For weeks Ben Bernanke couldn't do anything right. Every time the Federal Reserve chairman opened his mouth, financial markets took a dive.
Imagine chairman Bernanke's surprise when he woke up on Friday morning to read that the same words that had previously been so dissonant were now music to the markets' ears.
"The day's big news was Bernanke's speech to the Economics Club of Chicago, in which he said inflation expectations indicated by yields on treasury bonds have 'fallen back somewhat'," said the June 16 Wall Street Journal.
Big news? It was old news at best and no news at worst. Bernanke's comments on inflation were a reiteration of his June 5 speech, with some additional phrases tossed in.
And as for his reference to inflation expectations falling back a bit, the last I heard, the gunslingers in the bond market didn't wait for anyone, Fed chairmen included, to interpret inflation signs for them. Expected inflation, as derived from the spread between the yields on nominal and inflation-indexed treasuries, is available 24/7 around the globe.
Recall that the June 5 speech to the International Monetary Conference in Washington set the Dow Jones industrial average back almost 200 points and clipped 3.2 percent off the Russell 2000 index of smaller companies, its biggest decline since October 2002.
Ten days later, on similar comments about inflation, the Russell 2000 soared 3.5 percent, its biggest gain since October 2002.
The rest of the press did no better than the Journal in differentiating Bernanke's June 15 message from the one 10 days earlier that caused such gut-wrenching declines.
The New York Times attributed the rally to "tame inflation remarks", using a quote that was part verbatim from the June 5 speech and part observation about reduced inflation expectations, which was flagged by the Journal as well.
If the interested reader were to let his eyes wander to the other side of the page where the story appeared (on the front page of the Times' June 16 business section), he would get a different picture. Floyd Norris explains why the idea of making inflation-fighting central banks the scapegoat is misplaced.
After detailing the explosive rise in stock markets of developing countries, you would never visit for fear of being kidnapped, Norris writes: "What has changed is not the outlook for those economies; it is the outlook for speculation."
Bingo. Neither the earlier gains nor the recent declines in emerging markets can be explained by the fundamentals, he says. That doesn't stop folks from trying.
Easy money for an extended period made risky assets more appealing. At the same time, "the decline in volatility and risk premiums encouraged more risk taking in an attempt to raise returns", writes Ray Dalio, the chief investment officer at Bridgewater Associates, in the firm's June 16 research note to clients.
"Essentially, investors have overdone things that work in 'good times', but are not good things to do in the late stage of economic cycles when central banks' trade-off between inflation and growth becomes most acute."
With the proverbial punch bowl being taken away - by the Federal Reserve, the European Central Bank, and at some point the Bank of Japan - risk appetites are receding. The shift is manifesting itself in stock markets, emerging markets and commodities.
The rally in gold from about $500 an ounce in mid-March to $732 in mid-May looks more speculative than fundamental with the benefit of hindsight (it looked speculative at the time as well),; but the metal's inflation-sensing ability made for a good story. Its 25 percent plunge to $546 (R3 749) last week - a bigger decline than the October 1987 stock market crash - got much less attention.
Bernanke said nothing new last week on the issues investors care about; no doubt that was his and the Fed staff's intent. That reporters and investors who feed them information credited the stock market's June 15 rally and June 5 selloff to one man who made identical comments should put an end to the game of blaming Bernanke - specifically what he says - for every move in the markets. At minimum, it should expose it for what it is: traders and investors looking to deflect blame when they lose money.
In shifting his stance from a desire to pause after 16 consecutive rate increases to an implicit promise of more to come, Bernanke demonstrated that he was listening to the markets. The market is listening to Bernanke as well. It's just not hearing, based on the flip-flop response to his reiterated comments, what he has to say. - Bloomberg