Like Sammy Hagar in his Van Halen days, Ben Bernanke has the tools to satisfy Wall Street, but decided to walk away — at least for the moment, leaving those hoping for QE3 in despair. C'mon baby, finish what you started.
At Friday's much-anticipated Jackson Hole speech, Bernanke offered no new Fed policies to address the nation's economic malaise, which is even worse than previously estimated. Ahead of Bernanke's speech, the Commerce Department revised its second-quarter GDP estimate to 1% from 1.3% previously, meaning the U.S. economy grew a paltry 0.6% in the first half of 2011.
In the speech, Bernanke reiterated the themes of the FOMC's Aug. 9 policy statement: Economic growth "considerable slower" in the first half than the Fed expected but the ingredients for a revival remain in place.
"The economic healing will take a while, and there may be setbacks along the way [but] the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," Bernanke said. Furthermore, "the healing process should not leave major scars."
And should Bernanke & Co. prove, yet again, overly optimistic about the economy, "the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus," he said, leaving
For the bears, the conclusion from Friday morning events is simple: Bernanke is out of bullets, the economy is at stall speed and heading for a crash, and Europe is still a basket case. Abandon all hope, ye who enter here.
But bulls like David Kotok, chief investment officer of Cumberland Advisors, look at the same development and see reason for optimism.
"This was exactly the correct speech for Bernanke to give today," Kotok says and it appears the financial markets agree. After an early dip after Bernanke's speech, the Dow was recently up 1.3% at 12,294.
"All this expectations we're going to get QE three, four, five, six, seven is nonsense," he continues. "The Fed has always left the door open to go either way with policy depending on the economics. The economics today say 'don't do anymore' and see if it'll work."
No Case for QE3
Kotok maintains an upbeat view on U.S. stocks based on valuation and his baseline scenario for slow but steady GDP growth, as detailed here an in a upcoming statement. As a result, he thinks the Fed might be on hold for a while.
"I don't see the case for QE3 -- meaning expansion of the [Fed's] balance sheet -- unless [events] turn the economy into recession, take the growth rate negative, take the inflation rate to deflation, take the unemployment rate to 10%, you'll get QE something. Without that, I don't think you're going to get anymore."
In addition to applauding Bernanke's comments on monetary policy, Kotok also cheered the Fed chairman for wading into fiscal policy matters, and giving America's elected officials a stern rebuke.
"The country would be well served by a better process for making fiscal decisions," Bernanke said. "The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses."
It's unusual for a sitting Fed chairman to criticize Congress, which Kotok calls "the most disappointing organization and entity in America."
Congress makes "a very convenient target…but the fact is [Bernanke] said the truth," he says. "It's very nice to hear the truth no matter which mouth it comes out of."
About the only criticism Kotok had for Bernanke is his decision to not hold a press conference after the Fed's September policy matter, which is now going to be a two-day affair.
"Where's the transparency?," Kotok asks. "Why not hold a press conference after every meeting?"
Why not, indeed. Unless, of course, the Fed has something to hide...
- Ben Bernanke