My thoughts on Helicopter Ben’s last press conference

Original at dshort.com.
I began China lands “Goddess and Rabbit” on Moon and other space news by begging off commenting on Wednesday’s big news.

Now that I'm through grading for the year, it's time to resume "regular programming" here.  I should be remarking on yesterday’s announcement of tapering off Quantitative Easing and Wall Street’s reaction, but I’m not up to it right now.

I’m up to it.  Time to quote the Reuters articles, beginning with Fed cuts bond buying in first step away from historic stimulus.

The Federal Reserve on Wednesday embarked on the risky task of winding down the era of easy money, saying the U.S. economy was finally strong enough for it to start scaling down its massive bond-buying stimulus.

The central bank modestly trimmed the pace of its monthly asset purchases, by $10 billion to $75 billion, and sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised.

At his last scheduled news conference as Fed chairman, Ben Bernanke said the purchases would likely be cut at a "measured" pace through much of next year if job gains continued as expected, with the program fully shuttered by late-2014.

The move, which surprised some investors but did not cause the market shock many had feared, was a nod to better prospects for the economy and labor market. It marked a historic turning point for the largest monetary policy experiment ever.

"The recovery clearly remains far from complete," Bernanke said. But "we're hopeful ... we'll begin to see the whites of the eyes of the end of the recovery, and the beginning of the more normal period of economic growth."
...
To soothe investors' nerves, the Fed said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the jobless rate falls below 6.5 percent, especially if inflation expectations remain below target.

I watched the entire news conference as I was grading final exams and presentations.  Follow over the jump for my reaction and those of actual experts on the subject.

Three things struck me about the speech.  First, Bernanke had a good clue about a promimate cause of the employment recovery being so sluggish--lack of employment support from government at all levels.  Of all publications to note it, the Washington Times did.

He noted that at this point in previous economic recoveries, state and local governments had hired 500,000 new workers, contributing to the recovery. But in the current recovery, they have laid off 600,000 employees, posing a significant drag to the economy. The federal government also has eliminated close to 100,000 jobs in the last year.

Yes, the conservative Washington Times, who cheer on the people who support austerity, was the paper that pointed out that austerity is hurting the economy.  The irony would be delicious if the people who normally read the paper actually acted appropriately.  Instead, they’ll proabably think “more than one million government jobs down--that’s a good start.”  That’s exactly the wrong lesson to take away from Bernanke’s remarks.

Bernanke had nothing to say about why this is happening.  Maybe he knows but decided to stay mum, or maybe he wanted to let his audience, including legislators and policy makers, figure it out for themselves.  One of the problems is that local government just don’t have the tax receipts to hire, and have had to let people go.  As Krugman called it five years ago, welcome to the actions of “50 Herbert Hoovers — state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.”  Five years later, Krugman has been proven right.  The actions of the governors have been compounded by all of the counties and municipalities that have had to do the same thing.

That written, the Washington Times article indicated Bernanke thought that this trend, at least at the federal level, is likely ending.

The easing of fiscal tensions and partisan discord signaled by the budget agreement played a role in the Fed’s decision to start tapering earlier than expected. Many economists had predicted the Fed would wait until next year to see the outcome of Congress’s latest battles over the budget, but the bipartisan deal signaled that budget matters will be handled with fewer disruptions in the future.

No, more new servings of Satan Sandwich!

Now, from the perspective of someone like me, the deep problem is that energy became too expensive and scarce, reducing the surplus that can be taxed.  When asked about energy, Bernanke cited exactly the opposite trend, of oil becoming actually less expensive.  He’s actually on to something, as this chart from Doug Short shows.


Gas prices have been high for the past three years, but they’re slowly declining.  That’s removing what New Deal Democrat over at the Bonddad Blog calls “the oil choke collar.”  In fact, NDD pointed out last October that The oil choke collar disengages - and that's good news.

The oil choke collar -- the dynamic by which an improving economy caused gas prices to rise to the point where they choked back consumer spending on other items, which weakened the economy, which in turn caused gas prices to decline -- in other words the mechanism that acted as a governor restricting growth -- has disengaged in the last few months. Gas prices are now 13% lower than they were a year ago, and even lower than they were two years ago at this time!

That’s good news, although my take on it is enjoy it while it lasts, which I expect will be until 2020 at the latest, when the increase in U.S. production from tight oil is projected to end and the country hits peak oil--again.

Helicopter Ben’s comments about energy were the second part of the press conference I found worth a response.  The final item was the reaction of the markets.  Watch Economist: Fed taper is 'a toe in the water' from CNN and pay attention to the chart for the Dow.

Economist Diane Swonk says the fed taper is small, but it's the right call.

That was the intraday picture.  Here’s what Reuters had to say at the end of the day: Dow, S&P 500 end at record highs after Fed trims stimulus.

U.S. stocks staged an explosive rally on Wednesday, driving the Dow and the S&P 500 to all-time closing highs after the Federal Reserve announced it would start to unwind its historic stimulus.
...
"This is a vote of confidence in the economy and represents the first step toward monetary policy normalization," said David Joy, chief market strategist at Ameriprise Financial, in Boston.
...
Stocks extended losses just after the announcement, but quickly turned higher and began rallying. The day's move marked the biggest swing from the day's high to the low for the S&P 500 in two years. All 10 S&P 500 sector indexes ended higher, with all but information technology .SPLRCT gaining more than 1 percent, and the S&P 500 financial index .SPSY rising 2.4 percent.

The Dow Jones industrial average .DJI surged 292.71 points or 1.84 percent, to end at 16,167.97, a record closing high. The S&P 500 .SPX gained 29.65 points or 1.66 percent, to finish at 1,810.65, also a record closing high. The Nasdaq Composite .IXIC climbed 46.384 points or 1.15 percent, to close at 4,070.064.

That was Wednesday.  Yesterday, the Dow extended its gains while the other indices consolidated as Reuters described in Dow inches up to record close on quiet trading day.

U.S. stocks finished mostly flat on Thursday as investors paused after a rally in the previous session, though the Dow closed at its second record high in a row.
...
The Dow Jones industrial average .DJI rose 11.11 points, or 0.07 percent, to finish at 16,179.08, a record closing high. The Standard & Poor's 500 Index .SPX dipped 1.05 points, or 0.06 percent, to end at 1,809.60. The Nasdaq Composite Index .IXIC shed 11.93 points, or 0.29 percent, to close at 4,058.14.

The Dow reached an all-time intraday high of 16,194.72 during the session, while the S&P 500 moved within 3 points of setting a new high. Both indexes are up more than 20 percent this year, with the rally largely fueled by the Fed's accommodative monetary policies.

There was a dark lining in the white cloud, however.

In economic news, the number of Americans filing new claims for unemployment benefits rose last week to the highest in nearly nine months, while home resales fell to the lowest in nearly a year. On the upside, the Philadelphia Federal Reserve Bank's index of factory activity rose slightly in December.

It looks like I was right to be ambivalent over at Kunstler’s blog Monday.

I haven’t had much to say about FIRE since I noted that the Dow went over 16,000 and the S&P500 went over 1800, with the NASDAQ joining them at over 4,000. I should probably note that the Dow actually hit a new real high this month, higher in real terms than its 2000 peak. I take that as a sign that this time, the bull is about ready to go to the slaughterhouse–but what do I know? I’ve been calling for that since March.

So far, what I wrote in Dow over 16,000, S&P over 1,800 has been proven right.

While I've been watching for the market to top out since March, I think it probably won't do so until after the new year, as Reuters reports.

Both the Dow and the S&P 500 recorded their seventh straight week of gains in what has been a very strong year for stocks. The seven-week advance comes just ahead of December, which since 1950 has been the best month for both the Dow and the S&P.

"We're advising our clients to take this ride until the end of the year," said Drew Nordlicht, managing director and partner at Hightower San Diego.

Until then, the Business as Usual people can take comfort from the stock market.

The market can thank Helicopter Ben for extending the rally.  Apparently, traders sold on the rumor, then bought on the news.  That’s exactly the opposite of what usually happens, another sign that we’re not really in Business As Usual times.