Ben Bernanke

Money Morning Mailbag: Investors Show Growing Concerns Over Deflation

The threat of deflation has been making its rounds as inflationary measures like the consumer price index (CPI) fell for the first time in 13 months in April, dropping 0.1%. Core CPI - which excludes food and energy prices - rose only 0.9%, its smallest gain since 1966. The producer price index (PPI) also dipped 0.1%.

"The recent trend in inflation has been swiftly to the downside," Eric Green, chief U.S. rates strategist at TD Securities, told Reuters. "All measures of inflation are decelerating."

Investment behavior has shown an anxious but mixed sentiment of hedging against both inflation and deflation: Demand for gold metal is outstripping supply by more than 1% per year and has pushed gold prices to record highs, while others have sought out both corporate bonds and U.S. Treasuries for safety.

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Will Obama's "Soft Money" Fed Lead to Hard Times for the U.S. Economy?

For a U.S. president, nominating Fed governors is a little like nominating Supreme Court justices: Since they serve a 14-year term, you have the chance to shape the U.S. Federal Reserve for a decade after your administration ends. What's more - even though Fed governors are subject to confirmation by the U.S. Senate - you're far less likely to have trouble getting them through than you do with the Supremes.

That's why U.S. President Barack Obama's current chance to nominate three out of the seven Fed governors is legitimate front-page news - and isn't merely the "inside monetary baseball" trivia that occupies much of the daily business section. Probably two of those three governors still will be serving in 2020, long after President Obama has published his memoirs.

The bottom line: One of President Obama's legacies will be a "soft money" Fed.

To discover the dangers of a "soft money" Fed, read on...

No Changes to Fed Policy

The U.S. Federal Reserve today (Tuesday) kept its benchmark interest rate at a record low level Tuesday and made no changes to the key "extended period" policy pledge.

In its description of the economy, the Fed noted that "household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit." Also, the housing market has yet to turn a significant corner and the commercial real estate market remains in dire straits.

"Investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls," the Fed statement said.

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The Dividend Stock Recovery: Get Ready for a High-Yield Bonanza

It's been a tough time for income investors lately.

Ten-year Treasuries pay less than 4%. The Standard & Poor's 500 Index yields just over 2%. Money market fund returns are microscopic, paying an average of just 0.05%. (At that rate, it will take your money one thousand years to double.)

What should you do?

Take a look not at the stock market, but inside it. The S&P 500 may yield 2.1%, but many individual stocks are yielding far more. In addition, yields are about to arch higher.

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Weak Job Market and Low Inflation Stall Fed's "Exit Strategy"

Any speculation that U.S. Federal Reserve Chairman Ben Bernanke had his finger on the "exit strategy" trigger has been silenced.

Bernanke yesterday (Wednesday) faced the House Financial Services Committee to instill public confidence in the Fed's ability to exercise a smooth exit strategy and quell continued fears of a tightening monetary policy.

The Federal Open Market Committee (FOMC) "continues to anticipate that economic conditions -- including low rates of resource utilization, subdued inflation trends, and stable inflation expectations -- are likely to warrant exceptionally low levels of the Federal Funds rate for an extended period," he said.

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Plans to Hide Commercial Real Estate Losses Won't Avert a Double-Dip Downturn

Sooner or later, mounting losses on commercial real estate could crash through the market's 2009 optimism and send the economy and stocks into a double-dip downturn.

The major problem is that lawmakers and regulators are setting up investors into believing that commercial real estate (CRE) losses are being effectively addressed. The truth is that escalating losses are being hidden as part of a campaign of optimism in a desperate gamble that a robustly reviving economy will save the day.

To protect yourself from another investment beating, here's what you need to know.



To find out how to avoid the commercial-real-estate implosion, please read on...

Fed's Discount-Rate Increase Illustrates Exit-Strategy Challenges That Await the U.S. Central Bank

Is the U.S. Federal Reserve finally launching its "exit strategy?"

When the nation's central bank boosted the discount rate last week, it assured investors that this wasn't a monetary tightening. The assurance didn't seem to matter. The move late Thursday touched off a furious global-market reaction and U.S. dollar increase on Friday. This demonstrates the challenge the central bank will face as it crawls toward an ultimate increase in interest rates.

In a move that surprised the markets, the Fed announced Thursday that it was increasing the rate it charges banks for emergency loans to 0.75% from 0.50%. The also reduced the central bank also slashed the maximum-loan-maturity length from 28 days (it was once as high as 90 days) to overnight.

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The Five Factors That Could Rescue U.S. Stocks

When the stock market is enduring as much trouble as it has been lately, it pays to remember that there are still many positive catalysts that are in place and working to buoy securities prices.

Let's take a few moments to consider the top candidates:

  • A Friendly Fed: The current U.S. Federal Reserve under Chairman Ben S. Bernanke is the most accommodative in history and is likely to keep short-term interest rates at or near zero for the remainder of this year. Occasionally there will be rumblings of an increase - as there was in The Wall Street Journal last Monday, but they are likely just smoke screens.
To find out about the other four factors - as well as three possible profit plays - please read on ...

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Seven Signs of the Fed's Eventual "Exit Strategy"

Looking for an exact date when U.S. Federal Reserve Chairman Ben S. Bernanke and his fellow central bank policymakers will raise interest rates?

Experts refer to this eventuality as Bernanke's "exit strategy" - a financial euphemism for the interest-rate increases that are certain to come ... at some point.

That's just it - those experts can't tell you when that exit strategy will begin. I can't tell you that, either (Sorry, loaned my crystal ball to Miss Cleo for her new infomercial).

But what I can give you that the pundits can't is a "Road Map to Higher Interest Rates," which spells out the specific events that should precede the most-heavily anticipated U.S. central bank interest-rate increase in history. Follow it and you should be perfectly positioned to profit when the time comes.

(Remember, a few months ago, I introduced Senior Secured Floating Interest Rate Bonds, or SSFRs, an investment that you'll want to own when interest rates rise.)

So, without further ado...

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How Banks Are "Crowding Out" the U.S. Rebound

When U.S. President Barack Obama unveiled the $787 billion "stimulus" bill of extra spending and modest tax cuts last year, it became clear that the U.S. budget deficit was going to eclipse the 10% of gross domestic product (GDP) level for at least one year (and, as we now know, probably three years).

On those grounds, I opposed the "stimulus" - a position that was a lot less popular then than it has since become. However, as I'll show you below, it now looks as if I was right - and the implications for the U.S. economy are highly worrisome.

You see, the theory postulated by economist John Maynard Keynes holds that the extra spending stimulates additional output fails to address the question of where the money comes from.

Government cannot create wealth - it has to borrow it. If, before the stimulus, government finances were in good shape, as was the case in China, then stimulus does indeed stimulate: The modest budget deficit that it causes is easily financed, and the extra spending creates some jobs and maybe some useful infrastructure, depending on how well targeted it is.

In the United States, however, government finances were in a mess before the stimulus began.

To find out how banks are blunting the recovery, read on ....

Europe-China Connection Could Rattle Stocks

I was watching the Asia Edge show on Bloomberg television Wednesday night when the lovely and smart Susan Li broke in breathlessly on her guest with news about China's consumer inflation numbers. Inflation was reported up just a touch in January, which was considered good news because if it was higher it would have made Chinese banking authorities more anxious to clamp down on interest rates and if it was lower it would have raised the awful specter of deflation.

The Shanghai stock market ended a fraction higher, so it was a bit anticlimactic. But the key thing to know is that the Chinese market still appears to be in a downtrend and that bodes ill for the rest of the emerging markets. The 50-day moving average of iShares FTSE/Xinhua China 25 Index (NYSE: FXI) has turned emphatically negative, as has the slightly longer 100-day average. The index fund also is already beneath its 200-day average, which tends to distinguish bull cycles from bear cycles.

Read more about the Europe-China connection...

My Confrontation With Ben Bernanke: The One Question He Refused to Answer

The Secret Service agents watched me warily as I approached U.S. Federal Reserve Chairman Ben Bernanke.

I didn't waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January 2007. I circled all the times he used the words "panic," "crisis," and "stress" in his speech, entitled "Central Banking and Bank Supervision of the United States."

A total of 36 occasions.

I asked him point-blank: "Did you know in advance that a financial crisis was headed our way?"

He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled.

And he refused to answer.

But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, "Yes."

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Why the Volcker Plan Doesn't Go Far Enough

I don't often agree with the Obama administration. So I have to say that I was surprised when I heard it had a plan to reduce the risk of another banking crisis. It wants to prohibit banks that are protected by deposit insurance from engaging in risky, proprietary trading, and it wants to break up some of the very largest banks.

I made both those recommendations in my forthcoming book "Alchemists of Loss" (Wiley 2010). The book, written jointly with Kevin Dowd, a British finance professor, should debut sometime late this spring(we sent the manuscript to the publisher last weekend - what a relief!). But after I studied the Obama plan further, I realized that I shouldn't have been surprised - the idea's sponsor was former U.S. Federal Reserve Chairman Paul A. Volcker.

Why Volcker's plan doesn’t go far enough...

Can Bernanke Tune Out Political Pressure as the FOMC Again Ponders Policy Changes?

When U.S. Federal Reserve Chairman Ben S. Bernanke emerges from the central bank's monthly policymaking meeting at around 2:15 p.m. today (Wednesday), it's a near certainty that he'll reaffirm his pledge to keep interest rates "exceptionally low" for an "extended period" of time.

Bernanke has kept the benchmark Federal Funds rate at a record low range of 0.00%-0.25% since December 2008, and that's not likely to change as a result of today's meeting of the central bank's Federal Open Market Committee (FOMC).

At some point, however, Bernanke will have to tighten credit and raise interest rates in order to soak up all the excess liquidity and curb inflation in the U.S. economy. But the question remains: When that time comes, will Bernanke have the fortitude to do so?

There's no simple answer. And for good reason: With the country mired in its worst financial crisis in most Americans' lifetimes, the central bank's decisions now are as political in focus as they are economic.

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A Note to Bernanke: Sorry Ben, More Bureaucracy Isn't the Answer

U.S. Federal Reserve Chairman Ben Bernanke's latest thesis is that the home mortgage bubble had little to do with record low interest rates, and was actually much more a problem of regulation.

It sounds plausible - until you give it some real thought. After all, I believe that humanity has already tried a system with tight, vigorously enforced regulations, and no price mechanism.

It was called the Soviet Union.

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