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Friday, January 11, 2008

FOMC Chairman Ben Bernanke says 'Substantive' Rate Cuts May Come Soon

Bob Brinker has said the Federal Reserve Chairman Ben Bernanke has been making rookie mistakes to worry too much about inflation. In a speech yesterday FOMC Chairman Ben Bernanke strongly hinted the Fed would reduce its short-term interest-rate target, probably by half a percentage point from its current 4.25%, at the central bank's next meeting, Jan. 29-30. He said the Fed could act before then if needed but it would take a dramatic deterioration in the markets or exceptionally bad economic data.

From Bob Brinker Moneytalk Summary, January 5-6, 2008, Honeybee wrote:

Excerpts of Brinker's reply (to a caller): “I think we can identify what we certainly know would cause a recession. One thing would be if the Fed gets it wrong. If the Fed interprets, for example, high oil prices as a priority – now so, far they have not done this…………then they would make the mistake, which would be very disappointing, that they would think that they can actually control oil prices – which they cannot. They have no power whatsoever. Oil is a global commodity, and they have no power whatsoever at the Fed, or to even have a significant impact. If they make the mistake of thinking that they have to fight oil prices by raising rates, then that will cause a recession. All they have to do is go back into a pattern of raising interest rates –tightening monetary policy--that will definitely cause a recession. There is no question in my mind.
So far they have gone the other way……..I expect them to cut rates again by the end of this month – at the January 30th meeting, at the latest……And I wouldn’t be surprised to see them cut rates again after that, because they are behind the curve. We have a ROOKIE at the controls at the Fed. I’ve talked about it for months, and you have ROOKIE risk. And ROOKIE risk tells you that the ROOKIE in control may not do everything the perfect way…….They were locked in their IVORY TOWER going into August. We were badgering them to death – I don’t think they care.
Bernanke said the Fed must "remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

The Wall Street Journal reported today:
  • The speech comes at a crucial time for the Fed. Mr. Bernanke noted that until last spring the central bank thought it was facing "the classic problem of managing the midcycle slowdown" -- guiding the economy from rapid to slower growth in order to keep inflation in check. But the dramatic deterioration in housing and credit markets since then has significantly raised the risk of recession -- an outright contraction of economic activity and employment lasting at least six months.
  • Inflation concerns figured in yesterday's decisions by the ECB and the Bank of England to leave their interest-rate targets at 4% and 5.5%, respectively.ECB President Jean-Claude Trichet suggested at a news conference following the ECB's meeting that the threat of higher inflation remains the central bank's top concern. Euro-zone consumer-price inflation in November and December was at a 6½-year high of 3.1%, well above the ECB's goal of just under 2%, and policy makers expect high food and energy prices to keep the rate elevated in coming months. Mr. Trichet warned the ECB "is monitoring wage negotiations...with particular attention."
  • The Bank of England will release minutes of yesterday's meeting on Jan. 23. They are expected to show the bank kept rates steady because of inflation concerns -- including fresh utility-price increases and the pound's 7% fall against the dollar since November.

Asked about a possible recession, Mr. Bernanke said, "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth.'s very important for us to stand address those risks and provide some insurance against those negative outcomes."

What changed for Mr Bernanke?

The U.S. employment report for December showed a decline in private-sector jobs. Mr Bernanke said this was "disappointing," and added "[Previously,] relatively steady gains in wage and salary income [were] providing households the wherewithal to support moderate growth" in spending. "Should the labor market deteriorate, the risks to consumer spending would rise," he said.

The higher unemployment rate, 5% in December up from 4.7% in November, shows that one inflationary pressure, higher wages from tight labor markets, is declining.

To make the Fed's job harder, the labor department yesterday reported initial claims for unemployment benefits fell 15,000 to 322,000 last week, the second straight decline, suggesting the labor market isn't deteriorating dramatically.

When former FOMC Chairman Allan Greenspan kept increasing interest rates above 4% to reign in the housing bubble, Bob Brinker complained on his Moneytalk radio show by saying:
"What does Allan Greenspan have against people's home prices going up?"

Clearly the FOMC was right to be concerned and they probably should not have kept rates so low for so long and better monitored the loans member banks were making so they would not have a mess to clean up today.


  1. Thanks for the update. Listened to bb over the weekend and he did not hint of lowering his 1650 SPX target for 2008, nor fully vested position (new money averaging in.) Indices this money are in correction mode with SPX sitting at 1,400. 1,650 appears to be optimistics.

  2. I thinks its time for BB need to admit he blew his call for a new secular bull market in June/July of 2007. While he did admit that corrections in the range of 10% are possible, he also has contended that corrections usually last in the range of 1-3 months.. It has been close to 7/8 months since his imfamous call, and the market is approximately 10% below the levels when he made it... He blew it... He misread or misinterpreted his market indicators at the time (such as the put/call ratio-an obsolete indicator)..If anything, as evidence by the direction of the market since the call, his indicators should have been neutral...not the screaming buy to which he had confidently conveyed...This is his second blown call (after the qqq debacle) and if we enter a bear market, an embaressing mark on his record and credibility...

  3. One call which may still come to be correct and one qqq outlier does not negate an otherwise remarkable record of accuracy.

    I would bet money on Brinker's calls over anyone else's in the past 30 years.

  4. By the way, Bob has said we are in a CYCLICAL bull market imbedded in a secular bear market.

    He has not, to my knowledge, said this is a secular bull market. That secular bull market, he has said, ended in 2000, I recall.

  5. SailFree said... "One call which may still come to be correct and one qqq outlier does not negate an otherwise remarkable record of accuracy.

    His record, since inception and not counting restarting his portfolios in 1988 after under performing the first two years, is not as good as it is advertised. The Wilshire5000 would have been better, especially if you deduct the cost of the newsletter for 20 years.

    see Effect of Bob Brinker's QQQQ advice on his Reported Model Portfolio Returns

    I would bet money on Brinker's calls over anyone else's in the past 30 years.

    You need to read more I think. The article above shows Brinker's P1 under performed the Wilshire 5000. Here is the summary

    # QQQQ Adjusted APR=10.7 %
    # Wilshire 5000 APR =12.0 %

    If I could go back and invest with "anyone" then I'd give it to the guys at Blackstone or Warren Buffett if you wanted a public company.

    For the last 10 years, My newsletter explore portfolio, Fidelity's Contra Fund and Low Price Stock Fund (my two largest mutual fund holdings to diversify from my explore stocks) have all CRUSHED the W5000, S&P500 and Brinker's P1. Add in a good international fund (MSLIX is one I have been pleased with) and you can make a very nice, diversified active portfolio that crushes Brinker over the past 10 years.

    So... over the 10 year period and 30 year period, why fret over attempting to do the impossible, time the market, when other, honestly reported methods offer superior returns?


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