Enter your email address:
Delivered by FeedBurner
“A wide range of market indicators supports the view that the Federal Reserve’s securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels.” From Ben Bernanke’s speech before the National Press Club 2/3/11 (emphasis added)
"I think it's entirely unfair to attribute excess demand pressures in emerging markets to US monetary policy, because emerging markets have all the tools they need to address excess demand in those countries. They can, for example, use monetary policy of their own. They can adjust their exchange rates, which is something that they've been reluctant to do in some cases." Ben Bernanke in response to a question on whether Fed policy is partially responsible for rising food prices and the unrest in Egypt. (emphasis added)
“The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.” From a portion of the same speech concerning US fiscal policy. (emphasis added)
One of those two charts above is a chart of the S&P 500 dating from Ben Bernanke’s speech at Jackson Hole that detailed the various policy options that ultimately became QE II. The other chart is of the Dow Jones-UBS Agriculture Sub Index for the exact same time period. Ben Bernanke apparently believes he can tell these charts apart and that he knows exactly why each rose as it did. Stock prices are up because of his enlightened policy of buying Treasury Notes which freed up capital to be invested in stocks and other “good” assets such as corporate bonds. Commodity prices, on the other hand, rose because other central bankers, especially those stupid ones who toil in emerging markets, did not use all the tools at their disposal to prevent inflation in their countries. In other words, all the good stuff is to Ben’s credit while all the bad stuff is the fault of someone else. I wouldn’t even accept that explanation from a teenager. By the way, the first chart is the S&P 500 and the second one is the agriculture sub index.
If there was any doubt about the goal of QE II, Chairman Bernanke provided the answer quite explicitly in that second quote above. Bernanke believes that reducing the value of the dollar is the key to economic recovery and it is the responsibility of the rest of the world to adjust to his policies by allowing their currencies to appreciate against the dollar. That is the equivalent of saying that we can make ourselves richer by making ourselves poorer and it makes as much sense as politicians saying we can spend our way out of debt. It is interesting that Bernanke believes the fiscal situation is unsustainable and that addressing it now “could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence” but feels no such urgency about normalizing monetary policy. As he points out above, if we don’t address the fiscal situation on our terms, the market will, at some point, force an adjustment in a rapid and painful manner. I’ve got news for Mr. Bernanke; the same is true of monetary policy. Commodity prices and interest rates are the market response to bad monetary policy. If lower long term interest rates are a potential benefit of better fiscal policy why has Mr. Bernanke been pursuing a monetary policy that produces the opposite result?
Mr. Bernanke believes that people need time to adjust to new fiscal policies but apparently believes they should be able to adjust to monetary policy and currency changes instantaneously. He rightly encourages our politicians to rectify the fiscal situation now before the market forces a more rapid change but then scolds foreign central banks for not allowing their currencies to appreciate to offset the inflationary impact of QE II. A rapidly rising Yuan or Real has consequences for China and Brazil and yet Mr. Bernanke would not accord them the same courtesy he demands for the US. He believes we should be allowed to pursue an inflationary monetary policy to give our politicians the time to address our fiscal situation and foreign countries should facilitate it by absorbing rapid changes in their currency values. Talk about an ugly American.
Our fiscal situation does indeed need to be addressed and the sooner the better. Better fiscal policy that addresses the deficit while also reforming our monstrous tax code would allow Mr. Bernanke to concentrate on our own monetary shortcomings rather than prattling on about how everyone else is to blame for and should solve our problems. I can but hope that Mr. Bernanke understands that capital will not flow back to the US just because fiscal policy improves. If he continues to pursue a weak dollar policy, individuals and companies will remain reluctant to invest here no matter how much the fiscal situation improves. As the fiscal situation improves - assuming it does - the Bernanke Fed needs to assure the market they will pursue policies that strengthen and then stabilize the value of the dollar. It’s that simple Mr. Bernanke and it doesn’t require that any other country do anything but pursue their own best interests.
The inflation of QE II does have at least a short term effect on the economy in that it induces activity. Whether that activity is sustainable or even beneficial in the long run is another debate (and doubtful in my opinion) but with improving data on a nearly weekly basis it is hard to ignore the immediate impact. The data last week was again quite good with the usual problem areas of construction and employment. Personal income and outlays both improved in December with - surprise - spending rising more than income. Some of the rise in spending was due to inflation but even stripping that out real spending rose 0.4% on the month and 4.1% year over year. As I’ve said many, many times this economy does not now and has not ever suffered from a lack of consumer spending.
The Chicago PMI reported Monday merely foreshadowed the national ISM reports later in the week. New orders in the Chicago report were an astonishing 75.7 and a still very strong 67.8 in the national manufacturing ISM report. The employment component of the national report rose to 61.7, the first reading over 60 in seven years. The headline reading for the manufacturing ISM rose to 60.8 which according to the ISM corresponds to a 6.4% GDP growth rate. Factory orders were also reported last week and rose 0.2%. The non manufacturing report later in the week confirmed the strength of the manufacturing version, rising to 59.4. The downside to all these reports is found in the prices components which all rose significantly and point to either consumer inflation, reduced corporate margins or more productivity gains and fewer jobs.
Jobless claims continue to be confusing with weather effects hard to decipher. Claims dropped back to 415k last week again teasing us with improvement toward the 400k level. I will say this about claims; while they have been volatile lately, they continue to do a good job of telling us the current situation with respect to employment. Friday’s employment report was consistent with the still high level of claims with a gain of just 50,000 private sector jobs. I’m sure a lot of people want to believe that the drop to a 9% unemployment rate was the important number but I just can’t see it. That was primarily due to another drop in the workforce of over 500k souls who just gave up looking. That isn’t a healthy job market any way you slice it. I won’t go over the gory details but suffice it to say that the report was not fun reading.
The worst report of the week was construction spending which fell 2.5% in December which might be the only report I’m willing to really concede was lousy due to weather. The housing market and construction are just barely registering a pulse now so the good news is there isn’t much downside from here. The bad news for all my construction company friends is that there seems little hope for rapid improvement.
The economic situation continues to improve with manufacturing leading the way. Whether that lasts beyond the end of QE II is dependent on whether the politicians finally get their act together and do something about the fiscal situation. I am hopeful but skeptical as always.
The markets last week returned to their winning ways with the S&P 500 gaining 2.7% and the NASDAQ over 3% but the most significant news was in the bond market where rates continue to rise and prices continue to fall. The ten year Treasury note yield broke out to the upside to 3.65%. That’s up from about 2.5% since Bernanke’s Jackson Hole speech which explains why he so quickly abandoned his original premise that QE II would produce lower rates.
I am still uncomfortable with the overwhelmingly bullish consensus concerning stocks. The AAII poll reported bulls back over the 50% level and bears way back down in the mid 20s. Obviously the consensus can be right for a long time and Bernanke is probably right that a lot of the money he is pushing out there by purchasing Treasuries is finding its way into the stock market. Some of that money is just as obviously finding its way into commodities though and rising prices along with rising interest rates does not sound like a positive environment for stocks or companies. Bernanke spent much of his speech warning that we need to address our fiscal situation soon or the market will force the necessary changes on us. As I said above, the same is true of monetary policy and the changes are happening now. Higher interest rates and higher commodity prices are not signs of growth; they are signs of excessively easy monetary policy. If Mr. Bernanke doesn’t change his ways soon, the market will force the issue. The outcome will likely not be pleasant for the bulls.
If you'd like to receive this free weekly commentary by email, Click Here.
Weekly Chart Review, Click Here
[...] Weekly Economic and Market Review | Contrarian Musings alhambrainvestments.com/blog/2011/02/06/weekly-economic-and-market-review-45/ – view page – cached A wide range of market indicators supports the view that the Federal Reserve’s securities purchases have been effective at easing financial conditions. For [...]
“That is the equivalent of saying that we can make ourselves richer by making ourselves poorer and it makes as much sense as politicians saying we can spend our way out of debt.”
Nailed it. That’s exactly what they’re trying to do. If it goes well, oh yeah, great, we have another printed money inflation fuelled economy for maybe a decade or so and we’ll cope with the gargantuan debt later. If it goes pop and the inflation skyrockets, OK, so with this much debt already, we’re actually cutting the debt down! How come one can borrow and lower his debt by borrowing more?
Name (required)
Mail (will not be published) (required)
Website
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
« Inflation and Inequality
Contrarian Musings is © 2008 Alhambra Investment Partners LLC. All rights reserved. Please read our Terms of Use and Privacy Policy.
Read Full Article »