Following this morning’s disappointing retail sales numbers, it was hard for one to be optimistic about the economy, but speeches by President Obama and Ben Bernanke changed all that.

President Obama delivered a 45-minute speech on the economy at Georgetown University today designed to update the American people on where we are, what we have to do going forward, and lay out the steps that the government is taking to transition us from recession to recovery. During his speech Obama said “There is no doubt that times are still tough. But by no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope.” I consider those to be very encouraging words.

Similarly, at a speech today to faculty and students of Morehouse College, Federal Reserve Chairman Ben Bernanke was upbeat about the economy as well. Bernanke said that he sees “tentative signs” that the steep contraction in U.S. economic activity may be waning, and that he is confident in the economy’s long term prospects. Bernanke cited recent figures on housing, consumer spending and new vehicle sales as some of those signs that the recession is slowing.

The words now coming from government officials are only echoing what the markets have been telling us for the last month as they rebounded off the lows. In fact, as of late, market expectations for economic data have been too dire, and the actual data releases have been consistently surprising to the upside.

Bill Hester of the Hussman Funds provides us with the following chart and writes:

“The rebound in the stock market has been at least partially fueled by economic data that consistently came in better than expected last month. Some part of this rally is likely relying on the continuation of these “positive” surprises.

To track the trends in economic performance, we keep an ongoing tally of how data is announced relative to expectations – a method of analysis originally inspired by Bridgewater Advisors . Economic data that surpasses expectations gets added to a 3-month running total. Data that comes in weaker than expected gets subtracted. A rising line means that economic data is generally coming in above expectations, while a falling line means that the data has disappointed. A descending line could be the result of an economy that is not expanding as quickly as economists predict or – like in 2008 – it could be the result of an economy that is contracting at a faster rate than expected…

The red line in the graph above tracks the S&P 500 Index and it shows that stocks have recently closely tracked the trend in data surprises. The market fell along with the deteriorating surprise line last year, rallied slightly prior to improved news in December, and then rolled over again as the news weakened versus expectations in late January. In March the market rebounded along with a more pronounced persistence in favorable economic news versus expectations.”

Even other indicators of “flight-to-quality” and fear have declined significantly since March. Gold is off its highs and is currently testing its 200 day moving average.

I’m optimistic that the worst is behind us.

Uncategorized bernanke, economic data, gold, obama

Today Secretary Geithner and Chairman Bernanke were busy testifying before the House Financial Services Committee regarding the AIG bonuses.  They really didn’t say anything new, and the most interesting part of the testimony is below:

Check Out The Protesters in the Back

On another note, it looks like 15 of the top 20 AIG execs have agreed to return the bonuses in full.  However, it looks like they were strongly coerced by the New York Attorney General who made the following statement:

“My intention today is if a person returns the money, I don’t believe there’s a public interest in releasing the names. People who do return the money, they would no longer be on our list”

-Andrew Cuomo, New York Attorney General

This almost seems like a form of blackmail — give back the bonus or we will release your name to the public.  No one wants to be handed up to the public given that they are currently an angry mob armed with pitchforks and torches.  CNBC is reporting something similar with an internal memo being circulated stating that names of bonus recipients will not be released if certain “performance targets” are met.

Not much else happening in the market as it seems tired after yesterday’s gains.

Uncategorized aig, bernanke, bonuses, geithner

Today’s release of the official statement from the Federal Reserve following their two day meeting was not supposed to contain many surprises as the FOMC target rate could not move lower and the majority of economists expected the statement text to be relatively unchanged.

Well, the Fed threw us a curveball and announced it would be committing over $1 trillion dollars to provide support to the mortgage lending and housing markets. It will be committing $300 billion to purchasing long-dated treasuries over the next 6 months and also would be purchasing an additional $750 billion of agency mortgage-backed securities.

The Fed is telling us that mortgage rates ARE NOT GOING HIGHER any time soon and are likely to head lower to perhaps 4%. David Greenlaw of Morgan Stanley makes the following point:

This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.

David Greenlaw, Morgan Stanley, WSJ Real Time Economics March 18, 2009

Effectively, lower mortgage rates represent another stimulus package for the economy, as homeowners who are able to refinance now have extra money in their pockets each month, and this is potentially a large number.

Ben Bernanke is doing what he knows best — Printing Money. He is a student of the Great Depression and has spent his entire academic career studying what went wrong and crafting the right approach to the situation. He was called “Helicopter Ben” after he theorized that the correct approach would be for the government to essentially print money and drop it out of a helicopter.

The Fed has been extremely vigilant in averting an all-out depression and will continue to do so, as Bernanke indicated in his recent 60 minutes interview. Through its numerous lending facilities and outright purchases of securities in the market, the Fed will continue to expand its balance sheet until the financial markets are functioning properly again.

Many people got burned today being short the treasury market as the 10 year yield plummeted almost 50 basis points on the news, and they probably are right when you hear them say ” there is a massive bubble in treasuries”. I think the key here is to understand that the Fed is going to do everything in its power to keep interest rates low until a sustained economic recovery is on the way.

Uncategorized bernanke, federal reserve, mortgage rates