Inconclusive Bernanke Testimony Brings the Week to a Bullish Close
Fri, Aug 27, 4:11 PM ET, by ForexTraders.com
Since afternoon of yesterday markets were quiet awaiting the testimony of the Fed Chairman at Jackson Hole. Nothing drastic was communicated in his comments, in which he maintained his cautious optimism about the future, while repeating his unequivocal commitment to doing all it takes to help revive the economy. The "doing all it takes" approach is in itself flawed, but he has to believe that it will work, since, after all, there doesn't appear to be anything else that can be done. The problems faced by governments arises from the initial belief that this crisis would have long ago aded away by now in consequence of the strong measures that were adopted. They frontloaded their stimulative measures, which leaves them without ammunition now even as the downturn takes on new dimensions and threatens to snowball into an altogether different form. Bernanke will do all that he can to support the recoveryIn today's statement at Jackson Hole, Ben Bernanke for the first time clarified that the Fed is considering the possible benefits that further easing would have. Up until now, while never ruling it out, he refrained from making clear statements on the matter. Still, the changes are in nuances, since the basic line has always been to "do whatever it takes" to help the recovery. There are a couple of very interesting remarks in Ben Bernanke's speech on U.S. savings, business investment, and availability of credit, which we'll quote here in summary. "...Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought--averaging near 6 percent of disposable income rather than 4 percent... On the one hand, this finding suggests that households... are even more cautious about the outlook and their own prospects than we previously believed. But on the other hand, the revision... implies greater progress in the repair of household balance sheets." Comment: The rise in U.S. savings is good for the reduction of global imbalances, and for a sustainable recovery. The Chairman, on the other hand, has been doing his best to hinder this rise by keeping rates as low as possible, which leads many people to stash cash under mattresses, so to speak, or remove funds from circulation by investing in physical gold, and similar assets. With bank accounts less attractive due to Fed policies, it is doubtful that the increase in savings will be beneficial in fuelling a sustainable recovery. "...Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. ...Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. " "...Private-sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high. Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty. In lieu of adding permanent workers, some firms have increased labor input by increasing workweeks, offering full-time work to part-time workers, and making extensive use of temporary workers. Comment: Large firms have access to government support. If they go bankrupt, the government will bail them out, or take them over (consider AIG, the investment banks, Ford & GM, and many others that were saved indirectly through government action). This makes banks and investors more optimistic about them, so they can get access to credit not on their own merit, but on the basis of the government's implicit backing. They can also build low cost, low risk stockpiles of cash by resorting to government channels. Smaller firms do not receive government support, and must be evaluated on their own fundamentals, which are not great in the context of the wider economic difficulties. Employment is the weakest part of the recovery, as the Chairman concedes. There is barely anything on that front that gives cause for optimism. "...Besides consumption spending and business fixed investment, net exports are a third source of demand for domestic production. The substantial recovery in international trade is a very positive development for the global economy; for the United States, improving export markets are an important reason that manufacturing has been a leading sector in the recovery. Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters. Comment: The manufacturing industry, and the export sector will undoubtedly be the star-performers of this decade, even if their edge is against an very sluggish average. The inevitability of the depreciation of the U.S. currency, and the unavoidable reduction of global imbalances will create very favorable conditions for export and manufacturing oriented companies that can take advantage of poorer Americans in a weak labor market. ---- While summing up his opinion on where policy is headed, the Chairman comments: "Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability. " In other words, he ancitipates the sluggish economy to do what the central bank is supposed to do usually, which is restraining inflation. Although we agree with him that inflation will not pose a lot of trouble on the surface, this is only because of the disfunctioning of the channels that Mr. Bernanke is trying to repair. If policy measures had had the intended impact by now, we would be having a worrisome level of inflation in the U.S. as consumers stormed shops to take advantage of easy credit. That is not happening, because banks are not very generous with credit to consumers (who they are busy charging interest rates at close to 30% on credit card payment delays and similar issues), but redirect the Fed's generosity to speculators and fast money who then dump it to places where they have been doing very well so far (Asia, and emerging markets come to mind.) After all, this is what has been happening with Japan and China over the past decade. And what was the consequence? Everybody knows that the bubbles that created our problems were fuelled, not to a small extent, by Asian money that was created by BoJ 's zero rate policy, and the currency manipulation of the Chinese. They also thought that, since there was no risk of inflation at home, it would be fine to permanently keep rates at a low level in order to stimulate the domestic economy, however small the ultimate impact seemed to be. Now the Fed is doing the same thing. Since it has all been done before, what else should we expect the result to be other than economic ruin and chaos? Now cheap money originating from the U.S. is creating bubbles in developing economies, even as the yen oceans ebbs as Japanese investors and their proxies repatriate their assets. The end result will be another collapse, of which the center must be China, since it is the largest soaking center for speculative money, be it leveraged or not. We follow FOMC statements, minutes, and the comments of the Chairman mostly for the sake of completeness nowadays. Since rates hit zero percent, the Fed has been sidelined in the major scheme of events, but its expert opinion still counts since it has prestige as the manager of, the economic revival. Ben Bernanke should not be blamed for the downturn (unless he is held responsible for his role in the Greenspan era), but he must be held accountable for being grossly incompetent in assuming a mission that neither he, nor the organization that he heads were qualified to undertake. Revised US Q2 GDP Numbers released, come better than expectedThe Q2 GDP numbers were not exceptionally interesting apart from the change in corporate profits which were reported at 0.1% vs. 11.4% in the first quarter. It is not a lot much to say that, since profit growth is caused more and more by productivity adjustments instead of increasing overall demand, it will plateau at a lower level once the turbulent times pass, in a case strongly resembling the Japanese situation. In our opinion, this is a structural issue that is a part of the global rebalancing, and cannot, and should not be addressed through monetary policy or government directives. At the moment inventory adjustment is contributing a lot to volatility so it is difficult to make much of the data of two quarters, but the sharp fall from 10% to unchanged is nonetheless notable, especially as it comes at a time when the U.S. economy was doing reasonably well. Still, we should keep in mind that year-on-year profit growth remains at a massive 37% even with the latest weak release. Inflation data showed little change, with core PCE at 1.1% annual rate, implying that the Fed can continue to keep rates low. The week ends on a bullish tone with U.S. stocks recovering after Bern Bernanke's statements. Markets were looking for an excuse to rally, and now they have it. But it is unlikely to last until the Fed and its peers are forced to make good their promises, which will be an altogether different matter than just giving informative, enlightening speeches.
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