SPG Trend Advisors Blog

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

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Ben Bernanke appears to be fighting for his life before Congress where several members from both major parties and one of the independents in the Senate are rejecting his reappointment as Chairman of the Federal Reserve Board for a second four year term.  The opponents of his reappointment blame Mr. Bernanke for aiding and abetting the excesses in the financial system that resulted in its meltdown and taxpayer bailouts of many of its institutions. In their zeal to lash out at the stewards of fiscal and monetary policy during the financial crisis of the past two years, the critics of Ben Bernanke fail to include one of the most culpable parties to the worst financial crisis since the Great Depression and that is Congress itself. From the enactment of the Bank Holding Company Act in 1956 and its subsequent amendments which allowed banks to buy non bank financial entities outside of the supervision of the Federal Reserve System, to the repeal of the Glass Steagall Act which had separated the commercial and non-commercial banking activities of banks in 1999, to the lax oversight of Fannie Mae and Freddie Mac, federally chartered institutions that were the backbone of mortgage securitizations and transactions which fed the lending bubble. For over 40 years the Congress has consistently enacted legislation that enabled banks and other lenders to engage in high risk activities OUTSIDE of the supervision of the Federal Reserve Board. So when the Fed complained that it was losing control of the financial system, Congress did nothing.

In our website article of December 7, 2007, “The Treasury Plan: Is This the Solution?“  we outlined our skepticism of the success of the Treasury plan of then Treasury Secretary, Henry Paulson, to effectively “dance around” the mortgage crisis by adjusting mortgage rates and terms in the hope of forestalling the inevitable losses from mortgage defaults. It was not until March, 2008 that the Federal Reserve forcefully attacked the loan loss problem by swapping Treasury paper for the problem debt held by mortgage lenders. The Fed subsequently expanded Discount Window facilities to both commercial and for the fist time, non-commercial banks like investment banks and brokerage firms so these firms could have liquidity. In fact in our ongoing economic presentations such as the ones  posted on our blog and website,  there is an entire section of slides and commentary entitled “The Government”s Response” to the severe credit crisis. It shows the leadership of the Fed in increasing the money supply, reducing interest rates and expanding its own balance sheet by purchasing the “toxic” assets of the banking system to provide it with liquidity necessary to keep the system afloat.  By most objective scutiny of the Federal Government’s handling of the credit crisis, including our own jaundiced view, if there is a hero in this debacle, it is Ben Bernanke who literally pulled out all the stops to keep the financial system in this country from totally collapsing, particularly after Henry Paulson triggered a system panic by allowing Lehman Bros. to fail. We may not have liked the bailouts of many of these instituions but as we have stated in prior commentaries, the country runs on credit and letting the banking system fail was just not an option.

If one wants to point a finger at the Fed for allowing the credit bubble to build, it needs to be pointed at Alan Greenspan who instead of musing on the illogical low level of interest rates in 2004-05 in the face of the real estate boom should have raised interest rates and loan reserve and capital requirements to slow the creation of credit. Upon succeeding Greenspan in January, 2006 Ben Bernanke’ s Fed started raising interest rates through the spring and into the summer of that year and held those higher rates until the recession began in late 2007.

We and other observers believe Ben Bernanke will be reappointed to another term after this current thrashing. He better be. A rejection of Ben Bernanke AND an ill advised replacing of the Federal Reserve as the nation’s principal regulator of monetary policy and the financial system, would create a loss of confidence in foreign bankers, creditors and traders and would depress our bond markets and exacerbate an already “free falling” U.S. dollar. The President needs to show leadership on this issue and strongly reaffirm his support for the reappointment of Ben Bernanke and not let Congress make him the “goat” of the recession. If Congress wants to assess blame for the financial mess, they should begin by looking in the mirror.

Morris R. Segall, CFA, CIC

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