Ben Bernanke, Break The Buck!

Ben Bernanke is in the midst of being taken through the accountability paces of the Senate Banking Committee. When it comes to talking about Depressions, Bernanke is a pro. He should, confidently, dominate the debate on this front – this is an important debate that Wall Street needs to have.

At down -17.7% for 2009 to date, and down -52% from the 2007 peak, the question for the US market from here is will it enter a Depression? Provided that our government figures out that the best way to ensure that deflation decelerates is to break the buck (de-value the Dollar), I do not think we are going to enter anything that resembles an unemployment rate of 15-23%, and the mother-load of all deflations from today’s prices (i.e. The Great Depression).

Bernanke seems to be suggesting this morning that the US market will recover within the span of a year. Explicitly, this morning he is saying "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

While Wall Street/Washington’s latest meme of prefacing everything it says with “in my view” is annoying (it implies that everyone else on the team may not agree – that’s not a team anyone can trust), Bernanke is finally “making a call” here, with an explicit duration. If Wall Street wanted specificity – that’s as close to what we have received from Bernanke to-date when it comes to timing the turn. He is also mapping out the timing of spending both the TALF (term auction lending facility) and the CAP (Capital Assistance Program). On the margin, this is progress when it comes to transparency/timing.

Economic bottoms are processes, not points. Our US Strategist, Howard Penney, and I believe that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, so the timing of Bernanke’s 2009 bottoming process is in line with ours.

Importantly, we “make calls” based on delta’s here at Research Edge. So, to be clear, our call is that year over year deflation in US home pricing gets less toxic. Put another way, going from toxic to bad is good – and we think this starts to play out on the asset side of the US Consumer’s portfolio come Q2. The prices associated with both American homes and portfolios will go down at a lesser rate. This will build confidence from its current record low base.

Ensuring that deflation slows is best accomplished by breaking the US Dollar’s current upward momentum. Ben Bernanke, now is the time to do what you can to break the buck.

Keith R. McCullough
CEO & Chief Investment Officer