Ben Bernanke’s Kick…. It’s Good!

Today the Fed announced that it was lowering the Fed Funds rates to 1%. The market rallied strongly late in the day, and then gave it all back to close at a loss. Barrick Gold, the stock I follow and am an investor in, announced that they were doubling their dividend and rose nicely to close the day up some 12% or so. Combined with a similar rise where Barrick mirrored the entire stock market in a 10% rise and I’ve had a couple of good days. The strange thing is that, outside of the announcement of this dividend today, Barrick has not had any newsworthy events or announcements for the entire month yet their stock has fallen from $37.36 on October 1st to trade at $18.14 on October 27th. When a company with a good balance sheet loses 50% of its value on absolutely no news, you know it’s a volatile market. 

I feel the stock’s going to make it all back though, so I’m not particularly worried. Still, as someone who’s been watching stocks for ten years or so, I’m not used to this kind of volatility. Usually if a stock loses 50% of its value, it’s because it announced it was being investigated by the SEC or something, but in today’s market it seems like anything goes. To try to understand what’s happening, you have to understand that basically the price that a stock trades at is really just a game being played by various players. Everyone comes to the game with money, but they borrow a lot more because that’s how big profits (and loses) get made. When someone in a leveraged position (i.e. they bought stock with borrowed money) takes a big loss they will often face having to liquidate their entire position just to pay off their creditors, and I believe we are seeing some of that happening with Barrick’s gold price.

In Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation he discusses the stock market of the late 1800s- the so-called “Gilded Age of the Robber Barons.” This was back before the days of the SEC; in fact, the SEC was created in part to stop the very activities that these guys would engage in. The market had various players, men like Jay Gould or JP Morgan, and each was playing with plenty of leverage. These men would often take interests in thinly-traded stocks because their stock price was easier to manipulate. Such stocks came to be known as “footballs” because they would be kicked by the various players to almost whatever price was desired. Fortunes where made and lost on these manipulated stock prices of these footballs. 

Fast forward more than a century, and it seems like the rules have changed, yet the game remains the same. Except now, instead of thinly traded stocks, the world market for everything from the price of oil to gold to the stock market seems to be kicked about by the various players of hedge funds, central banks, and governments. So I wasn’t too worried much about the loses I’d taken on Barrick this month. I figured it would only be a matter of time before one player or another would kick the stock back into play, and along came Ben Bernanke to cut the Fed Funds rate to 1%. Thanks Ben! I needed that.

Of course, I’m not sure that was the right now for the American economy as a whole. Fundamentally, we just need to get our house in order. Both our government and our people need to start spending less money than they take in for starters, and I’m afraid your interest rate cut is actually just an attempt to get them to do just the opposite. Making it easier for people to borrow money by lowering the key interest rate just discourages savings, and that’s actually the opposite of what needs to be happening now. But, what’s bad for the US Dollar is good for gold. It also seems to be good for the sales of books related to the collapse of the American Dollar. 

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