What Happens When Bernanke Quits?
212% from the End of QE3
It's one of my most important investment rules: If a corporate officer quits his or her job unexpectedly, sell the stock first and ask questions later.
The reasoning is pretty simple...
People don't quit jobs that make them wealthy without a really good reason. And that reason usually involves that person getting less wealthy.
Just a few days ago, on June 10, the CEO of Lululemon (NASDAQ: LULU) announced that she was quitting. The stock fell over $14, or 17%, the next day. The shares fell another $3.55 the day after that.
Now if you don't know, Lululemon sells clothing and other stuff for the latest health craze, yoga. I have no opinion on yoga. Yes, health fads tend to fade. Maybe yoga is different. I don't know, and I don't really care.
The point is when someone important to a company quits all of a sudden, it's usually a bad sign.
A 2011 academic study found “... a significant relationship between CEO and CFO resignations and the firm's subsequent bankruptcy..."
This same study found it was even worse when the Chief Financial Officer (CFO) quit: "... a CFO resignation is a greater predictor of a future bankruptcy."
The reason I bring this up is that our Fed Chief Ben Bernanke is quitting in January, just six months from now. Bernanke has been America's Chief Financial Officer for the last six years.
And I can't help but wonder what he sees on the horizon...
Is Bernanke getting out while the getting is good?
Ben Bernanke was nominated as Fed Chief after Alan Greenspan quit on January 31, 2006. Ole Ben had a couple good years. But he was sitting atop the worst bubble the U.S. had ever seen, thanks to his predecessor.
(By now, no one should doubt that Alan Greenspan was the chief architect of the housing bubble. He was way too slow to raise interest rates to normal levels. He endorsed the use of derivatives to mitigate risk. And he refused to acknowledge that the explosion in subprime loans might be a problem.)
The U.S. economy is still reeling from the impact of the bursting housing bubble, and that's despite the unprecedented amount of liquidity that Bernanke has dumped on the economy.
This is not a “mission accomplished” moment for Bernanke. Growth is weak, unemployment actually ticked higher in the last month, housing has only just started to improve, wages are flat and so is consumer spending... the U.S. economy is far from healthy. And Bernanke hasn't really fulfilled the Fed's dual mandate of achieving maximum employment and price stability.
So again, why quit now?
Is this an admission that he's not the right man for the job? Or is there something worse down the pike?
The Fed has spent $2.5 trillion dollars to buy Treasury bonds and mortgage bonds over the last five years. So, the new Fed Chief will have to decide whether to keep spending $85 billion a month... or not.
He or she will also have to decide whether to sell $3 trillion in bonds, or just let the interest payments keep rolling in.
Making trillion-dollar decisions is not how I'd choose to spend my first few days on the job...
But the real question for us as investors is what do we do ahead of a new Fed Chief. Will stock prices crater on the uncertainty surrounding a new Fed Chief? Or is there reason to believe a new leader can better manage the economy without massive liquidity dumps?
Seems to me we've already gotten a taste of what it will be like under a new Fed Chief — and it ain't pretty.
About a month ago, Bernanke said the Fed might start buying less than $85 billion in bonds every month.
He didn't say the Fed would stop altogether. And he didn't say he was raising interest rates. He only said the the Fed would eventually lower, or "taper," the dollar amount of monthly purchases.
All hell broke loose... the Dow Industrials has been down as much as 500 points since the word "taper" was mentioned.
How far will stocks fall if the Fed actually does "taper"? And what will happen if a new Fed ends the purchases altogether?
A Strong Dollar? Are You Kidding?
Right now, most of your stock market brainiacs will say the end of quantitative easing will mean a stronger U.S. dollar.
To them, I say, "Are you kidding?!!"
There's no way the end of QE is good for the economy — at least, not in the next two years. Stop buying bonds, and rates will skyrocket. The housing market will grind to yet another halt. Consumer spending will dry up, and companies will start firing people to cut costs. The whole world could be pushed into recession.
And you know what asset will do well in that environment?
Precious metals: gold, silver, and platinum.
Turn everything on its head, and the poorest performers will be the winners.
But here's the thing: It's not the mining stocks that will do the best — it's the physical metals themselves.
Don't wait for America's CFO to quit. Once word is out, it will be too late...
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.