Wednesday, February 27, 2013 - It's Ben's World

I will be speaking at the 2013 Wealth Protection Conference in Tempe, AZ, April 5 & 6. For information please click here. This is an excellent conference. Hope to see you there.

It's Ben's World

by Sinclair Noe

DOW + 175 = 14,075
SPX + 19 = 1515
NAS + 32 = 3162
10 YR YLD +.02 = 1.90%
OIL + .22 = 92.85
GOLD – 18.40 = 1597.30
SILV - .45 = 29.08

Yesterday, Federal Reserve Chairman Ben Bernanke deliver his semi-annual testimony before the Senate; today he talked to the House of Representatives, repeating testimony in which he defended the Fed's policy of buying bonds to keep interest rates low in order to promote growth and bring down the unemployment rate. Woohoo! Ben is going to continue with QE to infinity and beyond. Wall Street loves free money. The markets moved higher. That pretty much covers it.

The stock market tumbled a few days ago. Bernanke promised more free money and the market moved higher yesterday. And then today, Bernanke reiterated that the free money spigot is wide open, and the market moved higher again. That pretty much covers it.

So, maybe we can play some music. Start happy hour a little early today if that's your thing. I'm just saying that you need to keep it all in perspective. If you have friends, call them up and thank them for being friends. If you don't have friends, go make some. If you are doing something productive, keep doing it. If your not doing something productive, then enjoy the sunset. Go placidly amidst the noise and confusion.

So, Bernanke was on the Hill. The lawmakers questioning Bernanke today were by and large, stupid; they talked a lot and didn't allow much time for answers. So, here's a rundown of what Bernanke actually said, because after all, you can forget the fundamentals, forget the technicals; the Fed is running the game. It's Ben's world, and we're just trying to make a living in it.

BERNANKE ON POSSIBLE EXIT STRATEGIES:

"First, we can simply allow securities on our balance sheet to run off and not replace them as we currently are doing. Secondly, we have a number of tools that can be used to drain reserves from the system such as reverse repos. Thirdly, we can raise interest rates even without reducing our balance sheet, by raising the interest rate we pay on excess reserves, which will in turn translate into higher interest rates in money markets. And fourth and finally ... eventually we can sell the securities back into the market in a slow, predictable way."

"Each of the elements is something that we have tested, that we have seen other countries use, so we think we understand it pretty well."

BERNANKE ON IMPORTANCE OF EQUAL OPPORTUNITY TO ECONOMY:

"In the longer term, what matters is our productive capacity and there, human talent and skills is really the most important thing. In this country we had a period where we brought women into the labor force and that brought a whole new set of skills and talents into our economy.

BERNANKE ON EFFECTS OF QUANTITATIVE EASTING:

"We have seen recovery that is not as fast as we would like but it is nevertheless meaningful and is stronger than many other industrial countries."

BERNANKE ON INTEREST RATES AND CREATING BUBBLES:

"It's the cost of these policies and one that we take very seriously. We look at these possible mis-pricings and we ask ourselves are they in fact mis-pricings, how large are they, and if they are mis-pricings, what is the vulnerability."

"I ask you what the alternative is - interest rates are low for a good reason."

BERNANKE ON EXIT STRATEGY:

"We haven't done a new review of the exit strategy yet. I think we will have to do that sometime soon. Even if we don't sell any securities, it doesn't mean that our balance sheet is going to be large for many years, it just would be maybe an extra year, that's all it would take to get down to a more normal size."

So, here we learn the Fed might just hold onto the Treasuries and mortgage backed securities. Just hold them to maturity.

BERNANKE ON UNUSED ECONOMIC RESOURCES:

"I don't think the economy is overheating. There still seems to be quite a bit of unused resources, people that could be working, capital that could be used and is not being used. We believe the monetary policies that we've conducted have helped get stronger recovery and more jobs than we otherwise would have had."

BERNANKE ON STATE AND LOCAL BUDGETS:

"...state and local governments seem now to have stabilized their budgets, and as a result we don't expect to see those ongoing layoffs to the extent we have in the past."

BERNANKE ON JOBLESS RATE:

"It's hard to predict but a reasonable guess for 6 percent (unemployment) would be around 2016, about three more years."

Just in case you were wondering when QE might end.

BERNANKE ON TOO BIG TO FAIL ISSUE:

"We are not asking for any additional tools at this juncture. We continue to work on the orderly liquidation authority with the FDIC and at some point it would be good idea for Congress to review that process and see if you are comfortable with the approach that the FDIC in particular has suggested for dealing with a failing firm."

BERNANKE ON BANK RESERVES:

"So we have generally been supportive actually of banks doing more reserving so they would have some more reserves available against losses not yet seen."

In other words, the banks balance sheets are not in good shape; they need to be shored up. This was pretty scary, but remember – no more bailouts.

BERNANKE ON HIGHER RETURNS:

"The best way to get sustainable high returns to savers is to get the economy back to running on all cylinders. It's somewhat paradoxical, but in some ways the best way to get interest rates up is to not raise them too quickly, because by keeping rates low, now, we can help the economies get stronger, we can create more jobs, we can create more momentum in the economy, that's the way to get a sustainable higher set of interest rates. Until we can get greater forward momentum, we are not going to get sustainable higher returns."

So, why is everyone concerned about breaking the speed limit when we can't get this jalopy out of first gear?

BERNANKE ON SUCCESS OF CURRENT POLICY:

"If we see no progress for an extended period, which I don't expect because we've already seen some progress, then I think we want to discuss the efficacy side of the equation."

"This is very much focused on the average American citizen. Our estimates are that we've helped create many private sector jobs, government jobs to support the economy quite significantly."

And then Bernanke bowed, threw a kiss to the audience and bowed again.

BERNANKE ON FINANCIAL MARKETS:

"The Treasury and the MBS market functioning is something that we do … every hour because we are heavily engaged in those markets obviously. To this point we don't see any significant problems with those markets. But if we do see any problems obviously we will react to that."

I guess that's Bernanke's way of saying the Fed has completely taken over the bond markets.

BERNANKE ON HOUSING MARKET RECOVERY:

"The evidence thus far is that the housing market has hit the bottom and is recovering. ... So we're still far from where we'd like to be but the evidence is that the housing market is strengthening."

This would be reassuring, except I remember it's the same thing Bernanke was saying about the housing market in 2007.

BERNANKE ON SEQUESTRATION:

"What I am advising is a more gradual approach. I'm not saying we should ignore the deficit, I am not saying we shouldn't deal with long-term fiscal issues, but I think that from the perspective of our recovery, a more gradual approach would be constructive. ...

"The more gradual this is, as long as there is offsetting changes in the further horizon, the less the immediate impact will be on jobs and growth in this recovery in 2013. ... I think there is some cost to the economy of these repeated, I won't say 'crises,' but these repeated episodes where Congress is unable to come to some agreement and therefore some automatic thing kicks in, I think that's on the whole not a good thing for confidence."

BERNANKE ON FISCAL POLICY:

"I cited in my testimony just the numbers from the Congressional Budget Office which suggest that fiscal measures will reduce growth this year by 1.5 percentage points which is very significant. … "My suggestion for your consideration is to align the timing of your fiscal consolidation better with the problem, that is to do somewhat less in the very near term when it will have the greatest impact on growth and jobs and where the Federal Reserve doesn't have any scope to offset it and instead to focus on the longer term where the real problems I think still remain.

"I am very much in favor of getting our fiscal house in order but I think it's a long run issue and I would be supportive of a less front-loaded set of measures."

Bernanke should get some kind of an award for constraint when talking to the politicians about sequestration and fiscal policy. And I'm not one to hand out kudos to Bernanke; he does that himself. The simple fact is that we don't have a real emergency, we have a manufactured crisis. The deficit is already falling at the fastest rate since the end of World War II. The deficit is down 50% as a percentage of GDP in the past four year. It's not growing, it's shrinking. Austerity – budget cuts – hurt the economy; they cut economic growth. Europe is engaged in a grand experiment with austerity, and we can see the results. The differences between the US and the Euro-zone are not that great. They cut their budgets, their economies decline, less tax revenue comes in the door, and their deficits as a percent of GDP actually go up making the problem worse. And the next thing you know, Italy elects a clown. I'm just saying.

The sequester is coming; it will hit Friday. The world will not end. The sky will not fall. Do not distress yourself with imaginings. And most important. Strive to be happy.