Weekly Market Commentary 6-27-2011

Ben Bernanke's “Investor Insurance for Investors”

Weekly Market Commentary 6-27-11

Tim Phillips, CEO – Phillips & Company

insurance policy rolls

This week Ben Bernanke, Chairman of the Federal Reserve, gave a press conference following the release of the FOMC statement.

While the market reacted poorly to the Fed's downward revisions to GDP it might have missed a critical point.

GDP projections of Federal Reserve Governors and Reserve Bank presidents

Change in Real GDP1




Jan 2011 Projections

3.4 to 3.9

3.5 to 4.4

3.7 to 4.6

April 2011 Projections

3.1 to 3.3

3.5 to 4.2

3.5 to 4.3

June 2011 Projections

2.7 to 2.9

3.3 to 3.7

3.5 to 4.2

1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

After Bernanke read his prepared remarks, he opened the floor up for questions. During that Q&A session he made an interesting statement when asked why the Fed wouldn’t consider taking more actions to stimulate growth if the Fed believes the recent uptick in inflation is transitory:

“We'll continue to look at the outlook and act, you know, as appropriately as the news comes in and the projections change. We do have a number of ways of acting… We could, for example, do more securities purchases and structure them in different ways. We could cut the interest on excess reserves that we pay to banks…. But we'd be prepared to take additional action, obviously, if conditions warranted.”

I interpreted this statement as a possible blanket “insurance policy for investors” issued by Bernanke and the Fed. The question is no longer if the Fed will step in if needed, but instead what would need to happen for the Fed to step in. There are two games of brinksmanship going on and consequently, it could cause the Fed to take additional action.

At home the Democrats and Republicans are playing brinksmanship with the US Debt Ceiling while internationally, Greece and the ECB are doing the same thing with the European Union’s next round of funding for Greece.

I believe the most probable outcome concerning the US Debt Ceiling is it gets lifted at the 11th hour. Everyone agrees on spending cuts, the fundamental public disagreement is on tax increases. In the end, the democrats won’t need to fight too hard because the current tax cuts expire at the end of 2012. Republicans would perhaps like to have tax policy as a major issue in the next presidential campaign. Much of this is all public posturing in my opinion. This political theater should provide improved ratings for the 24/7 news channels and provide investors with good buying opportunities leading up to August 2nd.

Looking across the Atlantic at the Greece situation, I agree with Bernanke. A disorderly default would no doubt roil financial markets globally; I don’t believe that is the most probable outcome. The European Central Bank (ECB) and the International Monetary Fund (IMF) have too much at stake to let Greece simply default. I think the more probable outcome will be continued talks among the ECB, the IMF, the Greek Parliament, and other countries to enable members of the European Union (EU) to save face and gracefully exit the EU before an actual default. I also believe this will provide investors with a good buying opportunity at some point.

In the long run, I don’t think the Fed will have to pay out on its “insurance policy for investors,” but because it’s there I’m using these brinkmanship events at home and abroad as buying opportunities.

Thank you for your thoughts and comments, please keep them coming. Send them to: tphillips@phillipsandco.com

Tim Phillips, CEO - Phillips and Company

Twitter: @PHCOAdvisors

Primary research done by Adam Gulledge, Associate – Phillips and Company