Ben Bernanke spoke today (Tuesday May 5th, 2009) and said some very encouraging things that were widely interpreted throughout the US media machine as a claim that the "the bottom is in."
Astute observers of past Bernanke statements will quickly recall the numerous other times he made either overly-optimistic or horribly off-the-mark statements that seem, in retrospect, to have been crafted to be soothing, instead of wise or accurate.
Bernanke said this today in front of the Joint Economic Committee:
"We are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term and we will see positive growth by the end of the year,"
"The recent data … suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing."
There he goes again, speaking of positive growth, which is, of course, vastly preferred to that old enemy of modern economists, "negative growth."
Bernanke used some recent housing data (recently debunked here) as well as the unexpected surge in Personal Consumption Expenditures (also debunked here) to bolster his case that "the bottom is in."
However, the bulk of his claim rests with the apparent repair of the credit markets. In his prepared remarks, he said this:
Among the markets that have recently begun to function a bit better are the markets for short-term funding, including the interbank markets and the commercial paper market. In particular, concerns about credit risk in those markets appear to have receded somewhat, there is more lending at longer maturities, and interest rates have declined.
This is the most disingenuous and patently wrong statement out of many. The entire repair in the credit markets, especially the ones he refers to, is entirely due to the active involvement of the Federal Reserve itself, in printing up more than a trillion dollars out of thin air to intercede in the free and fair functioning of these markets.
Brian Pretti of Contrary Investor brilliantly dissected these claims a few days ago (before they even appeared; kudos, Brian!) in his May monthly report (which you can find here until the next monthly report is loaded). I strongly recommend that you read the entire report, as it clearly demonstrates that, without massive intervention on the part of the Federal Reserve, the credit markets would have quite possibly disintegrated. Here’s what he said:
On Interbank Lending:
Maybe more than any other headline credit market indicator of the moment we believe Fed actions have distorted what used to be the prior “risk based” message of LIBOR. And that cuts right to the conceptual heart of government intervention. Just how the heck can the private sector assess risk and allocate capital correctly and efficiently when the Fed/Treasury/Administration is acting to help “misprice” assets and risk measures?
On Commercial Paper:
The message is clear. Commercial paper markets are not healing. Not only is total volume down as is seen in the chart above, so is new issuance this year. And at the same time, the percentage of total CP market paper held by the Fed has been growing in 2009. One more time, without the Fed finger in the CP dike, just what would this market look like? (Answer: You probably do not want to know.)
Instead of Bernanke attempting to speak of "concerns about credit risk in those markets appear to have receded somewhat," as if those concerns were somehow a legitimate reflection of market sentiments, I think he should have made the role of the Federal Reserve in making that happen more transparent. Why? Here’s two views on that, both said better than I could:
The first is from "Mr. Practical" of Minyanville:
As more and more traders and investors view the recent rally through the eyes of technicals, we are closing in on the completion of the bear trap. Human beings are inductive: they see things and their preexisting views are reinforced by them. Rising prices beget rising prices until facts finally exact their toll. People assume others know what they’re doing.
I came out of the airport terminal to grab a cab one night. The line was two hours long. The last person in line assumed the person in front of them knew what they were doing and resigned their fate with the rest. I decided to take a five minute walk to the next terminal, where I grabbed a cab immediately.
If people really did hard analysis on the current environment they would take a much different view. The Fed’s balance sheet is not only irreparably massive, it is a mess with credit risk. When you hear people saying credit is improving, it can clearly be shown that the only areas of improvement are where the Fed has stepped in and become the market. The Fed has reduced transparency, not increased it.
…
The point is that the Fed and the government have been able to shift psychology, convince people that things are "stabilizing", but they have done so at a high cost. The risk has increased dramatically. Who knows where the rally stops, if it does? But the marginal buyer is taking higher and higher risk. The economy and the markets are a physical system, which hasn’t changed for the better. Sure, you can get a low rate mortgage now but you better be able to put 20% down. That is reality.
And here again is Brian Pretti (from same link as above):
As we see it, the BIG bottom line message is that the Fed is creating the impression or perception of healing in pockets of the US credit market. For those not willing to or literally unable to understand what is happening behind the scenes, many a headline credit market perception is actually a misperception when a light is actually shown on the facts of these various market segments. Where the Fed is involved, the perception of healing or stabilization can be created. Where they are not involved (corporate markets), continued stress is still plainly visible.
(…)
Absent the influence of the Fed, these markets are not yet recovering. Absent the Fed, the credit market patient is unable to get out of bed and walk on his/her own. Let’s just hope equity investors have it dead right in their happy anticipation in recent months. For if what they are discounting is correct, especially in financial sector issues, the US credit markets should very soon be involved in a Lazarus event – an immediate rising from the dead. But for now, it’s really the Fed holding up the credit markets, from which they cannot have a current exit plan by any stretch of the imagination.
The main issue here is that we got into this entire mess due to a massive misallocation of investment funds (mainly reflected in overbuilt residential and commercial real estate), caused by the miracle of "too cheap money" (thank you Greenspan!) and a mispricing of assets and risk. Despite this, the Federal Reserve has decided that the cure involves vast floods of newly issued "too cheap money" and the willful mispricing of asset values.
In other words, it looks like a "double down" strategy.
I simply cannot imagine being more at odds with the current Federal Reserve policy. I think the solution involves letting the institutions that made the poor decisions take their lumps. Where bad investments were made, let there be pain.
Instead of trillions poured into various black holes of greed and fraud, I would strenuously support pouring those same trillions into productive investments in retooling our energy, transportation, and agricultural infrastructures.
Unfortunately, we are being told about as clearly as possible that Bernanke does not feel he can be transparent and honest in his remarks. We might speculate that he believes that "investors" and "the markets" would behave the wrong way if he was more forthcoming. Perhaps he’s right. Who knows?
But one could be forgiven for wondering if perhaps the hole we are in is being dug just a little deeper because Bernanke lacks the mettle required to be an honest man.
While it might be tempting to buy the green shoots that Bernanke is selling, I am of the firm opinion that one does so at one’s own peril.
by hucklejohn