1. Greenspan “Put,” Bernanke “Put,” Trump “Put” Explained

2. With the Fed in Neutral, Here Comes the “Trump Put”

3. Trump Wants to Reshape China Culture – Good Luck With That!

4. US-China Trade Deal Could Fall Apart – Look Out Below!

Greenspan “Put,” Bernanke “Put,” Trump “Put” Explained

In talking with clients, colleagues and friends, it occurs to me that a lot of adults (especially investors) have heard terms like the “Greenspan Put” or the “Bernanke Put, but I also observed that most people don’t really know what they mean. Investors should know what they mean and what they do not mean. It could be very important if our trade war with China escalates.

The term Greenspan Put was coined in the late 1980s as a result of certain policies implemented by then Federal Reserve Chairman Alan Greenspan. He was Fed Chairman from 1987 to 2006, followed by Ben Bernanke from 2006 to 2014 when the term changed to the Bernanke Put.

Throughout both men’s terms as Fed Chair, they routinely lowered the Fed Funds rate to help support the economy, which in turn helped the stock markets. As this practice went on, investors came to view the Fed’s policy of lowering interest rates to shore up the economy and risk assets as something akin to a “put” option.

A “put” is a type of option security that lets people put a floor under their losses. If you buy stock for $50 a share and also a put option with a $40 strike price, you are protected from losing more than $10 per share. If the stock price drops to $40, you can exercise the put option to protect from any further losses (until the option expires).

The Federal Funds rate is the interest rate at which depository institutions (banks, S&Ls, credit unions, etc.) lend reserve balances to other depository institutions overnight to meet their reserve requirements.

Federal Funds Rate

As you can see above, the Fed Funds rate was around 10% when Greenspan took over the Fed in 1987. His first rate cut after becoming Fed Chair came just after the 1987 stock market plunge, and he implied that the Fed would similarly intervene in times of crisis. He continued to lower the rate overall for the next 19 years.

Greenspan’s policy of intervening to support the economy (and thus the stock market) included the savings and loan crisis, the Gulf War, the Mexican crisis, the Asian financial crisis, the Long-Term Capital Management crisis, Y2K and the bursting of the dot.com bubble following its peak in 2000. Bernanke continued this practice until the Fed Funds rate was “zero-bound” in 2009 where it remained until late 2017.

The Fed Open Market Committee raised the Fed Funds rate four times in 2018 to a range of 2.25% to 2.50% and was expected to raise it 2-3 times this year. However, in December of last year, Fed Chair Jerome Powell hinted there might be fewer rate hikes in 2019. Then in January, he said the Fed would “wait and watch” before raising the Fed Funds rate further. Investors took that to mean no rate hikes in 2019, and stocks vaulted to new record highs.