Can Bernanke Keep Quiet Already?

[jyl]

Bernanke is proving a gift for traders and shorts.

I've lost track of how many times he flip-flopped on whether the Fed is "done" raising rates. Then he started saying the Fed's decision will be "data-dependent" which basically invited the market to gyrate up and down with each economic data point. Lately, every time he opens his mouth the shorts make money. I made 4.4% today, shorting NDX.

Okay, this is kind of unfair. He can't change or disguise what's happening, which is that inflation is rising as the economy is losing momentum. I guess he's just the messenger.

Still - remember that Greenspan started building his reputation by how he handled the 1987 crash? I'm getting increasingly concerned that Bernanke will get the same opportunity. A low-probability but high-significance event.

[turbo6bar]

I have no data, but perhaps Bernanke is using the inflation demon to justify action. He may be protecting the dollar? Maybe he has been ordered to reel in the consumer? Who knows. I sure don't.

[jyl]

His communications gaffes are so surprising, one might wonder if they are purposeful.

[Porsche-O-Phile]

It's only going to get worse. . . Hate to be the pessimist but I think we're headed into a full-blown prolonged recession with high inflation rates just like what happened in the 1980s, and I think Bernanke is simply looking at what happened before and trying to do what he can to mitigate the effects (that IS the guy's job, isn't it?) If memory serves, the 80s recession was right on the heels of the highest energy prices in history (the "energy crunch" of the 1970s) and an unprecedented real estate market collapse.

What's that line about those not remembering history being condemned to repeat it?

Difficult times - inflation is definitely going up, wages are stagnant, the economy is slowing, we have record levels of debt load (both personal and corporate AND government) and less and less manufactured goods here in the good old USA. I wouldn't want to be Bernanke - he's probably just hoping that history doesn't pin the coming storm on him and his leadership. . .

[RoninLB]

World markets are in convulsions readjusting to lower liquidity.

Times were less complicated under the fixed gold standard post WW2. We could export our inflation and the world absorbed it. Today it's productivity that rules. Unfortunately wages lag productivity for what could be years.

How the most powerful man in the world handles this economic worldwide war may affect years of growth and job creation imo. Why should he show the enemy his hand if he doesn't have to ?

That's not saying that the US stock market can't rebound shortly after the next election and fuel excellent returns for a few years.

I also think that world indexes will continue to grow. If Japan doesn't screw up again that'll be another strong player. Add in Australia being big enough to stand up to the big boys now and long term strong worldwide growth becomes a real possibility. That's a huge amount of solid liquidity.

Traders must be having a wild time. Oldie Paul Sarnoff was instrumental in setting up Wall St put & call mkts+. His books are uncomplicated and basic to successful gaming if you're a player and can locate them. When he taught at Hofstra U on LI guys would still sit in his classes after they graduated for the latest way to play the current mkts.

[tabs]

Originally posted by RoninLB


Times were less complicated under the fixed gold standard post WW2. We could export our inflation and the world absorbed it. Today it's productivity that rules

Well at least one of U idiots understands something....

The economic situation was completely different in 1980.
As Ronie said the US was able to export our inflation onto the world with Gold being fixed at $35 an OZ...In 1972 Nixon took the US Currency off the Gold Standard. We had been finacing the Vietnam war off the Gold standard. Remember when DeGaulle said he wanted the US $$$ he was holding to be paid back in Gold, that was in 67.

We had forced the OPEC nations to EAT OUR $$$$ at an inflated rate..so once the US abandon the Gold standard they were left holding $$$ that were DEVALUED..so they said in 1973 we are going to up the price of oil on U SOBs....

This devaluation of the $$$ caused a hugh round of inflation in the USA....the cost of a new Porsche, Houses...in CA it was the 1st time the price of housing really took off and escaluated and to bring all of this back down to earth the Fed had to raise interest rates to cool the economy....so the 30 year Bond hit 18% and Mortgages hit 16%. Thus the price of housing took a dump while the price of equities started rising till 2000.

After those highs interest rates were on the decline till Greenspan started raising them in 2004.

Take a clsoe look at the economic/financial history of the past 40 years and U will see that 911 opened the ABYSS, the ramifications/ripples of which are still with us today.

To advert a collapse of the world financil system by a run on the bank the Fed had to keep liquidity at a very high level. Now that 911 is receding in our memories a return to more normal levels can take place. The price of oil as Wayne so elequantly said has been driven by Wall Street Speculators that are playing the fear of a ME blow up. Once they have been handed their heads financially you can see the price of equities rise for the next few years while the price of housing declines to match affordability..eg.. wages...

[tabs]

OHHH and GUESS what Brenanke is an EXPERT on the Great Depression....LOL....is that a coincidence or what????

[1967 R50/2]

Tabs-

I enjoy your economic insights, but please consider curtailing the use of ellipses. I use them myself from time to time. However, sometimes they....make...it very.... hard....to read. Plus, when you read it out loud, it sounds like William Shatner. OK, that's kinda funny, so keep using them.

Back to the topic at hand. I do not think 911 would have precipitated a run on the bank as happened during the great depression. Even in the days immediately after the events it was apparent that the plane attacks and the anthrax attacks were isolated incidents, and not likely to jeopardize the economy as a whole.

As for the price of oil, again, DESPITE the increase in the cost of oil, the US economy continues to expand by an enormous rate in comparison to the European or Japanese economies. So I do not see high oil prices as a threat.

Likewise, this expansion happened in the face of two simultaneous wars and a plethora of natural disasters.

All of this says to me that if these any one of these depressing factors were removed from the economy, that indeed, it would be running off the rails. So if oil does come down in price, Bernanke can continue to raise rates without fear of crushing expansion.

[turbo6bar]

I enjoy commentary at Minyanville. Here's one of today's writeups of Bernanke:

Fed Chairman Bernanke Calls for 25 ml Sodium Pentothal Hike

See, when you use massive amounts of liquidity to "create" global growth, and then use that "synthetic" growth as a benchmark, inflation doesn't appear to be inflation until the pub owner turns the lights on. (Yikes, you look... different with the lights on!)

In this case, we believe the Fed is focused on inflation at precisely the moment the cyclical upturn created by excess liquidity is ending... globally. Meanwhile, it's 4.a.m., and the structural elements of deflation and the end of the credit cycle are upon us.

[tabs]

The ....USA .....Shut down its financial system within 15 minutes of 911...Europe was not so LUCKY...we had to send them 80B to keep them afloat...

Other things were done to insure Markets would maintain their Liquidity...like dropping the FED Rate SEVEN TIMES, GM went to ZERO % financing. The Stock and Bond markets were closed for a week as a cooling off period...

Oil prices to date have been a drag on the economy but hasn't stopped economic expansion. However many of the increased costs are just now hitting the economy, pocket book, etc.

If U take the price of oil outa the economy then there wouldn't be much need to raise interest rates?

[1967 R50/2]

Originally posted by tabs
The ....USA .....Shut down its financial system within 15 minutes of 911...Europe was not so LUCKY...we had to send them 80B to keep them afloat...

I think bringing GM financing into is a bit much. Their financial decisions have not been the best regardless of the economy.

Originally posted by tabs
If U take the price of oil outa the economy then there wouldn't be much need to raise interest rates?

Maybe....but maybe not. Note the ellipse. One of the things that has been talked about on Bloomberg is how higher energy costs have NOT impacted prices paid by consumers on most goods. So if HIGHER oil prices are having no effect on spending, I can't see how LOWER prices would either. Producers are not likely to pass on the energy savings by turning around and immediately lower prices on goods when customers are not shy about buying them at the current price.

Of course, I am talking about goods outside the transport and energy sectors.

[tabs]

Mother is the one who keeps telling me how GM saved America by going to Zero % financing. After all Greenspan is her friend, so she oughta know? It kept people buying cars, the cash flowing.

Most of those increased prices are just now coming outa the pipeline. My Landscaping is going to cost $500 more this year than it would have last year. The Contractor told me it was due to the increased cost of fuel and how it has driven the costs of everything he does upward. What has kept a lid on prices is that there is virtually NO WAGE INFLATION.

The Stock and Bond Markets were closed for a week to provide a cooling off period so that people would act more rationally. Event though the Market was down for a week, it still dropped 500 points upon opening. Can U imagine what would have happened if it had opened the next day? Further what U have to realize is that BANKs & Brokerage Houses MAKE MARKETS FOR COs STOCKS. That means if the price of a stock reaches a certain level the Bank etc will buy those shares to maintain a stable price for those shares. If the system is swamped with sell orders soner or later the Bank will run outa cash to buy those shares. When that happens its a case of free fall and no one knows where it will stop.

[jyl]

I'm seeing more companies discover that they have pricing power after all. Its becoming pretty common for retailers to make their comps on lower traffic but higher ticket. They are actively pushing consumers to trade up and so far consumers are not pushing back. Inflation is definitely finding its way into the economy.

[pwd72s]

Bernanke calls 'em like he sees 'em...and in a language we mere mortals can understand. His predecessor didn't do that.

[RoninLB]

I really like Westbury
today's WSJ



Economic Rehab

By BRIAN S. WESBURY
June 7, 2006; Page A14

The stock, bond, currency and commodity markets are bouncing around wildly. While there are many crosscurrents, monetary policy and economic data are front and center in day-to-day market volatility. As a result, some market observers are trash-talking the new Federal Reserve Board chairman, Ben Bernanke, and blaming him for all sorts of perceived missteps.

This is unfair. Mr. Bernanke is doing a fine job. The inflationary pressures he is fighting today were baked in the cake before he arrived. Monetary policy was overly accommodative for too long, and even after 16 rate hikes the Fed has not yet reached neutral. Weaning investors, home builders, hedge funds and proprietary trading desks from 50-year low interest rates is like forcing them to quit smoking: It's good for the health of the economy, but it hurts and they are complaining loudly.

There are two forces that cause the economy to grow. One is real, the other is an illusion. The real force -- entrepreneurial innovation and creativity -- comes naturally as long as government policies do not drive it away. The artificial force is easy money. An increased supply of money, by creating an illusion of wealth, can increase spending in the short run, but this eventually turns into inflation. Printing money cannot possibly create wealth; if it could, counterfeiting would be legal.

For monetary policy makers and investors it is important to determine to what extent growth is due to each force. In the late 1990s, when the economy and equity markets were booming, the Greenspan Fed became convinced that monetary policy was largely responsible. But commodity prices were falling and the dollar was strong -- both signs that Fed policy was not the culprit. The Fed hiked interest rates anyway. This was a mistake. The U.S. economy fell into recession and deflation became the No. 1 fear of financial markets and central banks around the world.

The Fed fought this deflation -- by cutting rates 11 times in 2001 -- eventually pushing the federal funds rate down to 1%. In late 2001, commodity prices began to rise, and in early 2002 the dollar began to fall. But because it was so worried about deflation, the Fed ignored these signs of monetary excess and held rates artificially low well into 2004. This policy has finally come home to roost.

Inflation is on the rise. "Core" consumer prices have climbed 3.2% at an annual rate in the past three months, the fastest growth since 1995. Mr. Bernanke said recently that inflation has "reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth."

What the market is debating is whether fighting this inflation will hurt the economy. With housing activity down sharply, these fears are palpable. But this is likely an overreaction. Housing was stimulated to extraordinary heights by artificially low interest rates (and the 1997 capital gains tax cut) and is now correcting back to more normal levels. Housing starts may be down 18.4% from their peak, but they are still up 12.3% from 1999 levels. It may be painful for participants in the construction industry and those who thought they could make a fast buck flipping houses, but only a recession could send the housing market into a tailspin.

Historically, housing has been a solid leading indicator of business cycles, but the special circumstances of recent years suggest that this time it is sending a misleading signal. And while some believe that a slowdown in housing will undermine consumer spending, this fear is overblown. Cash-out financing (or mortgage equity withdrawal) may have increased spending for those who took advantage of low interest rates to refinance, but every dollar of borrowing was funded with someone else's savings.

With interest rates up and refinance activity down, the savings do not disappear, but instead are used in different ways. Resources that would have been put into housing will be shifted to other sectors of the economy. One area that appears to be benefiting already is business fixed investment. Commercial and industrial loans are up 14.9% at an annual rate during the first four months of this year, and after five years of sluggishness are finally growing at rates similar to those of the late 1990s.

In other words, there is little evidence that rates have reached a level that is detrimental to the economy. The Fed is not tight; it is just less loose. This can be seen in real time by watching market-based indicators. Commodity prices remain elevated and the dollar continues to weaken; both suggest excess money creation. Moreover, the economy has not experienced a recession in over 45 years without the federal funds rate rising above nominal GDP growth. In the past year nominal GDP growth has been 6.9%, so with the federal funds rate at 5%, monetary policy is still accommodative.

Nonetheless, the Fed is very close to a neutral monetary policy. Using nominal GDP as a target, and looking back historically, a neutral rate is likely close to 6%. If the Fed could get rates to this level soon, the economy could continue to grow based on underlying entrepreneurial activity and productivity -- a rate estimated to be 3.5% or 4% per year. A neutral rate would also put a lid on inflation, stabilize the dollar and cap commodity prices, including oil. A 6% federal funds rate would be monetary policy nirvana.

Now that the Fed is close, the future path of short-term interest rates has become less certain. After two predictable years, with a rate hike every six to eight weeks, a great deal of leverage was employed by investors who understood the pattern. Lately, many investors have been betting on an early end to rate hikes, but with Mr. Bernanke remaining vigilant about inflation this leverage has become more risky. The result is volatility. In retrospect, if the Fed had moved rates up faster than it did, it might have been able to stop sooner. Unfortunately, the longer the Fed maintains an accommodative policy stance, the higher the neutral rate becomes.

The good news is that there is no reason to suspect that this volatility is anything more than a short-term phenomenon. During the past two years, the Fed was trying to wean the economy from low rates slowly, so as not to shock the system. But in doing so, it allowed inflationary pressures to accumulate. Ben Bernanke is finishing the job and cleaning up the mess. While this may create some near-term turbulence in financial markets, getting rates to neutral will be a huge benefit to the economy.

Mr. Wesbury is chief economist of First Trust Advisors L.P. in Lisle, Ill.

[turbo6bar]

Hmmm, I think he has it reversed. A housing market in a tailspin will throw the economy into a recession. Also, dollars extracted from housing equity weren't taken from other's savings accounts. Those dollars are borrowed via foreign central banks and a growing monetary base. See M3 numbers.

Otherwise, I agree that folks need to let Bearnanke do his job. The days of cheap money are over and that theme is supported by the quotes I posted above. "Synthetic" growth is no substitute for real growth. I surely don't mind higher rates. My high cash position benefits from bridled inflation and deflating asset prices. Rock on, Ben.

[1967 R50/2]

Originally posted by turbo6bar
A housing market in a tailspin will throw the economy into a recession. Also, dollars extracted from housing equity weren't taken from other's savings accounts. Those dollars are borrowed via foreign central banks and a growing monetary base. See M3 numbers.

Yes. This is the elephant on the economic dining room table that the business press has quickly forgotten about.

All the headlines are about oil, commodities and rate hikes, which is certainly more exciting than covering the same old housing news that they have been covering for three years.

Meanwhile the housing inventories continue to build. As I said in the "More Bad RE News" thread, we'll see in the autumn how far it will fall.