Money goes where it’s treated best. If you’ve got the Fed chair’s number on your rolodex, you may want to give him a call and let him know. How else can you explain the rise in the Aussie dollar and the string of new highs in Aussie resource stocks like Woodside and BHP?
Bernanke meant to calm financial markets by appearing decisive. But central banking is not simply a matter of acting with conviction, like some over-caffeinated existentialist philosopher on the Left Bank of Paris. By lowering the interest rate on US dollar denominated assets, Bernanke has set off a chain of unintended consequences. What are they?
As we mentioned, money goes where it’s treated best. By lowering the rate of return on US bonds, Bernanke has made a massive shift in global capital flows that much more likely. Global investors like themes. They also like capital gains. Popular themes generally lead to capital gains.
Bernanke has made dollar-based assets an unpopular theme, unpopular because the total return on US investments is compromised the dollar’s decline. Imagine for a moment you’re the manager of $1 billion in institutional funds. Where do you invest the money? Do you buy US blue chips because you think the Fed’s rate cute will spark growth in the US economy?
You might consider waiting for reports on new and existing home sales this week, to see if the housing market in America has bottomed and a recovery is on the way. Or, you might see the mounting tally of housing-related job losses in America as a sign that further Fed rate cuts are ahead. America faces a recession and Bernanke is determined to prevent it from becoming a Depression. Only reckless money would go to a party like that.
Markets and Money