Wednesday, February 9, 2011


On the Economy

* In February 2006, Ben Bernanke, as President Bush's Chairman of the Council of Economic Advisers, was responsible for drafting the Economic Report of the President, which claimed the following: "The economy has shifted from recovery to sustained expansion.... The U.S. economy continues to be well positioned for long-term growth." In this report, Bernanke projected the unemployment rate to be 5% from 2008 through 2011.

* On July 20, 2006, Fed Chairman Bernanke referred to the economy as "robust" and "strong."

* On February 15, 2007, Fed Chairman Bernanke said, "Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition."

* On July 18, 2007, Fed Chairman Bernanke said, "Employment should continue to expand.... The global economy continues to be strong ... financial markets have remained supportive of economic growth."

* On February 27, 2008, Fed Chairman Bernanke said, "The nonfinancial business sector remains in good financial condition with strong profits, liquid balance sheets and corporate leverage near historic lows.... Projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2% to 5.3%, up from the level of about 4.75% projected last July for the same period. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend, and the unemployment rate edging lower. The improvement reflects ... an anticipated moderation of the contraction in housing and the strains in financial and credit markets."

* On June 9, 2008, Fed Chairman Bernanke said, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

* On May 5, 2009, in front of the Joint Economic Committee, Fed Chairman Bernanke said, "Currently, we don't think [the unemployment rate] will get to 10%." In November the unemployment rate hit 10.2%.

On the Housing Market

* July 1, 2005: Bernanke, then President Bush's Chairman of the Council of Economic Advisers had the following exchange with CNBC:

CNBC interviewer: Ben, there's been a lot of talk about a housing bubble, particularly, you know, from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

Bernanke: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So, it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

Interviewer: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying, "Oh, this is a bubble, and it's going to burst. And this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

Bernanke: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. 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.

* On February 15, 2006, Fed Chairman Bernanke said, "The housing market has been very strong for the past few years.... It seems to be the case, there are some straws in the wind, that 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 but not at the pace that they had been rising. So we expect the housing market to cool but not to change very sharply."

* On February 15, 2007, Fed Chairman Bernanke said, "The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."

* On March 28, 2007, Fed Chairman Bernanke said, "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

* On May 17, 2007, Fed Chairman Bernanke said, "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

* On February 27, 2008, Fed Chairman Bernanke said, "By later this year, housing will stop being such a big drag directly on GDP.... I am satisfied with the general approach that we're currently taking."

On the Financial Crisis

* On February 15, 2007, Fed Chairman Bernanke said, "The Federal Reserve takes financial crisis management extremely seriously, and we have made a number of efforts to improve our monitoring of the financial markets to study and assess vulnerabilities, and to strengthen our own crisis management procedures and our business continuity plans."

* On February 28, 2008, Fed Chairman Bernanke said, "Among the largest banks, the capital ratios remain good, and I don't expect any serious problems ... among the large, internationally active banks that make up a very substantial part of our banking system."

* On July 16, 2008, Fed Chairman Bernanke said that Fannie Mae (FNM) and Freddie Mac (FRE) are "adequately capitalized" and "in no danger of failing." Since then, Fannie Mae and Freddie Mac have received a $200 billion bailout and have been taken over by the federal government.

On Derivatives

While Warren Buffett warned that derivatives were "financial weapons of mass destruction" that pose a "mega-catastrophic risk" to the economy in 2003, Bernanke supported the deregulation of these risky schemes.

* In November of 2005, Mr. Bernanke was questioned by then-Senate Banking Committee Chairman Paul Sarbanes:

Sarbanes: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast-growing market remain real. How do you respond to these concerns?

Bernanke: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

* On February 27, 2008, Fed Chairman Bernanke said, "If you have two investment banks doing an over-the-counter derivatives transaction, presumably they both are well-informed and they can inform that transaction without necessarily any government intervention."

* On July 10, 2008, Fed Chairman Bernanke said, "Since September 2005, the Federal Reserve Bank of New York has been leading a major joint initiative by both the public and private sectors to improve arrangements for clearing and settling credit default swaps and other OTC derivatives.... I don't think the system is broken, but it does need some improvement in execution.

No New Ground From the Fed Chairman

His main points:

* Unemployment will remain high.

* Domestic economy is recovering.

* Inflation is contained and will not pose a threat.

* Our fiscal problems are worsening and must be addressed.

In terms of the direction of monetary policy, the conclusion remains that QE2 will be completed and that zero-interest-rate policy will persist throughout this year.

Collin Stewart's Tony Dwyer:

The rate on 10-year Treasury Notes (UST) has now jumped more than 8% in the past week, to a new six-month high. This is very rare and only the third time since 1962 that the 10-year UST yield rose at least 5% over the past week to a new six-month high at the same time the S&P 500 (SPX) rose to a six-month high. While only two prior data points, the market grinded higher over the next week (has done this time as well), then saw a sharp drop followed by a new significant leg higher (Table Below).

The history of SPX returns following this rare event dovetail very nicely with our macro view. We continue to expect a 4-7% correction (imminent) followed by a new leg higher toward our 2011 SPX target of 1500. The key will be to remain convicted about the next leg higher as prices pull back and bearishness increases. As outlined in our CS February 2011 Picture Book, we are highly convicted on the equity market potential, especially if it goes on sale. Remember that corrections only seem "natural, normal and healthy" until they actually happen, but truly are very healthy as it renews interest in the market as measured by volume.

Source: Stewart Strategy

Mortgage Applications Drop

Not surprisingly (at least not to me!), given the increase in interest rates, applications for new mortgages dropped after increasing by nearly 10% in the prior week.

The refinancing activity was far weaker than expected, contracting by 8%. The continued weakness in refi will partially offset a moderately improving jobs picture this year.

This morning General Motors reported that its January monthly sales to the Chinese market hit an all-time high, rising by 22% year over year.

GM estimated that its market share in China is now 14.7%. And the manufacturer sold more cars and trucks into that market than it sold domestically (for the first time in the company's 102-year history).

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