The Road Ahead: Less Stimulus, More Bernanke

Less Stimulus

Recent data from the United States implies a return to economic growth is imminent. New home sales rose at the fastest rate in 10 months, 9.6%, during July whilst durable goods orders for the same month surpassed forecasts with a 4.9% jump against a 3% consensus prediction. 433,000 new homes were sold relative to 395,000 for June. The durable goods data, the best single month advance since July 2007, benefited from an increase in orders for big ticket items including aircraft.

Analysts have highlighted more and more recovery boxes are being ticked with consumer spending likely to become the last and most challenging obstacle with stubbornly high unemployment numbers holding back consumer confidence. The low level of confidence will however be aided with the stabilisation of house prices, July’s low inventory numbers were the lowest in more than 2 years. The data reinforces the view that Q2/Q3 represents the cyclical trough in the housing market but it will take new jobs and a falling unemployment rate to persuade consumers to re-open their wallets enthusiastically.

Overall most commentators accept that the US is exiting recession, though the speed and strength of recovery is still uncertain for the reasons mentioned above. The next item on the US and global recovery agenda is the pace at which loose monetary policy, stimulus and quantitative easing should be withdrawn. It’s a tough balancing act.

Take away the stimulus too soon and the economy could retreat back into recession, or at least fester at sub par growth. Leave too much printed money in the economy and central banks rates in loose mode for too long and inflation could return and erode any real economic gains.

The G20 have the unenviable task of discussing this challenge next week. Finance ministers and key central bank officials from the leading economic nations are to meet in London to try and co-ordinate an orderly exit from the easing phase of the monetary cycle. The meeting is likely to offer differing opinions and needs. China and Australia are ahead of the recovery curve (in fact China never fell into recession, and merely suffered 6.5% annualised growth for a couple of quarters). Japan, France and Germany have already exited recession. US data is at last improving quickly. Trailing the G20 economic recovery race and in need of further stimulus is the UK.

Therefore a single global monetary tightening policy would not work and is unlikely to be seriously considered. More likely is back-slapping photo shoot with “we saved the world from economic collapse but there’s more work to be done” sound bites with each finance minister returning home to fine-tune their own country specific stimulus exit plans.

Currency traders should pay close attention for hints and guidance on changing G20 interest rate differentials but for most of us it will be business as normal - unless you are a highly paid, bonus driven investment banker - in which case the other key item on the G20 meeting agenda will be of significant interest.

For a year now, politicians partly through common sense, but mostly to appease angry tax-payers burdened with bank bail-outs, have promised action to control investment banking bonuses. However, piece-meal country-by-country legislation will naturally just motivate bankers to relocate to another office within their employer’s global empire where remuneration controls are more lax or wholly absent so only a globally co-ordinated policy can work. The French have taken the lead and have announced controls to be introduced domestically and have already put the feelers out to other G20 members encouraging them to embrace the same proposal; that payments should be more aligned with bank’s equity and spread over 3 years to reduce trader’s focus on short-term trading.

A global consensus on bonus controls is desperately needed to reduce the correlation between greed and risk taking - a correlation wholly evident in the period leading to the 2008 banking sector collapse. Unfortunately the only action that is likely regarding the French proposal is that Gordon Brown will claim it as his idea.

More Bernanke

President Barack Obama has nominated Ben Bernanke as Federal Reserve chairman for a 2nd term. The nomination, a clear effort to offer markets continued leadership stability as the recession eases, was greeted favourably by equity speculators on release of the statement.

Obama praised Bernanke, and choose to focus on his recent actions rather than the perceived flawed monetary policy in place prior to the economic chaos. Obama articulated “”Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall.”

Obama also offered employees within the auto-industry hope suggesting auto manufacturing output was “showing signs of life”.

Perhaps the timing of the Bernanke announcement is of more relevance than the confirmation itself. Bernanke’s first term does not end until February 1st so there was time, months of it, before markets would get twitchy for news of his re-appointment. Cynics observed the Bernanke confirmation coincided with a positively disturbing White House report that the US 10-year budget deficit forecast had been increased by $2 trillion to $9 trillion. Interestingly, Obama interrupted his vacation to appear with Bernanke strengthening the view that the White House wanted to deflect attention from the budget deficit news with a counter-weight of good news.

Some commentators have since suggested the $9 trillion budget deficit forecast could only have been reached using very optimistic predictions regarding future tax receipts as the current US national debt figure already resides on the wrong side of $11 trillion.

The Bernanke nomination still needs to secure Senate approval and despite some criticisms of Bernanke’s inflationary stimulus policies, the Senate’s democrat majority should push through Obama’s choice.

Subscribe by RSS Subscribe by Email