Fed chairman Bernanke held a press conference this past week and despite these public affairs usually not providing anything new, several things could be deduced:
- There was an acknowledgment that the economic recovery has been unfolding more slowly than previously expected. But the effects of commodity price increases (food, energy) will weaken. And the pace of recovery is expected to pick up over coming quarters.
- Updated projections in real GDP for 2011 are 2.7% to 2.9% (down from 3.1% to 3.3% in April) and 3.3% to 3.7% for 2012 (down from 3.5% to 4.2% in April). The projection for inflation in 2011 was revised to 2.3% to 2.5% (up from 2.1% to 2.8%) and to 1.5% to 2.0% for 2012 (up from 1.2% to 2.0%).
- The FMOC thinks inflation will fall to levels that accommodate the Fed’s dual mandate (controlling inflation and employment).
- On the possibility of a QE3, Chairman Bernanke said things are different today than they were last year, in that, there is no longer a deflation risk and employment growth has picked up.
- The Fed chairman said our USbanks do not have significant exposure to Greecebut money market funds have indirect exposure based on their exposure to banks in core European countries that do have exposure. He added that a disorderly default would assuredly roil financial markets.
Overall Fed Chairman Bernanke’s composure seemed less certain than in the last press conference. Of course the FOMC has had to admit to an economic recovery that has been slower than previously expected, and that they do not have precise reasons why slow economic growth is continuing.
It is a fair and defensible position, but nonetheless the market would rather think the Fed is in a position of being ahead of the curve, particularly at this sensitive time. Yet they appear to be waiting for the next data point to see what is happening like the rest of us.
The market is in correction currently and there is concern that earnings season coming up in a few weeks may provide the reason for that. Some Colorado stocks have been leaders in the proir rally, and some of thsoe have held their ground impressively. Chipotle (CMG) and Crocs (CROX) are two. They are good stocsk to place on your watchlist if things turn around.
Unemployment initial claims jumped 9,000 to 429,000 for the week ending June 18, and continuing claims ending June 11 fell 1,000 to 3.697 mln as reported this past week.
One thing the Fed has been unable to do yet that they clearly want to do is get money moving faster. The velocity of money as it is called. It’s like the Fed has dropped all this money on the economy and everyone just put it under their mattresses. It is not moving around enough to stimulate the economy.
An example would be if Helicopter Ben dropped a million dollars in your driveway and your decision was to put it in your garage, then nothing really happens in the economy. It’s also the same if someone is underwater on their mortgage and can’t sell their house for what they need, they are very unlikely to buy another house. (Or furniture, a swimming poll and on and on.)
As you can see from the chart, velocity is at historically low levels. Can we really blame people for saving, paying down their debt at economic times like this? At the same time, U.S. corporations remain apprehensive about spending money, particularly when it comes to hiring, despite having large cash balances.
In simplistic terms, Bernanke’s hope is that if money is both cheap and accessible, velocity will eventually increase, thereby spurring growth.
On the other side of this, it is reasonable for some folks to conclude the Fed is following a policy of debasing the dollar by all this extra money in the economy. They say the Fed has put more dollars out there than the economy needs. Well, for sure more than it is using well.
The government has made many promises to the retiring baby boomers, who loom large in demographics. Homeowners, depositors, investors, the homeless, the jobless, and the clueless as an article in Barron’s put it. But we don’t want more taxes to pay for what we already have borrowed and spent, and we don’t want anything cut in the future either so the can has always been just kicked down the road.
Just give us our cake so we can eat it. Just one problem with that is we have been eating too much cake. And at some point we will become like Greece. When all the chickens come home to roost after we don’t fix it, the market will. And this is what those people that think the Fed is debasing the dollar say will happen if steps are not taken.
The inevitability of inflation as an end game with all this is a very good bet. While the Fed has pumped up the money supply and while it has not yet started moving around; at some point it will, and there lies the inflection point. Will the Fed be quick enough to reel enough of those extra dollars back in so ‘too much money’ when it gains velocity will not cause inflation? Or will they be too slow and the dollar will make all those homeowners, depositors, investors, homeless, jobless, and clueless folks old bills easier to pay with dollars that are simply worth a lot less.
Trade with a plan.