This chart shows gold vs. the stock market since Bernanke's famous 'helicopter drop' speech

By Steve Goldstein

Morgan Stanley says lower-quality stocks and commodities will struggle during heavy fiscal spending

It was Nov. 2002, and then Fed Gov. Ben Bernanke delivered an interesting speech. Titled, "Deflation: Making Sure 'It' Doesn't Happen Here," in a speech in which the future Fed chief referenced Milton Friedman's 'helicopter drop of money,' he argued for a range of policies including Fed-financed government spending to ward off deflation, were it close to happening.

Then, Bernanke noted, gold traded at $300 an ounce. Last week, gold (GC00) reached a new record high of $2,619.90 an ounce. That is better than the S&P 500 SPX since Bernanke's speech and most other assets as well.

(If dividends are included, the S&P has outperformed gold over that timeframe.)

"In short, market participants seem to agree with this thesis - in a world in which the government decides to keep the economy going via heavy fiscal spending, lower rates / other policy tools are helpful in terms of supporting that spending. As a result, the purchasing power of U.S. dollars has fallen much more than what conventional measures of inflation would suggest," said strategists at Morgan Stanley led by Mike Wilson.

The strategists said that over the past several years, policymakers have done an "admirable job" of designing and using creative ways to fund the government's large-scale spending, including this year when the year-to-date deficit is above $1.9 trillion.

They pointed out that gold, high-quality real estate, stocks, crypto and other inflation hedges have done very well, while lower-quality and cyclical assets like commodities, small-cap stocks and commercial real estate have done poorly.

"They are losing serious value when adjusted for purchasing power. We expect this to continue in the short term until something happens to change investors' view on the sustainability of such trends," the analysts said.

-Steve Goldstein

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09-23-24 0926ET

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