Market Update 4 15 10 _ Bernanke and his testimony

Tax day

I have a confession to make…I don’t do my own taxes.  My beautiful wife is an accountant and she volunteers to do this chore every year.  I think her motive is more self-defense than altruism.  She knows that if I do the taxes one of us is likely to go to jail when I forget to file them (I’m not a congressman or a Treasury Secretary so I’d face real consequences for failure to file).  Because I get out of this dreadful chore I figure I need to make some sacrifice to justify my existence…therefore I chose to watch, in its entirety, the Fed Chairman’s testimony before congress and report back to you with my findings.

The Joint Economic Committee

Bernanke testified before the Joint Economic Committee of Congress yesterday.  In general the questions coming from this committee were much better than those we usually hear from the House Financial Services Committee.  It was a nice change of pace.

Bernanke’s prepared remarks to the committee stressed that we are in the midst of a moderate economic recovery.  As he weighed the positives against the negatives you began to see the picture come to life.  We have an increasing array of slightly positive data contrasted against a backdrop of large negatives…like housing and employment.  Bernanke pointed out that the risk of a double-dip seems to have receded, but went on to state that a primary risk to the recovery was consumers becoming more cautious in their spending due to persistently high levels of unemployment.  Any drop off in spending at this point in the recovery would be very unwelcome news.

Q&A

The Q&A session is where the real fun begins.  The first 20 minutes of these meetings are usually filled with long winded statements that I believe are tuned out by everyone except the congressman that is actually speaking.  They love to hear themselves talk…for the rest of us it’s a nice time to get more coffee.  After the diatribes are over the Q&A starts.  I have to give the Joint Economic Committee credit, they asked a number of intelligent questions. 

The question of the day revolved around the Feds language that rates would remain “exceptionally low” for an “extended period”.  Bernanke pointed out that the factors driving this language are low resource utilization, high unemployment, and stable inflation expectations.  As always the Feds actions are data dependent…when they see material changes in the aforementioned items we can expect some change in the language of the statement.  Let’s get a current look at the three factors Bernanke mentioned.

Resource Utilization

US Industrial Production was released this morning.  This data series measures real output and is expressed as a percentage of real output in a base year (a higher number is better).  The survey expected a reading of 0.7%...the actual release was 0.1%.  Clearly we still have a lot of unused capacity.  In the words of the hip academics this is called a “high rate of resource utilization slack”.  In redneck terms it means “we ain’t makin’ near as much stuff as we could be makin’.”  That’s one item the Fed is looking at and it continues to show weakness.  Strike one.

Inflation

As far as inflation goes…CPI Ex-Food and Energy on a Year over Year basis was released this week at 1.1%.  To find a lower CPI release you have to go all the way back to 1966.  I wish I had a good 1966 story to include for perspective but I wasn’t born until 1969.  I might have to call my brother to get a good point of reference…it would be a nice time to remind him how much older he is than me.  At any rate, inflation doesn’t appear to be a concern at the moment either.  Strike two.

Unemployment

This morning Initial Jobless Claims were released a bit worse than the survey expected.  The survey expected to see 440,000 people file for first time jobless benefits…we actually had 484,000 people show up to file.  Continuing Claims were also a bit higher than the survey estimate.  Strike three.

In summary

So this morning we find ourselves in a world where we have a lot of idle manufacturing capacity, a stubbornly high unemployment rate, and historically low rates of inflation.  Given those conditions it seems that the Fed will continue to remain on hold, and that they will continue to use the “extended period” language.  There will undoubtedly be some public squabbling among Fed members as we go forward but keep an eye on these three factors as they were called out by name as conditions that help form the basis of Fed policy going forward.

As always if you have any questions comments or complaints…just let me know.  Now that I think about it just send me the questions and comments…send the complaints to George…he looks like he needs something to do.

Steve Scaramastro, SVP

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