spin so out of control as to distort the underlying economy. I don't believe the commodity markets are anywhere near that point. Maybe they'll reach it somewhere down the road, though I kind of doubt that.
Metals in line for medals?
In the meantime, I anticipate a bullish chain of events for the metals: When the "right" data emerge to support the fact that the economy is weaker than it appears, I believe the Fed will make clear that it's closer to pausing than people think. (Bernanke himself told Congress last Wednesday that whatever the Fed does will be "dependent on the data.") If that turns out to be the case, I think there will an explosion in the precious metals and currencies, an outcome that I intend to capture.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein did not own or control shares of companies mentioned in this column.
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