Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee Wednesday calling for fiscal balance and voiced the need to limit debt issuance, presenting a less than rosy picture, including a projected $1.8 Trillion federal budget deficit and rising Treasury interest rates over concerns about the deficit.  He said the Fed has limits and will not monetize the debt.  Stocks did not respond well.

MARKET ACTIONS TODAY

Here is how US stocks, non-US developed market stocks and emerging market stocks acted today:

Here is how US bonds, non-US developed market bonds and emerging market bonds acted today:

Here is how different types of US bonds acted today:

SELECTED BERNANKE TESTIMONY

On Fiscal Management:
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,”

He pointed out that before the crisis, the US federal debt was about 40% of GDP, and that by 2011 it’s likely to be about 70%.  He said, “These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II,”

… “unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,”

On Retiree Entitlements:
“Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the Baby Boom generation and continued increases in medical costs,”

[He pointed out that SS and Medicare funds could be depleted in a few years]

On Taxation:
“In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs …  Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient enough to achieve an appropriate balance of spending and revenues in the long run …”

On Mortgages and Lending:
“My impression is that most (mortgage rates) reset on shorter-term interest rates, like the LIBOR rate, which is very very low right now, or the Treasury bill rate. Since the Federal Reserve brought interest rates down to such a low level in the last year, concerns about resets in the mortgage market have considerably been reduced.”

[We read that statement as; if rates rise for whatever reason, such as inflation, falling Dollar, lower bids from China or others, mortgage rates will rise and a new wave of foreclosures and bank asset troubles will wash over the US]

“Financial markets and financial institutions remain under stress … and low asset prices and tight credit conditions continue to restrain economic activity.”

On The Economy:
“Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further … We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.”

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We think these are still very difficult times, warranting cautious risk taking.

Richard Shaw
QVM Group LLC

Last 5 posts by Richard Shaw

• Quality Individual U.S. Companies - November 7th, 2009
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