Bernanke - Concern?

By: Ian_R_Campbell

When Ben Bernanke was appointed the Chairman of the U.S. Federal Reserve in early 2006 I then said he was the person that lost the game of musical chairs. Bernanke has always impressed me as a sincere and honest man who inherited problems not of his own making. I believe he works hard at - as golfer Bobby Jones might have said to him - playing the ball as it lies with little if any complaint. As best I know he is paid something north of U.S.$200,000 per year - hardly a princely sum for someone who holds one of the most important financial jobs in the world. How ridiculous is that when measured against the Wall Street, Bay Street, London City, and corporate executive salaries. One side of that equation is materially wrong - you decide which one.

On Wednesday Bernanke spoke at the conclusion of a two-day policy meeting, and since Wednesday afternoon you and everyone else has been bombarded by media coverage of what he said. You can read summaries at 'Fed gloomier about the economy' (reading time 4 minutes) and 'Fed to Defer New Efforts for Growth' (reading time 4 minutes).

World events are currently highly volatile and unpredictable. It follows that it is very difficult if not impossible for anyone, irrespective of position, access to information, and intellect to accurately predict much of anything by way of specifically quantified future economic numbers these days. Trends, perhaps, but specific numbers beyond next week - I don't think so. As a result, I am neither surprised nor particularly fussed by Mr. Bernanke saying on Wednesday that he and the Fed now believe U.S. GDP Growth is going to be less in 2011 and 2012 than they had forecast only two months ago. I feel the same way about him saying that he and the Fed now think the U.S. housing market, financial sector weakness, and excess private sector debt might be more serious than had previously been thought. I am not that surprised or concerned that he said that if Greece or any other European country defaults that could have serious consequences for the U.S. economy - hardly a shocking statement given U.S. Bank exposure to European Banks that would be affected by such a default, and given what I see as the current general fragility of the U.S. economy.

That said, what I am concerned about is:

- that Mr. Bernanke said on Wednesday "We don't have a precise read on why this slower pace of growth is persisting". 'Precise' is a 'precise' word, and I wonder if he meant this in the strict dictionary sense. I suspect he added the word 'precise' to his sentence to tone down what he said - because think of how he and his colleagues would have looked if he had left the word 'precise' out of the sentence and simply said: "We don't have a read on why this slower pace of growth is persisting".

To me, well intentioned as I think he is, Mr. Bernanke's current credibility and that of the Federal Reserve turns on 'how precise is precise'. Reading between the lines, one interpretation of Mr. Bernanke's words could be that what he said was:

'Look, we have never experienced what is going on the U.S. economy before and haven't really known what would work. We thought and continue to think we have had to take steps to ensure the continuity and stability of our financial system, our financial institutions, and our equity markets. We thought that by doing that the U.S. economy would right itself over time and now, while not acknowledging we have been wrong, we aren't so sure any more that we have been right. For the past three years we have believed we were doing the right things to get the U.S. economy back on track. We haven't believed we have been throwing s--t at the wall to see how much sticks and where it sticks, but we are starting to realize that as a practical matter that might be what we have been doing. So we are going to take a break from continuing our activities to date, and are stepping back to see what happens before making any future decisions. Hence no Quantitative Easing 3 for the time being and no planned upward adjustment to interest rates - all to be revisited when we have a better handle on things'.

Is this interpretation of Mr. Bernanke's remarks plausible? I think so. If it is, I don't see how this augers well;

- the equity markets and all participants in them don't seem to be listening very closely to Mr. Bernanke or what is going on around them. The U.S. equity markets dropped yesterday, but not by very much. I understand both the need of money managers to invest somewhere other than cash in order to attempt earn something for their clients on their capital, and the investment community's motivation to keep the party going. I continue not to get much of anything else about the equity and money markets.

At this point whether my interpretation has any semblance of plausibility or not, I believe there will now be a period - perhaps as long as three months, perhaps less than that, that Mr. Bernanke indeed will 'step back, watch carefully, and think hard'. Certainly in that period of time Mr. Bernanke (and we) will know more about the disposition of the U.S. debt ceiling issue (which at least one report I have seen this morning says came to an impasse last evening over the Democrats wanting to raise income taxes and the Republicans refusing to consider that - see 'Republicans walk out of budget talks over taxes - reading time 3 minutes), and the U.S. Fiscal 2012 Budget issues. In the end, I believe there will be a QE3 or some 'subsidization substitute'. Increasingly, I am holding on ever tighter to my hat.

You might also want to read an article (with an accompanying video) this morning that I found after I wrote the foregoing titled David Bloom: "Is There a Bigger Armageddon Out There? - reading time 2 minutes, listening time 3 minutes. Bloom discusses Bernanke's 'downgrade of US economic growth, Quantitative Easing, and other things that concern him.

About Ian R. Campbell

Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is also the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining and Oil & Gas Companies listed on the Toronto and Venture Exchanges. Ian can be contacted at icampbell@srddi.com

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