Ben Bernanke is Walter White – Welcome to the Breaking Bad economy
Written by Keith Springer 9.20.13
While anxiously watching the last episodes of Breaking Bad, I was struck by a very interesting comparison: Ben Bernanke is Walter White. Both create and control two of the most highly addictive substances ever known to mankind. Walter White, the highest quality blue Methamphetamine and Ben Bernanke the green US dollar, the reserve currency of the world. Is this comparison a coincidence? I think not. After all, the end results are the same. In both cases the user becomes more and more addicted, while the recovery is painful and destructive.
In past newsletters I have referred to the Fed’s stimulus programs as both crack and Viagra in the Great Viagra Market. Very simply, our economy and stock market have become addicted to continued monetary stimulus. Bernanke has been controlling the economy in two ways: through $85 billion a month in bond purchases by printing money out of thin air, and by record low interest rates well below that of inflation, with the Fed Funds rate hovering at 0%. Just like with what happens on crack or Viagra, it’s all good while the chemical is in your blood stream, but absolutely no fun when it wears off.
Much like the message we see in the series season-end trailers that, “all bad things must come to an end,” neither Walter nor Ben are long for this world. Once the QE stops, our fate will be on a similar crash course. If Bernanke had only demanded that congress say his name……”Heisenberg!” I will admit that I dread the end of the Federal Reserve’s stimulus programs almost as much as I do the end to Breaking Bad.
We must all remember that QE is only a temporary remedy to the nation’s economic ills and is still subject to the basic laws of diminishing returns. QE1 brought the economy from the brink of death moving GDP from -1/2% to +3%. By 2011 growth had retreated to -1.3% again. This was the first cycle which showed 4 quarters up and 3 down.
By mid-2012 another economic Viagra was needed, which quickly brought growth up over 4% only to be followed by an equally fast drop to .14%, once again another 7 quarter cycle. By mid-2012 more was needed which ushered in QE3, which is expected to push GDP up to 3-4% by the 4th quarter of 2013. If the trend again proves right, we’ll be looking at a numbing 0%-.5% by mid next year…all at a time when stimulus is waning without the possibility of an increase. Even though all the QE may have helped in the short term, it will have lasting negative long term affects and investors must be prepared.
The Bottom Line
Well, all bad things must come to an end, both for Walter and our economy. Even if the Fed is not ready to taper, as Ben told us on Wednesday, at the very least they are done adding to it. This increases the risks for investors exponentially, as the bigger the bubble grows, the bigger the bust will be. The 4th quarter will likely be strong, provided investors do not look too far out.
The closest comparison we have to our situation is Japan. Since the Japanese bubble burst, they have not had a recovery last more than 4 ½ years. Moreover, since 1950 the US has not seen a bull market more than 5 years. Clearly the clock is ticking.