Bernanke Takes a Bow at Main Street's Expense

by: Charles Payne

"We do not have time for this kind of silliness. We've got better stuff to do. I've got better stuff to do." -President Obama

Yesterday, the President blinked, but Ben was defiant. The market yawned at the former's press conference but hung onto each word when the latter took his seat (literally) on center stage.

Ben spoke and the market roared as it loved the idea that the pump could keep churning out cash well into the foreseeable future. It does seem like a June cutoff is unlikely; even if there is a different tact the Fed will remain accommodative. There was nothing cryptic about the signal for tightening as Bernanke made it perfectly clear; when the Fed stops reinvesting proceeds that means its balance sheet shrinks, which means their job is done. But, that isn't going to happen anytime soon. Considering the Fed lowered its economic outlook there is a better-than-average chance of accommodation throughout the remainder of the year.

Assumptions are in place for commodities to come down in price, although the Fed might have a different definition of "transitory" than you and I have. They obviously have a different definition of inflation, after all. What I really don't get is inflation expectations amongst the public. The Fed chairman said they were low, and I'm wondering are there any working-class people in the family? I like the question about the dollar because it brought up more Fed babble. After stating there are many "factors" causing the dollar to go up and down, Bernanke zeroed in on a couple things that could strengthen our currency.

Keeping inflation low - which makes me wonder about cause and effect because it suggests inflation increases and then the dollar falls. It's the other way around; the dollar gets hammered in large part to Fed policy (and fiscal policy) and prices go to the moon.

Strong economy - but how can the economy get stronger if consumers can't get into stores because they spent all the cash filling up their gas tank? Yes, banks are flushed, the stock market is higher, and spreads have tightened but there is no wealth effect this time around. Maybe folks just got hipper, or maybe they simply don't feel wealthier.

There is no doubt Ben Bernanke is proud of his handiwork because his checklist for success is different than Main Street's. But, even Ben had to admit unemployment might be more difficult to unravel than simply pumping cash into the system. When he mentioned Europe in the 1980s and 1990s I cringed. With 45% of unemployed people in that condition for more than 27-weeks a longer term crisis is emerging. I don't remember any great burst of economic prosperity during those dark periods in Europe. In fact, the Fed has downgraded its economic forecast for this year and next.

Ben Bernanke is a smart person and history scholar, and he has to understand the ramifications of his policies. It makes me wonder why the Fed is taking such risk, completely trashing the dollar. It has to be one or more of the following:

  • The economy is in worse shape than the numbers say it is and the only way out is to pump so much money it eventually breaks the dam, following through Main Street with higher wages and more economic activity. Bernanke acknowledged central banks want some inflation, as much as 2%.
  • Bernanke has no choice because the White House is spending faster than even he can print the stuff. Yesterday, Treasury sold $35.0 billion in bonds, bringing us within $23.0 billion of the debt ceiling. Today, they will sell another $24.0 billion in an auction. Tax revenue slows down the day of reckoning, but it's right around the corner. What's amazing is the debt ceiling was just raised last February 12 to $14.294 trillion from $12.394 trillion.
  • Power corrupts absolutely, and it would seem to me the ultimate power trip is the ability to create money out of thin air. Maybe Bernanke really believes he can push this to the brink and simply reel it back in before it's a disaster.
  • Or, it could be a combination of all of the above.

I was happy when Peter Barnes from the Fox Business Network asked about the deficit, which got a straightforward answer. "It's not sustainable" was the reply along with the prescient observation that it's of the "highest importance." Some of the assumptions Bernanke is making just don't make sense, like the notion more money will be spent on Defense; with Leon Panetta at the helm we could see dramatic cuts. Then there is the assumption that regular people aren't bracing for higher inflation; heck they're living it already.

A look at critical price increases that crisscross everyone's wallets and pocketbooks reveals a crisis that can't be ignored as transitory.

  • Jet fuel +30%
  • Oil +23%
  • Gas +26%
  • Beef +20%
  • Wheat +63%
  • Sugar +68%
  • Coffee +121%

All and all, I say Ben Bernanke took a bow, with Wall Street in front of him and Main Street behind him.

Today's Session

Well, if quantitative easing is designed to create jobs, the return on investment hasn't been great. So, does the Fed triple down or step back and try yet another tactic? This morning, the latest update on initial jobless claims paints a demoralizing picture of the job market. After finally busting into a "3" handle, claims are back above 400,000…and climbing. This morning's report of 429,000 first-time filers for jobless benefits was well above the 390,000 expected.

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Coupled with the most recent update on first quarter GDP growth of only 1.8% (the Street was looking for 2.0%), and it's clear this is not a robust economy.

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Final Note

All things considered, equity futures act pretty good, but we are not forcing the issue this morning.