Bernanke's March Madness

Our brackets are locked, and each of us is rooting for our favorite teams as the NCAA Men's Basketball Tournament gets into full swing, but college sports isn't the only subject suffering from a healthy dose of March madness. Late last week, the Federal Open Market Committee, or FOMC, announced that it will make no change to U.S. monetary policy, but it slightly altered its economic forecasts for the rest of this year and next. Federal Reserve Chairman Ben Bernanke, in his now customary post-release press conference, made several positive comments about the economy, downplaying some of the risks that exist.

The Fed has been largely responsible for the huge run-up in the stock market, seeing the Dow Jones Industrial Average touch historic highs. While some economists saw Bernanke's comments as evidence that the Dow isn't in a bubble situation, some very real risks do exist. Even if the stock market is able to work through the eventual removal of the Fed's support, the central bank itself is stuck with the problem that its balance sheet has grown by more than $3 trillion over the past few years. That's "trillion" with a "T." Finally, the roles of natural gas, gold, and silver are intimately tied to the performance of the general economy and are worth considering when formulating an overall strategy.

Last results from the Fed: 2 + 2 = popsicle
While the Fed's policy statement remained virtually unchanged, some of its economic projections included included small shifts. The central bank's "central tendency" figures improved slightly for unemployment while worsening slightly for gross domestic product. Essentially, the Fed is suggesting that the economy is going to grow more slowly than was expected but that it will add more jobs than anticipated anyway. Furthermore, the lack of a policy change means that even though the economy will add more jobs than had been previously expected, it won't add enough to slow the central bank's printing presses. These statements make perfect sense not at all.

The central tendency the Fed reported for unemployment is a range from 7.3% to 7.5% for this year, 6.7% to 7% for next year, and 6% to 6.5% for 2015. The GDP estimates were 2.3% to 2.8% for this year, 2.9% to 3.4% for next year, and 2.9% to 3.7% for 2015. Each of these ranges is lower than the central bank previously projected. The lowered growth expectations are almost certainly the result of the sequestration cuts that went into effect earlier this month and that have been left to stand.

The Congressional Budget Office has projected that the sequestration cuts will cost the economy as much as 1.5% in growth, not to mention more than a million jobs. Bernanke, in response to questions about the impact of the cuts, said: "The economy is weaker [and] job creation is slower than it would be otherwise ... but monetary policy cannot offset a fiscal restraint of that magnitude." The reduction of government spending to the tune of $85 billion for 2013, which Bernanke calls "fiscal restraint,' may not move the needle for the Fed, which is pumping about that much into the economy each month to prop up stocks and housing, but the impacts are real.

Furthermore, if, as the chairman admits, fiscal cuts will "slow job creation," it remains unclear how the employment picture will improve. Ultimately, even if you're willing to dismiss the role the Fed has played in driving the stock market, at some point the central bank will have to reverse all of its bond purchases. At best, this is an extremely tricky procedure, and at worst, it will be catastrophic. Given these swirling influences, it's hard to see how the Fed is not itself a bubble.

The role of the elements
As I recently discussed, the role of natural gas has played an important role in bailing out the Fed thus far. Using U.S. Natural Gas as a proxy, gas prices have been depressed for an extended period of time as a result of the shale boom. The U.S. has thereby become less dependent on foreign sources of gas and oil, which has in turn kept energy prices low. These factors have kept inflation in check, giving Bernanke and his bond-buying some space to operate. Without inflation under control, the easy-money policy would have been a larger negative.

Conversely, lower inflation and a stronger U.S. dollar have pushed gold, as represented by the SPDR Gold Trust , and silver, as represented by the iShares Silver Trust, into the first real lull that either has seen in years. With neither metal having the same appeal as either an inflation hedge or a safe-haven play, prices have remained in a range of stable to declining. Silver has an advantage as an industrial play, but it still faces pressure under current conditions. In spite of these factors, as long as Bernanke remains a spin doctor and the Fed keeps buying, an allocation to precious metals is a wise layer of protection.

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The article Bernanke's March Madness originally appeared on Fool.com.

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