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Five Things You Need to Know: Finally, Some Bullish Talk From Bernanke


Today, Bernanke was decidedly more bullish than in his St. Valentine's Day Massacre Speech.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Finally, Some Bullish Talk From Bernanke

So far, it appears the conventional wisdom in the financial media is that Federal Reserve Chairman Ben Bernanke delivered yet another grim message in his testimony this morning before the House Financial Services Committee. We disagree.

A look back at Bernanke's February 14 testimony, the St. Valentine's Day Massacre speech, shows that as recently as two weeks ago he outlined the long-term bearish case for the economy; namely, that the U.S. recovery following the Internet bubble was largely led by a very profitable banking industry able to provide large amounts of credit to willing borrowers from top to bottom in the economy, but now conditions have changed, resulting in a sharp slowdown that is more worrisome than continued price pressures in non-core inflation measures, food and energy.

Today, Bernanke outlined that scenario, but was decidedly more bullish at the end. Gone was the long string of IF's at the end of the St. Valentine's Day Massacre Speech.

"On a more encouraging note," he said, "we see few signs of any serious imbalances in business inventories aside from the overhang of unsold homes. And, as a whole, the nonfinancial business sector remains in good financial condition, with strong profits, liquid
balance sheets, and corporate leverage near historical lows."

"In addition," Bernanke continued, "the vigor of the global economy has offset some of the weakening of domestic demand." The exports of goods and services increased at an annual rate of about 11% in the second half of last year, he noted, boosted by economic growth abroad and the lower value of the dollar. This has also improved the trade deficit, which probably narrowed on an annual basis for the first time in six years.

Finally, as we note the dollar down near 30-year lows, it is worth keeping this one sentence in mind going forward: "Although recent indicators point to some slowing of foreign economic growth, U.S. exports should continue to expand at a healthy pace in coming quarters, providing some impetus to domestic economic activity and employment." This means the Federal Reserve is intent on continuing to devalue the dollar. It is no secret that Bernanke believes some inflation is more welcome than deflation.

2. The More Things Change...

It's interesting how much we can learn by studying history. We're not talking about boring books and such, though. We're talking about the popular history as documented in the pages of popular magazines.

Time magazine, for example, is a terrific source for these types of articles. We went back and looked at some financial articles in the Time archives from the 1930s. They say that history doesn't repeat itself, that it rhymes... well, the rhymes below are eerie.

Headline: Federal Reserve Comes Under Scrutiny
Time magazine, Feb. 16, 1931

"Planting itself at the halfway point of the Era of Change, a subcommittee of the Senate Banking & Currency Committee has been seriously taking stock of the Federal Reserve system and its implications," Time Magazine reported.

To test the strength and flexibility of the Federal Reserve system there were three major inflations during the decade:

1) the boom in western farm land values followed by the long collapse of Agriculture;
2) the rise and fall in Florida land;
3) the boom of "Coolidge prosperity" followed by the stock crash and Depression.

Some of the questions to which Chairman and Virginia Senator Carter Glass sought answers:

1) Why did 6,000 banks out of 30,000 fail in the U. S. in ten years?
2) What did the Federal Reserve do to check 1929 stock speculation?
3) What new laws might stop excessive stock speculation?
4) What new powers does the Federal Reserve system need?

The following shares an eerie familiarity with today:

"Most impressive, most lucid, most constructive witness before the Committee was Owen D. Young, a director of the New York Federal Reserve Bank. Said he of the stock crash: "The low [rediscount] rates were continued too long. An active, firm and decisive policy of advancing rates should have been carried out in 1928. The Federal Reserve Bank of New York did not make its recommendations for rate increases early enough or advance the rates rapidly enough. I was quite as much to blame for that as anyone."

Headline: Out, Out, Damn Deflation
Time magazine, Jan. 25, 1932

"To inflate or not to inflate was no longer a question last week. The only question: Will inflation succeed?," Time Magazine reported.

"If it succeeds the downward spiral of deflation will be definitely checked. If it fails, historians may well look back upon 1932 with a shudder." (Editor's note: It's true! They do! We're shuddering even now!)

The first step in this grand deflation-fighting scheme was the creation of the Reconstruction Finance Corp. (RFC). "Congress will appropriate $500,000,000 from the Treasury as starting capital, whereupon the RFC will then move to raise $1.500,000,000 from the public by the sale of its bonds, debentures, short-term notes, all underwritten by the U.S. government."

To pave the way for this "great flotation" the Federal Reserve began pumping money out into the market to create the necessary buying power, or as it is know today, liquidity.

"With $2,000,000,000 in hand, RFC will be ready to function as a colossal credit agency," Time said. "RFC credit will be largely used as a bank crutch. It will, its friends hope, relieve the strong banks of the job of carrying the weak ones, thus freeing their liquid assets for more constructive purposes."

And at that, looking back, we had to laugh.

Headline: Fighting Fire With Fire
Time magazine, June 13, 1932

"The Senate Banking & Currency Committee last week produced a currency-inflation substitute for the Goldsborough bill as passed by the House," according to Time Magazine.

"Under the Goldsborough bill the Federal Reserve would be required to inflate commodity prices by a deflation of the value of the dollar. Presumably this would be accomplished by an intensive form of U.S. security purchases such as the Federal Reserve has been using to pump credit into the country. As the quantity of currency in circulation increased its value would decline and the prices of commodities would climb until they reached the 1926 level."

One final note of hilarious irony. Senator Glass, one of the original sponsors, summarily rejected the so-called "controlled inflation" of this scheme. Why? On the grounds that it put autocratic powers in the hands of a small Washington group, the Federal Reserve Board.

3. A Dollar Here, a Dollar There; In a Deflationary Environment We're Talking Real Money

Dollar Tree (DLTR) is one of the few retailers up today after a downgrade of Costco (COST) spilled over in the group. Dollar Tree reported pretty good results and listening to the conference call it seems this company is a bit ahead of the curve. How so? By focusing on staples, according to CEO Bob Sasser.

"As most of you know, one of our key initiatives over the past several years has been to increase the selection of consumer basics to our merchandise mix and this strategy is serving us well," Sasser said. "We have added more of the merchandise that people need every day, and that is more frequently purchased."

4. Suddenly, It's Cooler Not to Spend

"The new status isn't how much you've got, but your ability to show what you don't spend," says futurist Watts Wacke in a USA Today article, "Cutting Back." "This is a seminal moment. It's not a fad that will die out when the economy picks up."

Trends guru Faith Popcorn puts it this way for the article: "It's cooler not to spend."

Indeed. One of our key themes in Five Things over the past two years is the long-term secular shift toward anti-consumption attitudes.

This is not to say that people will en masse suddenly decide to no longer buy unnecessary luxuries. There will always be a segment of society that basks in the ability to spend more than the average worker's yearly take home pay on a wristwatch - or, more likely, not "bask" in that ability so much as not even for a moment consider it. Rather, what this is about is a long-term shift in aggregate attitudes toward devaluing the act of spending itself, and revaluing the potential to spend.

As we noted in a piece, "Where's the Bling," Sep, 16, 2006, the Stephon Marbury $15 basketball shoe, the Starbury, speaks to the ongoing shift in consumer attitudes. Importantly, this is an attitude that "trickles up."

"A few years ago it would have been unthinkable for a professional athlete to endorse an "inexpensive" product like a $15 shoe since the bull market demanded the association of athletic ability, wealth and persona with high-price tag goods. Increasingly it seems it is becoming "cool" to disassociate from luxury and symbols of wealth."

5. Financially Embattled King of Pop Organizes Rescue Song

It turns out that not even pop star Michael Jackson is immune from the downturn in housing. According to Fox news, Jackson's Neverland ranch is facing foreclosure unless the singer forks over more than $25 million due by March 19.

Of course, that deadline is still weeks away, and Minyanville has learned the King of Pop may be busy organizing a potential bailout of his own with a handful of musical celebrities. Below, see Minyanville's preview of what Jackson reportedly has in mind to save Neverland:

USA for Neverland

We Are the Foreclosed

There comes a time
When we get a certain call
When the bank demands a payment , just one

There are letters arriving
Saying it's time to pay the man
The mortgage, on the greatest ranch of all

We can't go on
Pretending everyday
That the check someday is soon on its way
A two bedroom apartment
A deposit for security
It's the truth, you know that is all we need

We are the Foreclosed
We're the defaulters
We are the ones who make a brighter day
For subprime lending
There's a choice we're making
To simply walk away
It's true, our debt has gone away
We're clear and free

Well, send 'em the keys
So they'll know that no one's there
Strip the pipes, they're made of copper and free
As the Fed has shown us, by turning gold to lead
What's the point in paying back The Man

We are the Foreclosed
We're the defaulters
We are the ones who make a brighter day
For subprime lending
There's a choice we're making
To simply walk away
It's true, our debt has gone away
We're clear and free

When you're down and out
And nothing seems to sell
But if you just believe
We're much too big to fail
Well, well, well, well, let us realize
That the bailout soon will come
When we stand together as one
We are the Foreclosed
We're the defaulters
We are the ones who make a brighter day
For subprime lending
There's a choice we're making
To simply walk away
It's true, our debt has gone away
We're clear and free

No positions in stocks mentioned.

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