Dear ,
Between Hurricane Irene's thrashing, Steve Jobs' resignation, and Ben Bernanke's annual economic conference, there were a number of important headlines last week. In the midst of them all, U.S. stocks managed to log their first winning week in five as major indexes all closed over 4% higher.
According to many pundits, much of the stock market's positive performance can be attributed to reassuring words from Fed Chairman Ben Bernanke's speech on Friday, during which he focused on the long-term strengths of the U.S. economy and touted that growth fundamentals "do not appear to have been permanently altered by the shocks of the past four years."[1]
While acknowledging the challenges we are facing, the overall tone of his speech was optimistic. After reminding his audience that "the financial crisis that gripped global markets in 2008 and 2009 was more severe than any since the Great Depression", he stated that "restorative forces are at work today, and they will continue to promote recovery over time."[3]
The Fed Chairman concluded his comments on a positive note by reinforcing that even though policymakers have a tough job in supporting economic recovery while also tackling long-term debt, "those challenges can be met and the fundamental strengths of our economy will ultimately reassert themselves."[4] He also went on to pledge that the Fed will keep short-term interest rates low, and will do "all it can" to help the recovery.[5]
For an alternative view of Bernanke's speech I would suggest that you read this article from today's Wall Street Journal!
St. Augustine at the Fed Ben Bernanke delivers a political lecture
The real question is how much should we listen to Mr. Bernanke? Is it his job to give us honest economic analysis, or is it his job to be a cheerleader? Let's take a look at some other things he has said.
Housing
(October 20, 2005) "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
(February 15, 2006) "Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."
(March 28, 2007) "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
(May 17, 2007) "All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable."
(July, 2005) "We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though."
Ok, so he blew it on housing. What else?
Recession
(January 10, 2008) "The Federal Reserve is not currently forecasting a recession."
(June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
The National Bureau of Economic Research is the group that officially dates the beginning and ending of recessions. According to the NBER, the Great Recession started in December of 2007 and lasted until June of 2009. As you can see, both of the recession quotes were made during the recession.
Current Economic Conditions
"The money supply is not changing in any significant way. What we're
doing is lowering interest rates by buying Treasury securities."
Really? Take a look at this chart of Money Supply. Looks like all three measures are rising to me.
(February 3, 2011) "Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term."
That was before he knew that 1st quarter GDP had dropped from 3.2% to 1.9% in one quarter, and that was in the middle of QE2!! (The government later adjusted the figures down to 2.3% and .4%)
How do we know who to listen to?
What we do here at Reames Financial is try to sort through the noise so that we can highlight the views that we think are important to your long term financial health, and in a similar fashion highlight the views that we think are extremely lacking in their ability to be useful in managing your finances. We happen to think that when someone is that consistently wrong, you should take their views with a grain of salt.
You may not always agree with our analysis but at least you know you will always get an alternative view here!
ECONOMIC CALENDAR: Monday - Personal Income and Outlays, Pending Home Sales Index Tuesday - S&P Case-Shiller HPI, Consumer Confidence, FOMC Minutes Wednesday -ADP Employment Report, Chicago PMI, Factory Orders, EIA Petroleum Status Report Thursday - Jobless Claims, Productivity and Costs, ISM Mfg Index, Construction Spending, Motor Vehicle Sales Friday - Employment Situation
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