Sunday, May 19, 2013

Bernanke’s Melt-Up (excerpt)

Fed Chairman Ben Bernanke seems to agree with my upbeat assessment of the future led by the ongoing high-tech revolution. He signed on to the thesis in a commencement speech on Saturday titled, “Economic Prospects for the Long Run.” That title is eerily similar to that of Jeremy Siegel’s investment textbook (1994), Stocks for the Long Run. His speech is also reminiscent of his predecessor’s cheerleading of the 1990s bull market. Bernanke said that he is optimistic about the long-term prospects for the US economy because he expects that “human innovation and creativity will continue.” He concluded that “historians of science have commented on our collective tendency to overestimate the short-term effects of new technologies while underestimating their longer-term potential.” 

In the past, Bernanke explicitly stated that his ultra-easy monetary policy is aimed at driving stock prices higher. Now that they are at record highs, his recent cheerleading could contribute to a melt-up, just as Alan Greenspan did during the second half of the 1990s. We all know how that ended.

Greenspan, who was Fed Chairman from August 1987 to January 2006, was a big believer in the high-tech revolution during the second half of the 1990s. His last major speech about this subject was titled “Technology and the economy,” on January 13, 2000. Just as technology stocks were about to crash, he said: “When we look back at the 1990s, from the perspective of say 2010, the nature of the forces currently in train will have presumably become clearer. We may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever.”

Subsequently, Greenspan said that the financial crisis of 2008 was caused by a “once-in-a-century event,” i.e., the Lehman bankruptcy! Let’s hope that Bernanke won’t regret his latest speech.

The S&P 500 is now 6.5% above its previous record high on October 9, 2007. The current bull market seemed to be tracking the previous one (from 2003-2007), raising concerns that 2013 could play out as badly as did 2007. Now the two bull markets are diverging with the current one rising to new highs. It’s much easier now to make the case that the market may be just starting a melt-up, as I discussed last week.

Today's Morning Briefing: Ahead of Schedule. (1) From 666 to 1667. (2) Symbolists vs. strategists. (3) To Hades and back. (4) Secular bear case is harder to make. (5) Illuminati and Numerati. (6) 666 x 3 = 1998. (7) The BRAINEE Revolution. (8) America will export gas. (9) Flood of federal revenues. (10) Are Obama’s scandals bullish? (11) Bernanke is high on high-tech. (12) So was Greenspan. (13) “Renoir” (+ +). (More for subscribers.)

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