Ben’s 60 Minutes interview impresses bond market but not equity investors…
Fed Chairman Ben Bernanke laid out his case for additional quantitative easing in an interview with Scott Pelley of 60 Minutes. The interview aired Sunday but was taped Wednesday – before Friday’s weak employment report, which lent credibility to Bernanke’s Apologia for QE2 and other Fed credit programs of the past three years. Bernanke said the Fed launched QE2 because of the sluggish economic recovery, and the employment situation in November was certainly more sluggish than recent leading indicators on jobs led the markets to believe. More broadly, the 60 Minutes comments were aimed at defending the Fed’s massive liquidity injections into banks and other firms in 2008 as a necessary condition for averting the failure of “ten or 12 or 15” firms and 25% unemployment.
• Bernanke also said it is conceivable that the Fed might buy more than the planned $600 billion in net new Treasury securities should unemployment fail to reduce. As things stand, Bernanke said it could be “four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent. Still, Bernanke does not believe a double-dip recessionary downturn is likely, although he did allow that the U.S. economy is “not very far from the level where the economy (economic recovery) is not self-sustaining.” According to Bernanke, “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.” As the chart below shows, 17 months after the 2008-09 recession ended, jobs growth is modestly better than it was at a similar point in the 2002-03 recovery; what’s different this time is that the unemployment rate is nearly 10% as compared with 6% in 2003.
• In response to Bernanke’s suggestion that QE2 could expand or even be followed by QE3, Treasury bond prices rallied and yields declined for the first time this month, while stock prices were slightly lower. The 10-year Treasury bond rose roughly two-thirds of a point on Monday, taking its yield down eight basis points to 2.93%. The U.S. dollar bounced nearly 1% against the euro today, but that may have had more to do with the euro’s 3% rise in the first three days of the month than with confidence in the dollar; the price of gold hit an all-time high of $1424 an ounce on Monday and silver futures hit $30 an ounce for the first time since 1980. In a day of little economic news, stock investors gave Bernanke a “C” grade; the Dow lost 20 points today, and the S&P 500 pulled back by 0.1% from Friday’s level, which itself was just 0.1% off its highest point in more than two years.
INVESTMENT OUTLOOK…Over the two months September-October, market momentum was impressive in financial assets as well as in real assets. But in November, the rally in stock prices ran into some resistance. The escalation of inflation expectations – no matter how limited inflation appears to be in the official inflation indexes – recurring credit anxiety in Europe, and the rise in the dollar suggest that we may have embarked on an interim period of “risk-off” investing ahead. While these trends may prove to be no more than a temporary pause in this latest Fed-fueled bull market, it is worth remembering that easy-money-driven bull markets often do not end well. Strong corporate earnings of the sort seen in Q3 can overcome a lot of the market’s shortcomings. But, judging by the poor market action in Cisco’s shares in the month since its injection of some caution into its outlook, equity investors never tire of asking “What have you done for me lately?”
Michael Flament (203-783-4360) <a href=mailto:firstname.lastname@example.org>email@example.com</a>