What Bernanke's Testimony Means

The stock market is at all-time highs,but markets tend to seize on what they want to hear and run with it.A case in point is Federal Reserve Chairman Ben Bernanke's testimony before Congress last week,which was assessed by Mohmamed El-Erian,CEO of leading asset manager PIMCO.This testimony is rather dovish,Mr.El-Erian said.Bernanke was saying that 1.The unemployment situation is unsatisfactory.2.Don't worry about inflation;it is too low.3.We have a number of instruments we can use. He's trying to strike a difficult balance between confidence and excessive risk-taking.The journey is full of ifs.The market extrapolates this to the destination.Markets are different from the Fed.They want to know where we are going,and when we're going to get there.1.The unaddressed cost and risk of unconventional policies.2.You've convinced other central banks to follow you,but does it make sense if everybody does it? The underlying economy is still fragile.The fundamentals with the technicals would call for lower yields from here.1.The real economy is weak.2.Banks have reduced risk exposure,so their ability to earn is less.It will be interesting to see how sustainable their earnings are. Mr.El-Erian,who formerly managed the Harvard endowment, is also co-Chief Investment Officer of PIMCO,along with founder Bill Gross.

Ranting and Raving:Stop Complaining and Invest

The Bernanke economy is lifting the world,said CNBC's Jim Cramer.The most powerful financial figure in the world,he did it right.Stop bellyaching and go make some money.I've never been against making money;it helps. Without China,the metals complex is catching up.There has to be something going on.We are pumping oil bigger than the level of 1992.We are expanding refined products. I would argue that PCs are over.The industry's going away.I like Nokia.Microsoft CEO Steve Ballmer wants to do bold things with it.I think Nokia is a spectacular buy. Investing is part of America,and I welcome people back-even if it is through "Helicopter Ben" Bernanke. Boeing is a teflon stock.I do like that CEO McNerney said the battery is fixable.Don't bet against Boeing. I think Ballmer is back.He's better than ever.I'm looking to Microsoft's gaming division.I probably want to buy UPS right now.Maybe there are a lot of negatives,not many positives.I like that.I think it's gonna be recovering two days from now. There's a lot of excitement in the market,the popular CNBC market analyst Jim Cramer noted. He also likes Advanced Micro Devices on the gaming console trade and Celgene on its positive myeloma data. Nokia(NOK),Microsoft(MSFT),Boeing(BA),Advanced Micro Devices(AMD),Celgene(CELG)

Ranting and Raving:Stocks Down,Bond Yields Up

Stocks continued their downward momentum on Monday.I see a lot of companies whose stocks seem to be in the wrong place.They want to come down,cautions CNBC's Jim Cramer.
The Fed has lost control of the bond market.Everybody has to readjust.What if the ten year Treasury goes to three?A 3% Clorox is not as good as a 3% ten year.It's one of the bond market equivalents that don't work.It's just breathtaking to watch the TNX,the Treasury Yield Index,when you don't have a bond terminal.
There's a couple of higher yielding stocks and MLPs,master limited partnerships.I'm watching Brazil and the riots.Are they still gonna stage the Olympics?You can't even make money if you bet against the Olympics.
Who is gonna say the magic word that Fed fund rates are gonna go higher?That's something we don't want to hear.I feel Fed Chairman Bernanke is boxed in the corner.He has become the world's largest bond trader.
Copper under three scares me.China does worry me.I went to see a meerkat exhibition.They were all huddled together,clearly worried about the bond market.
Whirlpool has a giant Brazilian market.This is one of those "let them eat cake" situations.They're building the Olympics and forgetting the people.I rented out one of my homes for July.I need the income because of the Brazilian market.
I want the highest quality here.The earnings coming out this week will be a good tell,the popular expert investor Jim Cramer said.
The TNX-10 Year Notes closed at 25.48 on Monday,up 0.34,or 1.35%.
Whirlpool(WHR),Clorox(CLX)

Asia This Day:Fiscal Cliff Troubles Australia;Tokyo Nuclear Protest

Tens of thousands clogged Tokyo Monday as they protested Japan's restarting of reactors in the wake of 2011's tsunami and nuclear disaster.Two of the country's fifty reactors are back on line at the Ohi plant.
Japan's GDP came in lower than expected at -3.5 versus the -3.4 estimate,on falling exports to a slowing China and Chinese protests against Japan's territorial claims.Consumer spending has also dropped,further shrinking the Japanese economy.The Nikkei was down 61.04 after the lunch break Monday.
The MSCI Asia Pacific index fell 0.30% in early Monday trading,while India's Nifty Fifty and Sensex indexes rose about 0.20%.A big wireless spectrum auction is being conducted by the Indian government.
Toyota  Motors will be doubling its capacity in Indonesia,building a new engine plant there.
Australian treasurer Wayne Swan has been warning about the results of the fiscal cliff,a combination of  US tax increases and spending cuts of some 800 billion dollars that will apply on January 1.Without action by Congress,there would be a severe blow to the fragile global economy.The world can't afford the continuation of this gridlock in Washington.Mr.Swan has met with US Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke to express his concern.
Gold is at a near three-week high on the fiscal cliff worry.
China's trade surplus came in at 32 billion dollars in October,a rise of 11.6%.Copper imports were down to their lowest level in 15 months,dropping 18%.Australian mining shares have declined because of the Chinese slowdown.

General Electric:Viewpoint Today

It just is today the most resilient economic system on earth,GE CEO Jeff Immelt said of the United States.The stakes are so darn high for the country and for all of us.Nervous laughter is a bad strategy.
We're asking for the same territorial system that our global competitors have.We're kind of like the last American company that competes in the fields that we're in.
Fed Chairman Ben Bernanke has been consistent to his word.It's not bad to have one person in power who's been more or less consistent since 2007.
If the fiscal cliff happens,that's a failure of governance-and it shouldn't happen,Mr.Immelt added.
Jeff Immelt,56,has been leading GE,the world's third largest company,since September 7,2001.He has been named to Barron's "World's Best CEOs" list three times.Mr.Immelt is also head of the President's Jobs Council.
General Electric(GE)

Leading Analyst Disturbed By D.C.'s Tax Cuts

To Ed Yardeni,the analyst who coined the term "bond vigilantes,"there seems to be a coincidence between today's rising bond yields and D.C.'s tax cut plans.D.C. is making it all too easy to increase the deficit by readily cutting taxes and hence decreasing revenue.As the deficit balloons,the government must pay more and more interest to skeptical investors who buy government bonds,which ultimately stresses the budget even more.
There's also a fear Federal Reserve Chairman Ben Bernanke may overshoot in his QE2 policy of buying Treasury bonds:another reason to lighten up on the bond holdings.The bond vigilantes have woken up in Europe,and are now waking up in the U.S.,Mr.Yardeni thinks.They're in the position to shut the bond market down unless the U.S. changes its policy.
Rising bond yields means retirement portfolios stuffed with bond funds will lose value,since bond prices fall as yields rise.
The U.K.'s making tremendous progress in cutting the deficit,and Europe's moving in the right direction,Mr.Yardeni said.He certainly doesn't like what he's been seeing in the U.S. recently,however,and neither do the bond vigilantes.
Bond vigilantes are big traders who insist on ever-higher interest rates to cover their risk as governments sink deeper into debt,making the cost of money increase even more.
Other observers disagree with Mr.Yardeni's assessment,saying the increase in bond yields is simply the bond market adjusting to better economic data and growing national debt,rather than the bond vigilantes waking up,and will not be disastrous.
Nonetheless,most financial advisors are urging their clients to move away from a bond market that is seen as being toppy now,and toward an improving stock market.

Special Access:With the Central Banker

Ben Bernanke,Chairman of the Federal Reserve,testified before the House Financial Services Committee last week,strongly defending the Fed's role in supervising the largest financial institutions.He also reflected on the current economic situation,including inflation and the structural deficit.We're not expecting inflation to rise in the near or medium term,Mr.Bernanke said.Employers are seeing slow wage growth and strong productivity gains.Unit labor costs are falling and there is weak demand,discouraging price increases.It's conceivable long term debt could directly or indirectly affect the economy by causing a loss of confidence.
The Federal Reserve still retains 1.25 trillion dollars of mortgage-backed securities.We think our holding them will keep mortgage rates down,even though we are ending new purchases.The very high vacancy rates in rental properties are keeping rents down.
Stripping the Fed of supervisory authority,in light of the recent crisis,would be a grave mistake.Large institutions need to be seen as a whole,the wide range of activites of a complex international financial firm.The Fed has a range of multidisciplinary skills for consolidated oversight.The Fed is the one institution with the full breadth of skills.The Fed of course made errors,but we were hardly alone in that respect.
We've learned that regulations need to be tougher;we have changed our approach to one of tougher risk assessment.We've increased capital requirements and scrutiny of executive compensation.You have to be careful not to restrict hedging activity,which involves securities purchases.We would implement regulations as part of our overall risk assessment of the company,whether the company has adequate management capabilities to manage those risks.A lack of strong controls would be grounds for the supervisor to require changes or elimination of those activities.If you can get market discipline to bear on firms,that would help the regulators,Mr.Bernanke told the committee.
Ben Bernanke was recently reappointed and confirmed for another four-year term as Chairman,despite distrust of the Fed by some members of Congress.Congress feared disrupting financial markets by denying his reappointment,among other considerations.

A Question of Balance

Federal Reserve Chairman Ben Bernanke,whose four-year term expires in January,appeared before the House Budget Committee last week,assessing the shape of the economy.The Targeted Asset-backed securities Loan Facility,or TALF,has helped open up lending,Mr.Bernanke said,and he is confident that TALF carries minimal risk.As well,the recovery rate for Troubled Asset Relief Program,or TARP,funds should be excellent.We need to restore ourselves to a more balanced fiscal path,however.
Currency and commodity prices are factors in inflation,Mr.Bernanke pointed out,and will be watched carefully.Most indicators point toward stable inflation.There is no sign of a wage/price spiral.Picking a time to remove accommodation,or Federal Reserve actions,is tricky,but monetary accommodations can be unwound,and the decision can be made with political independence.The increase in federal borrowing has been offset by a decrease in private borrowing.
The fear of deflation has receded somewhat,Mr.Bernanke told the House Budget Committee.Retaining the confidence of the financial markets requires that we as Americans take action now to try and restore the fiscal balance.Financial institutions and markets do remain under some stress,but those banks required to raise new capital have made substantial progress.
We need to be on a path of spending and tax measures to cut debt,Mr.Bernanke feels.The stimulus program will have an effect on jobs for two to three years.When the time comes,we will need to raise interest rates,as the Fed is strongly committed to price stability.Q2 economic growth could be negative as inventories are worked off,but the Fed will not monetize debt.Businesses remain cautious and continue to reduce the work force,as the unemployment report on Friday indicated.Overall,Mr.Bernanke,wearing a gray suit,white shirt and red tie with a gold pattern,was sounding a note of cautious optimism,cognizant of the threat of deficit spending to the economy in the long term.

Managing Systemic Risk

A critical part of risk management is understanding the linkage between incentives and risk-taking,Ben Bernanke believes.The structure of compensation is a safety and soundness issue.Our supervisors are emphasizing that maintaining risk management is equally important in good times and bad.The Federal Reserve is the consolidated supervisor of bank holding companies.We are working to bolster the ability of the financial system overall to withstand shocks,creating increasingly stringent standards and targets for market participants.We must be sure we continually increase our expertise,to match it with the situation.A macro-prudential agenda has many elements.Precisely how best to implement this agenda remains open to debate.An approach to supervision that focuses narrowly on individual institutions can miss threats to the financial system,in Chairman Bernanke's view.

Status Quo Problems

For Ben Bernanke,the way things are isn't good enough.Current law still hampers bank supervision.The Fed is asking Congress for tools necessary to monitor bank safety and soundness.The market infrastructure for derivatives still lacks adequate transparency and efficiency.There is a need for heightened vigilance and forcefulness on the part of supervisors to make sure standards are being met.Holding companies must serve as a source of strength for their subsidiary banks.We are monitoring the major firms' liquidity positions on a daily basis,the central banker indicated.

Banking Supervision Examined

Ben Bernanke,Chairman of the Federal Reserve,has been reflecting on banking supervision in light of the financial crisis.There are two questions,Mr.Bernanke said:1.What have we learned? and 2.How can we apply those lessons? Increasing the effectiveness of supervision must be a top priority of our institution.The Federal Reserve is now requiring banks to identify the unintended consequences of new financial instruments.We coordinate closely with foreign supervisors,Mr.Bernanke revealed.Our close relationships have proved very helpful as we have dealt with this crisis.The crisis underscores the importance of liquidity in banks.International collaboration has enabled U.S. supervisors to learn from the experience,Mr.Bernanke pointed out.

Man of Many Concerns

Ben Bernanke,who was widely praised for his interview on CBS' 60 Minutes,continued to express the range of his concerns to the community bankers.Current capital rules prompt banks to reduce new lending during downturns,he complained.International efforts are underway to reduce excessive pro-cyclicality in financial regulations.The Federal Reserve's actions taken last week are intended to improve private credit market conditions.We want to be sure we can move out of credit markets when appropriate.We have steps in place to shrink the balance sheet at the right time,Mr.Bernanke informed the community bankers.

Bernanke Charts Smooth Course

Ben Bernanke,Chairman of the Federal Reserve,said there is no realistic alternative to preventing large institution failure.We need to address this problem,he told a gathering of community bankers.It is an enormous problem.It creates an incentive for small institutions to grow and themselves become too big to fail.We need to make the financial system less susceptible to exuberant booms and disastrous busts.The drop in interest rates has partially,but not entirely,lessened the effects of financial turmoil.We need something similar to the regime for bank wind-downs for non-bank entities.We are generally encouraged by the market response to our credit-related tools,the central banker remarked.

When Normalcy Returns

Ben Bernanke,wearing a black suit,white shirt,and a black tie,promised that once financial conditions have become more normal,the Federal Reserve's extraordinary measures will no longer be necessary,and private counterparties will be looked to again for financing.The economy remains under considerable stress,and activity has downshifted further since September.The Fed sees the economy slowing even after financial markets improve.When they do,the Fed's Open Market Committee will ensure that the Fed's balance sheet is normalized in a timely way,Mr.Bernanke reassured.

Gauging the Fed's Deeds

Government intervention is necessary to protect the public interest,Mr.Bernanke asserted,but the offset of financial turmoil has been incomplete.The Fed has taken a number of extraordinary steps,such as the Term Auction Facility,resulting in large increases in the amount of credit available to the banking system.There were also the foreign currency swap line agreements with 14 other central banks,but judging the effectiveness of the Fed's liquidity programs is difficult.Certainly the credit markets would have been much worse without Fed intervention,the Chairman maintained.

Special Access:With the Fed Chairman

Throughout the financial crisis,Ben Bernanke,Chairman of the Federal Reserve,has exhibited quiet leadership.Mr.Bernanke recently shared his reflections on the course of the crisis and what might be done about it.Our nation is being tested by economic challenges,the central banker said,but there are more tools the Federal Reserve could use.The Fed could purchase long term Treasury bonds or agency debt.It could backstop liquidity in financial markets beyond banks.Further rate cuts are certainly feasible,but obviously the scope is limited:the Fed funds rate has already been cut to 0.5%.The rate cuts were rapid and proactive.Nonetheless,the Fed's liquidity programs have failed to return private credit markets to normal,although they have been helpful in lowering some spreads.The market itself must ultimately address financial problems.

Bernanke Provides Context

Speaking at Harvard University,Ben Bernanke,Chairman of the U.S. Federal Reserve,has put the current situation in historical context.So far,the U.S. economy has dealt with the oil shock pretty well,Mr.Bernanke said.The Fed has learned the lessons of the 1970s.Maintaining a commitment to price stability remains a top priority.Fixing inequality by limiting economic dynamism is a step in the wrong direction.Inflation today is significantly higher than he would like,but is lower than in the 1970s.There is little indication of the beginnings of a wage-price spiral today.Inflation is up 1% this year,compared to 6% in the 1973 oil shock,which was a result of war in the Middle East.Still,the rise of some inflation expectation indicators is of significant concern to the Federal Reserve,the central banker noted.Crude prices today are up more than four-fold,much like the 1970s,but the economic slowdown today is more due to housing and financial problems than to the price of oil,Mr.Bernanke reflected.

Jon Corzine

The governor of New Jersey,Jon Corzine,believes we are in a recession.The former Goldman Sachs(GS) executive isn't sure the the federal Govrnment's stimulus plan gives us the most bang for the buck.There's a real risk of getting into a deeper recession.He's afraid people will walk away from their homes.They're being squeezed by the cost of living.Governor Corzine feels that Paulson and Bernanke are taking steps in the right direction,but haven't gone far enough.Recession talk isn't helpful to the folks getting pinched.We're in the heart of a consumer economy.New Jersey's revenues are not coming in.There will have to be more budget cuts.We need a system that will help people lower their debt level,that will target homeowners with mortgages,Governor Corzine said.

Ben Bernanke

Ben Bernanke,the chairman of the Federal Reserve,the U.S. central bank,and a former professor,has been focusing on the economic dislocation.He notes that the U.S. economy is still going through a very difficult period.It should strengthen in the second half of 2008,returning to growth in 2009.Much adjustment has already taken place,but the financial markets are still under stress.So far,hedge fund behavior has not created losses for our major financial institutions.The sudden failure of Bear Stearns(BSC) would likely have led to a chaotic unwinding,which would have been felt broadly in the real economy,Mr.Bernanke said,justifying the Federal Reserve's intervention in the matter.

Responding To Rough Markets

In recent congressional testimony,Ben Bernanke,chairman of the Federal Reserve,said financial markets are stressed,but central bank efforts have helped.The Federal Reserve will act in a timely manner to support growth.Commodity prices and the housing market will weigh on the economy in coming quarters.It is important to recognize that downside risks to growth remain.Inflation could go higher because of energy,food and the weak dollar.Commodity price gains and price rises suggest the upside risk of inflation.The economic situation has become distinctly less favorable.The economy took a significant turn for the worse in early January.Credit conditions may tighten considerably further.The federal deficit is bigger and more threatening than it was in 2001.We're in a worse position to respond to a crisis.The unemployment rate is likely to go higher.The decline in home prices is creating a broad set of issues.Nonetheless,the former professor doesn't think foreign investors have lost confidence in the U.S..U.S. banks should take steps to raise more capital.Some bank failures could take place.The capital ratios of the largest banks remain good.Sheila Bair,chairman of the Federal Deposit Insurance Corporation,agrees.She says 99% of banks are well-capitalized.About 76 banks are on the troubled list,representing around 22 billion dollars U.S. in assets.We're in a challenging environmment,but we have a 52 billion insurance fund.There will be a bit of an uptick in bank failures this year.To handle this,the FDIC wants to bring back 25 retired bank examiners.There are 1200 FDIC employees working in bank receivership.Senator Evan Bayh(D-Indiana) has just returned from a trip to the Middle East.There he met with heads of sovereign wealth funds who are helping U.S. firms such as Citigroup(C) by infusing capital.Senator Bayh said he was reassured by the officials in Abu Dhabi,Qatar and Saudi Arabia.They want to do the right thing.They are eager to meet any U.S. standards.Saudi Arabia's fund is 300 billion,Qatar's is 50 billion,and Abu Dhabi's is the largest in the world at 550-900 billion dollars.To increase their wealth,many retail investors are looking to exchange-traded funds such as the PowerShares Builders Europe 100(ADRU),which is yielding 7.33%,or the SPDR KBW Regional Banking ETF,which yields 6.13%.