Bernanke Testimony Indicates Fed Still in Denial

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Sells Off Even Though Bernanke Is Bullish

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke stated last night that he is 'hopeful' the U.S. economy will not fall into a double dip recession. After a tremendous drubbing on Friday, stocks somehow managed to sell down to even lower levels yesterday. They are down again this morning following Bernanke's comments - a fitting response to his forecasting acumen.

Few people in the United States seem to be as oblivious to the condition of the American economy as is the guy who is in charge of the Federal Reserve. Bernanke notoriously stated that subprime borrowing wouldn't cause any problems only weeks before it blew up into the biggest financial crisis the world has ever seen. Following this, the Fed released a number of statements in the spring of 2008 about how it was hopeful that its policies would prevent the U.S. economy from falling into a recession. Unfortunately, the economy had already fallen into recession months before, but the Fed was blissfully unaware of this even though it has more access to economic data than anyone else. The buffoonish Bernanke has been beating the drum of economic recovery for a long time now, even though analysis of U.S. statistics indicates the private sector is still struggling. The only recovery that seems to have taken place is in increased government spending.

At the moment, the markets don't seem to share Bernanke's rosy view of the future. The Dow dropped 115 points (1.2%) yesterday and most of the selling took place around the close, as is typical in bear markets. The Dow's ending price of 9816 was well below the key 10,000 level. The S&P 500 fell 14 points (1.4%) and closed at a new low for 2010, as did the Dow. Selling was even more pronounced in the tech heavy Nasdaq and the small cap Russell 2000. The Nasdaq lost 45 points (2.0%) and the Russell 15 points (2.4%). As of today, the Dow and S&P 500 have spent 13 trading days below their simple 200-day moving averages, a bearish pattern. Selling was also widespread with market breadth close to three to one negative on the NYSE.

The only areas of the market that did well yesterday were utilities, gold/ gold miners, and treasuries - safe havens. Financials were hit hard with Goldman Sachs (GS) falling 2.5% and Bank of America (BAC) losing 3.4%. U.S. bank failures have reached 81 so far this year and look like they are going to handily exceed 2009's very high figure. Credit card debt has fallen for 19 months in a row and May's employment report indicated private sector hiring has disappeared. Once the 1.2 million temporary Census workers are dismissed, the U.S. unemployment rate should go above 10%. These are not signs of economic recovery and yet the Fed chair keeps spouting one cheerleading remark after another about how recovery is taking place. Herbert Hoover did the same thing in the early 1930s as the Great Depression was developing. Consequently, he is now treated as a historical laughingstock. History may take the same view of Ben Bernanke. 

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

An April 15th Look at Taxes and the Stock Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Tax policy can impact not just how much money you pay in taxes, but how much money you are likely to make in the first place if you are an investor. U.S. capital gains taxes have risen and fallen over the last one hundred years and the stock market usually follows the direction of rates. A significant rate increase will be taking place on January 1, 2011.

The reason capital gains are taxed at different rates than ordinary income is that investing involves risk and capital will not flow unless risk is adequately rewarded. Lower capital gains tax rates encourage more business formation and expansion and bring more capital into the stock market. This is the source of real economic growth. Taking on risk to obtain gain of course means the possibility of loss as well. Uncle Sam is more than willing to demand his share of your profits if you make money, but is no longer your full partner when you experience losses. If you make a million dollars investing, you pay taxes on that million dollars. If you don't have trader status with the IRS and lose a million dollars, you get a $3000 deduction per year and will certainly be dead long before you use it up.

Originally, capital gains were taxed at the rate of ordinary income between 1913 and 1922. Top marginal rates were only 7% at first, but rose to as high as 77% in 1918 to pay for World War I.  An alternative capital gains rate of 12.5% for assets held at least two years was introduced in 1922. The top marginal tax rate on earned income was lowered to 25% in 1925. It was an era of low inflation and even deflation starting in the late 1920s. The stock market and economy did quite well; at least for seven years after the lower capital gains rate was introduced.

In 1932, when Herbert Hoover was still president, the top marginal tax rate on earned income was raised to 63%. In 1934, capital gains tax rates were changed and based on how long an investment was kept. For assets held 1,2, 5 and 10 years, the exclusions were 20, 40, 60, and 70 percent respectively. In 1942, top marginal tax rates were increased to 88%, but maximum capital gains rates were capped at 25% for assets held for six months or longer. Top marginal rates went as high as 94% in 1944 and 1945. They remained at 91% or 92% until 1963. The huge differential between marginal rates on earned income and capital gains rates along with low inflation created an economic and stock market boom that lasted from 1942 until the late 1960s.

The top marginal rate was lowered to 77% in 1964 and then 70% in 1965. Capital gain rates were raised in 1969. Inflation began picking up at around the same time and the combination was a negative for the economy and stock market for over a decade. The government made the problem worse by raising capital gains rates significantly in 1976 and added insult to injury by taxing gains that only existed because of inflation. Maximum capital gains rates peaked at just under 40% in 1977 and 1978.

In 1978, congress voted to reduce maximum capital gains to 28%. In 1981, capital gains were lowered to 20% and the top marginal tax rate to 50% starting in the 1982 tax year. The high rates of inflation from the 1970s were beginning to decline significantly. An almost 20-year boom period followed. There were bumps along the way however. The 1986 Tax Reform Act increased capital gains rates to 28% and lowered the top marginal rate on earned income to 38.5% starting in 1987. The marginal rate was lowered further to 28% in 1988. Ironically, equalization of earned income tax rates and capital gains, a long sought goal of certain liberal economists, took place during the Reagan administration.  The U.S. stock market zoomed for the first eight months. Unfortunately, it then fell almost 40% in a few days in October.

Marginal rates started rising in 1991 and reached 39.6% by 1993. The Taxpayer Relief Act of 1997 reduced maximum capital gains rates to 20%, once again creating a significant differential between earned income rates and capital gains. Inflation was falling and low during this time and this kept the real capital gains rate close to the official one. The stock market and economy did extremely well for the next three years until the tech bubble burst. To pick up the flagging economy and stock market, the Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced maximum capitals gains rates to 15% and made this the rate for qualified dividends as well. Inflation was very low during this period. The market and economy did well for the next four years.

Now the maximum capitals gain rate is scheduled to increase from 15% to 20% after the end of the year. Additional taxes will be imposed later on because of the recently passed health care legislation. It looks like we are entering a period of rising inflation and this will make the actual capital gains rate continually go up. I will leave it to the reader to decide what impact this will have on the U.S. economy and the stock market going forward.

Disclosure: Long oil.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Case Against Reappointing Ben Bernanke

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Economics is one of the few professions where incompetence is regularly rewarded. The attempt to keep Ben Bernanke as head of the Federal Reserve for a second term is one of the most glaring examples of this practice - and one that will have serious negative repercussions for the United States going forward.

When president Obama announced that he was reappointing Bernanke last August, the reason he gave was that 'Bernanke prevented another depression'. This sound bite has been mindlessly repeated by politicians - senate leader Harry Reid most recently - and economically challenged media commentators ever since. Until the U.S. economy returns to its pre-Credit Crisis state, we will not know whether or not that we have been saved from another depression. There is more than enough evidence to indicate that we haven't been - double digit unemployment, bank loan portfolios that continue to deteriorate, rising bankruptcies and bank failures, lack of lending by the banks, and a housing market that only functions because of numerous government programs that prop it up are just a few reasons why this claim is wrong. Obama would not be the first U.S. president to prematurely call the end to a depression, Herbert Hoover did so in June 1930 when he told the press that the Great Depression was over - it was almost three years before the bottom and at least another decade before that was indeed the case.

One thing that will be pointed to as evidence of recovery will be good GDP numbers later this week - estimates are as high as 6% annualized growth for the fourth quarter of 2009.  If GDP numbers were calculated in a way that measured actual economic growth this would indeed be encouraging. Unfortunately, they are not. U.S. GDP figures for 2008 were positive even though it is universally recognized that the U.S. was in a severe recession the entire year - this is a theoretical impossibility, yet no one talks about it. The lesson of Japan in the 1990s and 2000s warns against using GDP figures as evidence that an economic crisis is over. Japan had quarters of over 10% annualized GDP growth. They were 'saved' from a depression as many as seven times (depends on how you count) in the last two decades. Their economy has nevertheless continued a long, slow leak since 1990 and bigger problems are likely in the next decade, which will be the third one after their crisis began. In reality, Japan extended its depression over a very long period of time; none of its government's actions prevented it.

The defect in the 'saving from depression' argument is an implicit assumption that the economy has two states like a light switch, on and off, instead of an infinite number of possible outcomes. Many of those outcomes involve inflation and hyperinflation. There is no discussion of the negative consequences of Bernanke's actions among his supporters - and all economic policy actions have side effects, many of which can be extremely undesirable. Bernanke himself wrote his PhD thesis on Fed policy errors during the 1930s and demonstrated that restrictive Fed monetary policy led to the debacle. He also came to the conclusion that doing the opposite would fix the problem. If the economy was as simple as a light switch it would. In a complex system, this is not the case. Doing the opposite may simply lead to a different disastrous outcome.

Bernanke also didn't show understanding of the impending problems within the financial system, nor did he react quickly. As late as June 2007, Bernanke was assuring people that there would be no problem with subprime loans. In July the problem blew up. As late as the spring of 2008, the Fed was releasing statements that they were hopeful they would still be able to prevent a recession. The recession had already begun in December 2007, but the Fed was unaware of it. In September 2008, Lehman was allowed to fail with the subsequent excuse being given that no one was interested in buying it. Only days later AIG was nationalized when no one would buy it. The Lehman failure set off a general global financial collapse. Bernanke is now claiming credit from 'saving' the system from this collapse with his quick action. As one commentator astutely observed, this is like an arsonist wanting credit for putting out a fire that he had started.

Bernanke was originally appointed by George Bush and is one of the key economic actors along with the current Treasury secretary Tim Geithner from the Bush administration. While on one hand president Obama constantly criticizes Bush economic policies and how much damage they have caused, on the other he has gone out of his way to keep the Bush economic team mostly in place. This is reminiscent of Obama's newfound criticism of irresponsible giveaways to the big banks. For those who don't recall, the TARP bill originally failed in its first congressional vote. Presidential candidate Obama was instrumental in rounding up enough Democratic votes to get it passed on a second try. Now, Bush deserves the blame.

Bernanke's appointment runs out on January 31st. The slow-moving senate has yet to get around to voting on it. While Bernanke has had his detractors in congress, they became energized after the surprise upset in the Massachusetts special senate election last week that indicated quite clearly that American voters are angry about how the economy has been handled. Senators up for reelection in November (only one-third of the total) particularly began to have second thoughts, as indeed they should. Support for Bernanke may come back to haunt them in the future even more than support for the ill-fated health care bill. Bernanke is almost guaranteed to win the vote to reappoint him however. The White House is leaning heavily on Democratic senators to support him and hoping that the public isn't paying too much attention. Voters tend to notice though when they don't have a job.

Disclosure: None

NEXT: Consumers Lack Confidence, They Also Lack Credit

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bernanke Reappointed, Court Order and FDIC

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Federal Reserve Chair Ben Bernanke is going to be reappointed for another 4 year term. Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the Credit Crisis, an administration official said. This is of course like reappointing the team that did such a 'good job' handling Hurricane Katrina. Just as Bush praised those incompetents, 'change you can believe in' Obama praised Bernanke for preventing another depression. Bernanke was first appointed by Bush and didn't foresee the Credit Crisis coming, nor did he respond appropriately once it did. There is of course also no evidence that another depression has been prevented . So far, it is just some fantasy that politicians inside the Beltway keep repeating to each other.

In other Fed related news, a federal court in New York has ordered the Fed make available information from 11 of its Credit Crisis programs to the public. The court ruled that the Fed improperly withheld records under the Freedom of Information law. Bloomberg News sued (kudos to them) and is trying to find out how much money was given to which banks. In its defense of the case, the Fed (which I would like to remind you is only a quasi-governmental entity - the big banks own stock in it and have their representatives sit on the Fed's regional board of directors) essentially maintained that it was above the law. Undermining our democratic system - just another example of the 'good job' that Ben Bernanke has been doing.

The FDIC is also in the news again. For some reason, even though the Credit Crisis is supposedly over and the economy is recovering U.S. bank failures are skyrocketing. The agency needs new bidders for failed banks because existing banks are now avoiding purchasing them. The FDIC's deposit insurance funds are also getting depleted. The FDIC is proposing a rule change that will allow private equity firms to buy failed banks and maintain capital ratios of 10% instead of 15%. This will of course make the failed banks likely to fail again - and I bet the private equity firms will scream for a government bailout when this happens. Indy Mac and Bank United were already sold to private equity firms earlier this year. Based on this news, we can presume that the FDIC is not using the Bernanke approach of threatening to fire any bank president that doesn't agree to the government's proposed takeover demands, as happened with Bank America. Since these banks are NOT too big to fail, they are not being directly nationalized as was AIG or indirectly nationalized as was the case with most of the big U.S. commercial banks and brokers. Undermining our capitalist system - just another example of the 'good job' that Ben Bernanke has done.

The biggest danger in any crisis is leadership that is oblivious and is in denial. The crisis only gets worse under such circumstances. Bernanke has been a disaster as a federal reserve chair by any criteria that you wish to measure his tenure by. Obama is not only totally ignorant of basic economics and devoid of any ideas for handling our current situation, but is even oblivious to what the current situation is. His actions remind me of Herbert Hoover's famous June 1930 press conference stating the Depression was over. Hoover was more than a decade early.

NEXT: Consumer Confidence Game and Housing's False Bottom

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Government Wants to Play Good Bank, Bad Bank

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The buzz on the wires yesterday was talk that the Obama administration is considering a good bank, bad bank policy. This would entail the government becoming the bad bank (like somehow that hasn't already happened) by buying up most, if not all, the toxic assets in the banking system. For anyone who missed it, this was the original intent of the biggest waste of government money of all time TARP program (Troubled Asset Relief Program). The Federal Reserve has also been doing this is various ways as well. Yesterday's reports said that the federal government would take on an (additional) trillion dollars in bad debt. As usual, the downside risk of major inflation that would result from implementing this policy was ignored by the media.

There was plenty of other 'good' news for the market to rally on as well. The House passed an $819 billion stimulus bill (it still has to be approved by the Senate). The bill would cut taxes at bottom instead of the top of the income structure (the most effective way to stimulate the economy), provide billions of dollars for infrastructure projects, help states balance their budgets, and provide relief to people who've lost their jobs or homes. Getting in touch with their Herbert Hoover roots, every Republican in the House voted against it. Just as a reminder, all the Republican leadership supported TARP and provided the votes from the rank and file to insure its passage.

The Fed also held up its end of the bargain yesterday as it two day meeting ended. To no ones surprise, it announced that it was keeping its zero interest rate policy in place. The Fed also reiterated that it will continue to buy mortgage-backed securities and other assets. The stock market rallied on this and all the other highly inflationary news and and as been the case for many months, the U.S. dollar counter intuitively rallied (only counter intuitive if you don't assume the government is manipulating it behind the scenes). Beaten down financial stocks led the way up.

Wells Fargo was one of the biggest winners, rising 30%. It only lost $2.55 billion last quarter.... or so it claims. Those results didn't include its Wachovia purchase, which would have increased Wells Fargo's loss by $11.2 billion (based on the reported figures, the reality is actually much worse). The bank took a whopping $37.2 billion in credit write downs at Wachovia. Even without the Wachovia losses, Wells Fargo still lost 79 cents a share. Analysts were completely off the mark as they have continually been since the Credit Crisis began and were expecting a 33 cent gain. While this should have tanked the stock, it didn't. Wells announced it was keeping its dividend and wouldn't need any more TARP funds (which is has been using to pay its dividend), so the stock shot up. Whoever said Disney was the king of fantasy, never looked at the U.S. banking system.

NEXT: GDP - Report is Bad, Reality Worse

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.