Posts filed under “Think Tank”

Bernanke Campaigns for Reappointment

Good Evening: Stocks were poised to correct their recent gains today, but a late rally extended the winning streak for both the Dow and NASDAQ to seven straight. The earnings news was deemed positive by market participants, though the bottom line “beats” came even as top line revenue estimates fell short. Cost cutting can always flatter the profit figures in the short run, but mass layoffs, deferred capital expenditures, and jiggered tax rates are not what creates either prosperity or long term wealth. Perhaps business executives are taking these actions in the hope the Fed’s aggressive monetary policies can restart the economy, save their careers, and prevent their stock options from expiring worthless, but Mr. Bernanke himself is fighting for his job these days.

With no economic releases on tap today, our index futures markets relied upon earnings releases to guide trading prior to the open in New York. Caterpillar, Texas Instruments, DuPont, UnitedHealth, and Freeport-McMoran all reported positive surprises to one degree or another, though most required financial gymnastics to achieve these “beats”. For all but FCX, revenues came in on the light side. Such a divergence between revenue and profits will be hard to sustain, but who knows? IBM has been managing to pull off this same trick for years, and investors have rarely put the stock in the penalty box for it.

CIT has certainly been penalized of late, though, and today brought word the company’s privately funded recap is in doubt (see below). Reported as a virtual certainty only yesterday, the deal looked less than done today. Fresh concerns about CIT helped cause the stock market to retrace its opening gains of 0.5% or so. CAT helped the Dow remain aloft, but the rest of the tape fell in for a bit of profit taking. Most of the major averages were down some 1% at mid day when stocks began to recover. Acting as if few investors wanted to be short ahead of Apple’s earnings release this evening, the whole tape healed by the time the closing bell rang.

The Dow’s 0.75% gain led the way, while the Dow Transports lagged with a loss of equal measure. Treasurys were on the strong side, with yields falling between 6 and 12 bps. The yield on the benchmark 10 year note is now once again below 3.5%. The dollar was on the lethargic side, with smallish early losses giving way to smallish gains later in the day. Commodities followed stocks to the downside early on, but, unlike equities, they never really recovered. Pulled down by losses in the grain complex, the CRB index gave back 0.5% on Tuesday.

The 2010 campaign season kicked off today, and I’m not referring to the folks in Congress who constantly seem to be running for office. No, the race for high office I refer to is the one for the Chairmanship of the Federal Reserve System. Ben Bernanke may occupy the corner office in the Eccles building right now, but others covet his job. Perhaps sensing the brewing competition, Chairman Bernanke fired off a pre-emptive salvo in the press prior to his semi-annual testimony on monetary policy before Congress today (see below). He wanted to reassure long bond investors that, cross his heart, the Fed would tighten policy at the “appropriate time”. Not content that politicians can read, the Chairman then trudged to the Hill and took to the microphone. He tried to strike a balance between caution (downside risks remain) and optimism (tentative signs of recovery). He even tried to claim his share of credit for the receding financial crisis.

“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” he said. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.” (source: Bernanke testimony before Congress)

Unmentioned, of course, was the Fed’s role (mostly under Greenspan) in fostering the credit bubble that later froze the credit markets, but Mr. Bernanke was not shy in saying the Fed’s monetary blowtorches were responsible for the thaw now under way. For this professorial man to strut, even a little, in front of elected officials and the media must mean he feels his job is on the line. As a Bush appointee, Bernanke knows he represents anything but the type of change promised by the Obama administration.

Bernanke knows who wants the keys to his office, too. One is Janet Yellen, and another is Larry Summers. I have no great love for Mr. Bernanke, but it’s probably fair to say that his tenure at the Fed has been marked more by trying to clean up messes than it has been marred by creating them. Neither of his main contenders can make such a claim; if anything, they’ve been part of the problem. Summers would be an especially poor choice, since he would be viewed as politicizing the Fed. Knowing that Bernanke would be on the Hill today, for example, Summers took the airwaves in a thinly veiled attempt to stay relevant (see below).

As the junior member of the famous troika on the late ’90′s Time Magazine cover, “The Committee to Save the World”, Summers is the only one of the three not (as yet) to have scorn heaped upon him. Greenspan has been unmasked as a disgrace, and Citigroup shareholders silently curse Rubin for his poor stewardship. I guess Summers wants his friend, President Obama, to give him a shot at redemption after some of his policies as Treasury Secretary under Clinton came a cropper during the credit crackup. Summers would be anything but “change we can believe in”, but his appointment would have some redeeming value. It would allow him to join the other “Committee to Save the World” members in validating the Time Magazine cover jinx. What happened to Greenspan, Rubin, and, to some extent, Summers after that cover came out is a fitting reminder that when someone tells you they want to save the world, just politely turn them down. History is littered with examples of well meaning people who did a lot of damage to the world in the name of saving it.

– Jack McHugh

U.S. Stocks Advance on Caterpillar Earnings, Bernanke Remarks
CIT Expects Loss of $1.5 Billion, May Seek Bankruptcy
The Fed’s Exit Strategy, by Ben Bernanke
Summers Urges Banks to Lend More, Says Growth Pace ‘in Doubt’

Category: Markets, Think Tank

Dennis Gartman, Ben Bernanke & Congress

Dennis Gartman’s letter today hit so many key points with an economy of words that I have excerpted it and scratched my own text on Bernanke’s testimony. Dennis doesn’t mention the changes in “velocity” which is too technical a subject for this missive. Maybe later. He does perfectly characterize our Congress. Go, Dennis, go. Give…Read More

Category: Federal Reserve, Think Tank

All’s Not Well in Kindleland

Here’s an excerpt from my latest update on the slow transition from printed books to electronic books. The course of technological innovation never did run smooth: When it comes to ebooks, no one seems to be able to keep a level head. Publishers are in self-induced swivet; Amazon is being a shortsighted bully, and the…Read More

Category: Think Tank

Bernanke’s testimony

Bernanke in his speech is saying most of what we already know about the economy and specifies that its the household/spending outlook that is the “important downside risk” which we know is the disease of the credit crisis. He says the unemployment rate will remain elevated even as the economy recovers (we need to generate…Read More

Category: MacroNotes

Ben comes to the Hill

If the front page article of today’s WSJ is any indication, Bernanke’s testimony on the economy and monetary policy will be anything but boring. Bernanke lays the groundwork for some of what he’ll say in an editorial that lays out “The Fed’s Exit Strategy.” It sounds great but if the Fed gets the timing wrong,…Read More

Category: MacroNotes

Should the Fed be Responsibly Irresponsible?

This week I offer two short essays for your reading pleasure in Outside the Box. The first is from Ambrose Evans-Pritchard writing in the London Telegraph. He gives some more specifics about the situation in Europe I wrote about this weekend.

He ends with the following sober quote: “My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.” This is a must read.

And the second piece? Last week in Outside the Box we looked at an “Austrian” (economic) view of the inflation/deflation debate from my friends at Hoisington. This week we look at the 180 degree opposite with Keynesian aficionado Paul McCulley, who argues that the Fed should be Responsibly Irresponsible and target higher inflation. This essay has brought some rather heated arguments in print and from some of the people who will be with Paul and me at the annual Maine fishing trip. And you can bet I will put them all together with a little wine to see how the argument ensues. I will report back.

And Paul ends with a great and what is a quite controversial line, “Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn’t work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia.”

And finally, this one last note on European banks: “European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves.” (Bloomberg). Want to think about the US taxpayer paying to bail out Europeans banks? Think that might be a tad controversial? This could be explosive.

John Mauldin, Editor
Outside the Box

Fiscal ruin of the Western world beckons
By Ambrose Evans-Pritchard

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go….Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc….

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

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Category: Federal Reserve, Think Tank

Bulls Win Today; Watson’s Example is Timeless

Good Evening: U.S. stocks stretched their recent winning streak to six straight today, as some good economic news and some potential help for CIT combined to lift share prices. With more investors becoming convinced the worst is over for our economy, the major averages all tacked on gains of 1% or more. The S&P 500…Read More

Category: Markets, Think Tank

On the Economic Outlook and the Commitment to Price Stability

On the Economic Outlook and the Commitment to Price Stability

Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta

Rotary Club of Nashville
Nashville, Tennessee
July 20, 2009

Photo of Dennis LockhartFor my remarks this afternoon, I’ll talk about how I see the economy at this juncture, the near- and medium-term outlook, and the growing concern about inflation. Let me add at this point my usual disclaimer that my remarks are my thoughts alone and may not necessarily reflect the views of my colleagues on the Federal Open Market Committee (FOMC).

It’s especially important that I mention this caveat the day before Chairman Ben Bernanke makes his semiannual monetary policy report to Congress. Tomorrow the chairman will speak for the Federal Reserve System. Today, I am speaking just for myself, informed by advice from my colleagues at the Federal Reserve Bank of Atlanta.

Current economy
Current economic conditions are mixed at best, but the economy appears to be in stabilization mode. Stabilization necessarily precedes recovery. A recovery has not yet taken hold but should begin before too long.

I’ll start with a look at manufacturing, which has been hard hit in this recession. Just last week we learned that manufacturing production was down 0.6 percent in June, month over month. In the past year, manufacturers have cut production by more than 15 percent, and the manufacturing capacity utilization rate dropped to about 65 percent, a record low.

Here in middle Tennessee, manufacturing accounts for about 12 percent of employment. The number of manufacturing jobs here declined by about 12 percent on a year-over-year basis in May, the most recent data available. I know that many of you here today have directly felt the troubles in this important sector.

Recent indicators of business investment are also down but are a bit less discouraging. Durable goods orders increased this spring and in May reached the highest levels in four months. On the other hand, the most recent data showed the liquidation of business inventories continuing, but the pace has slowed.

Consumer spending absorbs about two-thirds of economic output, and the recent picture in this area is mostly negative. After taking price changes into account, it appears that retail spending fell again in June. Restaurants, department stores, and building materials retailers all posted month-to-month declines. Overall, retail results are in line with the ongoing weakness in consumer spending we have been seeing.

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Category: Federal Reserve, Think Tank

Fed member Lockhart calling a mea culpa on Fed policy

I believe for the very first time, a Fed member is admitting that it was an artificially low fed funds rate that ‘helped create the housing bubble’ (I’m quoting Bloomberg). Voting member Lockhart just made the comment in a Q&A after a speech on the US economy. He took office as head of the Atlanta…Read More

Category: MacroNotes

Commercial and Industrial Loans

With CIT garnering headlines over the past week in terms of its own fate but that of many small businesses reliant on it, on Friday the Fed released its weekly balance sheet data for commercial banks for the week ended July 8th and we can see what the business lending trends are. Commercial and Industrial…Read More

Category: MacroNotes