As Chairman Ben Bernanke Clarifies Fed’s Moves, Markets Freak

The Federal Reserve might begin tapering off its economic life support late this year and finish a controversial program of bond purchases by the middle of the next year, Chairman Ben Bernanke said Wednesday (June 19) in remarks that triggered fear and loathing in financial markets.

Stocks fell sharply after Bernanke used a mid-afternoon news conference to clarify the circumstances under which he’d begin easing off the pace of purchases of government and mortgage bonds, a pace that’s now averaging $85 billion a month.

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Marc Faber: We Will See QE99!

“If you believe that [Bernanke] means what he says,” explains Gloom, Boom, and Doom’s Marc Faber to a spell-bound Trish Regan on Bloomberg TV, “then you believe in Father Christmas.” Simply put, Faber adds, “we are going to see QE99,” and while he notes that equities, bonds, and gold are “very oversold,” he would “rather buy bonds and gold than equities.” From his views on Laszlo Birinyi to inflation, the ‘taper’, US housing, and China, Faber calmly warns that “the S&P could drop 20-30% from the recent highs – easily.”

“The only thing that I know is that I want to own some physical gold because I don’t want all of my assets in financial assets.”

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China’s Credit Crunch

China’s worst cash squeeze in at least a decade may weigh on smaller banks’ financial strength as their reliance on interbank funding leads to an erosion of loan margins, according to Moody’s Investors Service.

Mid-sized banks got 23 percent of their funding and capital from the interbank market at the end of last year, compared with 9 percent for the largest state-owned banks, Moody’s said in an e-mailed statement today (Monday). Those banks will probably compete “more aggressively” for deposits amid the credit crunch, which would increase cost of funds, it said.

China’s money-market rates, which climbed to a record high last week before retreating for a second day today, have triggered a drop in shares of China Minsheng Banking Corp. and China Merchants Bank Co. on investor concern that funding may tighten and curtail credit growth. Slowing economic growth and efforts to rein in shadow banking have contributed to higher borrowing costs and rising bad loans.

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China’s Lack of Transparency Wreaks Havoc in Stress Test

China’s lack of transparency during a stress test on the nation’s banks became a cause of worldwide concern as it rocked bond and commodity markets and helped wipe out $4.5 trillion in global equity value.

While the Federal Reserve is signaling plans to pare stimulus that has kept U.S. overnight rates close to zero, the People’s Bank of China made no change to its goal of “prudent” monetary policy as borrowing costs whip-sawed. Chinese overnight rates jumped to a record 12.85 percent on June 20 amid speculation policy makers want to expose banks with mismatched financing and loan maturities. Asian emerging market stocks had their steepest weekly loss in 13 months, while their currencies dropped the most in almost two years.

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What’s Plan B…?!

It’s not “tapering off”. That’s for sure!

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