Thursday, July 20, 2006

Do You Hear What I Hear?

From Forbes:

Selective Hearing

Despite the nuanced, even-handed tone of U.S Federal Reserve chief Ben Bernanke's speech on the outlook for the economy on Wednesday, the markets took it as assurance that the Fed is done--or nearly done--with its rate-tightening.

In prepared remarks he delivered to the Senate Banking Committee, Bernanke said that economic growth was showing signs of slowing and predicted, therefore, that inflation would moderate. He also acknowledged the risk that the Fed could go too far with its tightening.

But at the same time, he dwelt in his testimony on the causes of inflation and insisted in response to a Senator's question that a rise in inflation--along with the risk that global turmoil might cause energy prices to climb yet higher--were the two biggest threats to the economy.

Surprisingly, investors seemed to tune out Bernanke's comments on inflation risks. Stocks staged their biggest rally in three weeks, and bond yields fell.


Blogger Metroplexual said...

I totally agree with this article. Every time he has stated that inflationary pressures were still present the market would ignore hime and then when the rate ratcheted up .25 BPS the markets would swoon. Then the players in the market would complain about being misled.

7/20/2006 07:23:00 AM  
Anonymous Anonymous said...

In media analysis it's referred to as an echo chamber. Once a few big media outlets decide to frame a story a certain way, that generally becomes the narrative. It's a very interesting phenomenon, that brings out the partisans like crazy in political reporting.

Go back and look at the reporting leading up to Iraq. There were knowledgeable people (Scott Ritter, Hans Blix) saying there were no WMD, but their comments didn't get a lot of coverage.

If you're a partisan who now feels your ox is being gored, please take it to another thread. I'm not trying to open a can of worms here, just citing an easily understood example.


7/20/2006 07:29:00 AM  
Blogger chicagofinance said...

Benny is doing a poor job of communicating. He is trying to sound objective, but instead, he is appearing to lack resolve in maintaining a certain course of action. It doesn't matter what he THINKS he's saying. He has to look at how people react. If he yields to outside pressure, then he is a clown.

7/20/2006 07:45:00 AM  
Anonymous Anonymous said...

Well Lindsey, I don't know why you think you can comment on an Economic thread, throw in your political dig without mentioning anything to do with economics, and then turn off any responses to your comment by saying "take it to another thread." Every intelligence agency on the planet thought there was WMD and Scott Ritter was accepting large checks from the Hussein administration. Maybe that had something to do with why one guy, who hadn't been to Iraq in years and was on the Iraqi payroll was not getting alot of coverage. You don't know what happened to the WMD and we've found some WMD. Oh, and if you care to refute any of what I just said, please, "Take it to another thread."


7/20/2006 07:45:00 AM  
Blogger chicagofinance said...

The Fed's Logic
July 20, 2006; Page A12

Every investor likes to believe that the bad news is behind him, so stocks understandably soared yesterday on Fed Chairman Ben Bernanke's allegedly dovish testimony to Congress on the future course of interest rates. For our money, however, yesterday's bigger and less reassuring news was the Commerce Department's June inflation report.

The June consumer price index proved, if more proof were needed, just how big a monetary policy mistake the Fed made from late 2003 through 2005. The government's price indices operate on a lag, often as long as 24 months, and they are now showing a marked inflation revival that too many economists and pundits, including more than a few Fed Governors, have been reluctant to acknowledge.

Overall prices rose in June by 0.2%, a deceptively low number since it included a big decline in energy prices for the month; the real signal is that inflation has set in across the breadth of the U.S. economy. For the last 12 months prices have climbed at an annual rate of 4.3%, and for the last three months by 5.1%. So-called "core" inflation -- sans food and energy -- rose 0.3% in June and is now well above the 2% annual rate that the Fed says is at the top of its tolerable range. For the last three months, "core" inflation is up a scary 3.6%.

So when Mr. Bernanke declared in his testimony yesterday that "Inflation has been higher than we had anticipated in February," he was understating things by a good measure. The Fed has been wrong for a lot longer than February; it has merely taken the conventional price indices this long to make some people believe it.

One striking, and perhaps worrying, part of Mr. Bernanke's testimony yesterday was his implicit logic that real economic growth will soon slow down, therefore we don't have to worry about inflation as much, ergo interest rates may not have to keep rising. Mr. Bernanke is too good an economist to actually believe this. Real GDP growth (defined as growth less inflation) can decline even as prices are rising fast and nominal growth continues to roar. What the Fed should be watching is less real GDP than real prices, and this is where the Fed took its eye off the ball by staying too loose for too long.

Mr. Bernanke is still scrambling to catch up, and the danger looking ahead is that the Fed will have to raise rates more than if it had tightened money faster and earlier in the final years of the Alan Greenspan era. Investors in stocks were betting yesterday that the interest-rate increases are almost over, though we wouldn't bet our own mortgage on it. Stocks were also perhaps oversold last week due to Middle East worries. More price increases are baked in the cake in coming months, and those will surely test whether the Fed can make its much-ballyhooed "pause" in raising rates at its August meeting -- and for how long.

Our own belief is that the Fed has substantially increased the chances of a recession in the next year or two by failing to blunt inflationary expectations early enough. Let's hope the economy's current supply-side momentum, led by very strong business investment, and stronger global growth will offset the impact of higher rates and $75 oil. Monday's Fed report of a big 0.8% jump in June industrial production was an encouraging sign that business spending and manufacturing remain strong.

One question for the Fed, and especially for its staff, is whether its inflation mistake will lead to any policy introspection. Mr. Bernanke is surely right, as he said yesterday, that "monetary policy makers operate in an environment of uncertainty." But those policy makers also continue to downplay, or even dismiss, the relevance of such real-time inflation signals as a weak dollar and the soaring price of commodities including gold. Those prices have been warning the Fed about future inflation for a long time. Some policy reflection can be good for the soul, and even better for the economy.

7/20/2006 07:51:00 AM  
Blogger grim said...

Minutes from the last Fed (FOMC) meeting to be released at 2pm this afternoon. I wonder how the market will react to this bit of history..


7/20/2006 08:05:00 AM  
Anonymous Anonymous said...

and we've found some WMD

Helloooo????? Do you mean the leftovers from Gulf War I? Even your beloved administration has admitted that this is not "WMD".

Time to take a break from Rush and Bill.


7/20/2006 08:22:00 AM  
Blogger grim said...

Can we try to minimize any political discussion that doesn't directly impact the NJ/NY/PA housing market?

It really does nothing but drive a big divide through the readership here. Many important contributors have left this blog because of it.

It's been incredibly difficult for me to continually try to grow the readership here.

Readership is the only motivating factor here. I'm not compensated for what I do in any way. What keeps me going is visitor traffic, pure and simple, knowing that people are stopping by and reading.

I don't mind if the normal churn traffic leaves because they don't like our viewpoint on the housing market, but it's very discouraging when a long-time contributor decides to leave because of non-housing related arguments..


7/20/2006 08:40:00 AM  
Blogger Richard said...

suckers rally yesterday. most businesses (aside from tech sector) are still showing healthy profits but that's going to change as the higher interest rates and home ATM machine winds down. it has to as hourly wages (which make up 80% of all workers) hasn't even kept up with inflation. you can't borrow into oblivion.

the 'slowing' of the economy desired by the fed will do nothing but move business profits a few % points down from record levels. the average worker has not participated in this 'blistering' recovery.

7/20/2006 09:18:00 AM  
Anonymous Anonymous said...

Well , i just heard on the radio
a college professor explaining
that the Fla. housing market is
still growing and ARM's are a good
way to go.

I'm baffled.

7/20/2006 09:19:00 AM  
Anonymous Anonymous said...

Grim and the rest,

I try to keep things short, but brevity, like so many other things, has unintended consequences.

As I was writing my media-centric post I realized I had chosen a subject that cuts deep, but I really thought, at this point, the controversy was over. I know some partisans can't let go, so I tried to head it off.

My point was how the media chosen narrative shapes the terms of a discussion. I really couldn't think of an example that wouldn't draw the ire of someone who wants to believe what they want to believe regardless of any facts to the contrary.

The simple fact is that what gets reported by major media outlets is the news.

To bring this back onto the topic, that's part of how things like housing or dotcom bubbles inflate. Rah-rah reporting in the press (or even one part of it like CNBC) contributes to a herd mentality. The real info is there, you just have to look for it in things like sales stats, P/E ratios, ROI and other balance sheet measures.

People who make investment decisions based on their perception of what the Fed Chairman said rather than economic and business fundamentals are part of what creates and sustains any bubble and part of what creates any buying opportunity.

I find it strange that people here can recognize that the narrative can be totally wrong on something they spend time thinking about, like housing, but not on other subjects.

This response may not be all about housing, but I'm pretty sure it relates to the original post.


7/20/2006 09:26:00 AM  
Anonymous Anonymous said...


Richard's comments illustrate the point I was trying to make.

The narrative that floated yesterday is that things are just fine. He's not buying it, and he has the decency to tell you why.


7/20/2006 09:32:00 AM  
Anonymous UnRealtor said...

"Go back and look at the reporting leading up to Iraq. There were knowledgeable people (Scott Ritter, Hans Blix) saying there were no WMD, but their comments didn't get a lot of coverage."

Holy revisionism Batman!

Hans Blix 8 weeks before Operation Iraqi Freedom began:

"Iraq appears not to have come to a genuine acceptance -- not even today -- of the disarmament, which was demanded of it and which it needs to carry out to win the confidence of the world and to live in peace."

"The nerve agent VX is one of the most toxic ever developed. 13,000 chemical bombs were dropped by the Iraqi Air Force between 1983 and 1988, while Iraq has declared that 19,500 bombs were consumed during this period. Thus, there is a discrepancy of 6,500 bombs. The amount of chemical agent in these bombs would be in the order of about 1,000 tonnes."

"The recent inspection find in the private home of a scientist of a box of some 3,000 pages of documents, much of it relating to the laser enrichment of uranium support a concern that has long existed that documents might be distributed to the homes of private individuals."

Much more reading here:

And Scott Ritter received payments in the hundreds of thousands of dollars from Saddam's regime, and was arrested two years ago for trying to molest an 11 year old girl he "seduced" on the Internet.

7/20/2006 09:48:00 AM  
Anonymous UnRealtor said...

"Do you mean the leftovers from Gulf War I?"

Neither UNSC 1441 cited a source date for Saddam's WMD, nor the Resolution authorizing US military force against Iraq cited a source date for Saddam's WMD.

VX nerve agent from 1991, released in Penn Station, or VX nerve agent from 2001, released in Penn Station, has the exact same effect.

It appears the "mainstream" media have managed to successfully rewrite history, as evidenced in this thread. All facts and statements made by hundreds of people from all countries and all political parties are apparently now moot.

The US needs to implement mandatory critical thinking courses for all children before graduating high school.

7/20/2006 09:57:00 AM  
Anonymous UnRealtor said...

"Can we try to minimize any political discussion that doesn't directly impact the NJ/NY/PA housing market?"

Sorry Grim, saw your post too late.

May I suggest ALL "partisan political discussions" are banned? (To include deleting the offending post?)

Things will only get worse as we near election cycles, etc.

7/20/2006 10:00:00 AM  
Anonymous LeeS said...

From Benny Boy:

"As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of non-energy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation.

The recent rise in inflation is of concern to the FOMC. "

How can the market overlook comments like this? Am I dumb to think that basically Ben is saying everything from rent, to food, to shaving cream will have its price affected by the spill over from speculator-fueled fuel prices? You don't have to be smart to realize we truck products all across the country, and as the price to truck them in goes up, so does the price to the consumer. While major companies may be willing to absorb some of the cost and reduce their profit margins, you can be certain they'll pass on as much as they can to the consumer.

And how in the HELL do people in the market not see another 25bps increase coming? If Ben is talking about inflation of or over 3 percent and the FOMCs comfort zone is 2%, don't you see a discrepancy between those 2 numbers? Wow, I should have been a financial analyst. Oh wait, I pay attention to things around me, guess that counts me out.

7/20/2006 10:11:00 AM  
Anonymous Anonymous said...


I've tried to leave this alone, but as much as this is a place for real estate/economics, it has been a place for discussing reality.

I don't know what makes an opinion worthwhile when it is at odds with reality, but I guess that's my fault.

Unrealtor has done exactly what the discussion here is addressing, he has chosen to hear what he wishes and disregarded the rest. Blix said a lot of things, including:

"Iraq has provided little evidence for this production and no convincing evidence for its destruction."

That's from his source, I'm not even going to get into any other equivocations.

If unrealtor came here to say that anon 10:19.55's college prof was making sense he would not be taken seriously because people here do not rely on radio interviews with hacks for housing related info.

If you want to wear blinders on a subject go ahead, but understand that when the echo chamber you select doesn't reflect reality there are consequences.


7/20/2006 10:42:00 AM  
Blogger grim said...

This thread is closed

7/20/2006 10:54:00 AM  

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