Bernanke remembers the importance of housing and inflation, after all..

A few very amusing pieces in, amongst other outlets, today’s Financial Times. First, Fed Chairman Ben Bernanke showed that he is capable of ‘reading’ an economy, after all:

Ben Bernanke acknowledged for the first time on Wednesday that credit concerns were spreading beyond the subprime mortgage market as investors showed their worries with a flight to quality, seeking refuge in government bonds and other safe assets.

Testifying before Congress, the Federal Reserve chairman said the US central bank was shaving back its “central tendency” forecasts for growth this year and next, largely because of a more protracted drag from housing investment.

But there was no change to the Fed forecasts for inflation, underlining policymakers’ reluctance to put much store on a recent decline in core inflation.

That bloody core inflation, again! How do we interpret the comments of a man who defines inflation that does not include fuel or food – the two things increasing most in value? Beats me.

So, short version:

  • Bernanke accepts that sub-prime problems are bleeding out into the rest of the economy
  • He still thinks credit spreads, being reasonable, indicate there’s no real risk of a crunch
  • He thinks the decline in economic activity will be met by increases in exports
  • He thinks his version of inflation is the best indicator (what households have to actually spend money on is, apparently, not his problem?)*
  • He acknowledges that headline inflation, which includes fuel and food, is higher (no!)
  • He knows the labour market is tight

I don’t know – does he like his core inflation because it keeps the odds on that the dollar will stay low and lift exports? Because headline inflation and a tight labour market suggest increasing interest rates and an appreciating dollar. I guess that’s why I’m not in charge of the Federal Reserve.

That reference to the credit spread is also popping up all over. It’s basically the difference between Treasury securities – the safest – and non-Treasury securities, of equal type but lesser quality. Right before previous credit crunches this spread was much greater than it currently is. Therefore, we are told, no problem. I’m skeptical. Like much of what’s going on, the circumstances now are not what they were in, say, the late ’80s. The credit spread just is not, to me, the indicator to use when releasing our bulls into the market.

Bernanke also, finally, warns of a too-fast recovery (an indication that he is not suggesting that a rate cut is in the offing, even though the dollar fell, suggesting that was the interpretation anyway).

*I am aware of the difference, yes. Core inflation is a better indicator (we are told) of inflationary pressure: the sort of inflation to which the Fed must respond. Headline inflation is a better indicator of household’s purchasing power. My point is that, if you’re going to be a macroeconomist and talk about consumer spending, ignoring food and fuel inflation seems odd, to say the least.

Bipolar Wall Street – buoyant one day, gloomy the next

The second interesting story is the ‘gloom’ on Wall Street. Only a few days after the run of stories about how great the earnings news has been, and editorials about foolish bears deserving what’s coming to them, suddenly it’s…not?

A combination of disappointing earnings and guidance, renewed worries over financials and cautious remarks on the outlook for the economy from Ben Bernanke, the US Federal Reserve chairman, roiled Wall Street on Wednesday.

Stocks pared some of their earlier losses late in the day, and the S&P 500 index closed 0.2 per cent lower at 1,546.19. Just three of the main 10 sectors in the index rose. Energy stocks were boosted by oil prices to 11-month highs and utilities also rose as Treasury bond yields fell on safe haven buying amid renewed jitters over subprime mortgages and hedge fund exposure.

Add to that regular mortgages (“California Home Sales Hit 12-Year Low“). That oil prices are pushing energy stocks up is fine, if you’re an investor. For the rest of us, it means our wealth will decline, not appreciate.

The reference to the S&P 500, by the by, is another example of awkward statistics. Here is its behaviour today:

S&P intraday

And here is the same for the previous 12 months:

S&P 12 months

I’m sure 0.2% is money for some people, but the wobbliness of the S&P over the last few months is more interesting to me. I’m more interested in how it looks before those rallies – because one of these days that rally just might not come. These follow by the day others about the glory of a 14,000 Dow – which is it, for heaven’s sake? Are weather-reporters in charge of financial reporting now, and employing the “absolutely scare the shit out of everyone” method of broadcast journalism? I can handle a bull market or a bear market just fine. A manic market is something else altogether.

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