Thursday, March 29, 2007

Analysis of Bernanke's Inflation Outlook

Here is the transcript from an interview from last nights Nightly Business Report on PBS.
This discussion is interesting because it shows the current debate concerning the strength and direction of the markets. Battipaglia's outlook is very pessimistic and he currently has over 30% of his client's allocation in cash (50% of his client's 60% equity allocation is in cash plus a percent of the bond portfolio). His firm is really expecting the markets to correct substantially. Market timing, to this extent, leads to under performmance.

Enjoy
The Financial Pragmatist
Libby Mihalka

Joe Battipaglia of Ryan Beck & Brian Wesbury of First Trust Advisors
Analyze Fed. Chairman Bernanke's Inflation Outlook

Wednesday, March 28, 2007

SUSIE GHARIB: More analysis now on Bernanke's testimony today and market reaction. Joining us, Joe Battipaglia, chief investment officer for Ryan Beck and Brian Wesbury, chief economist at First Trust Advisors. Brian, Joe, thanks for joining us.

BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Good to be with you.
JOE BATTIPAGLIA, CHIEF INVESTMENT OFFICER, RYAN BECK: Good to be with you.

GHARIB: Brian, let me begin with you. Do you agree with Ben Bernanke's assessment of the economy that inflation is the risk of not weaker growth?

WESBURY: I do. I think that we've seen a slowdown in housing. We've seen what I would call an inventory correction, which is caused industrial production and durable goods orders to fall over the last few months, slow down the economy a little bit in the last few months. But the real risk to the economy in the next six, 12, 18 months is inflation.

GHARIB: Joe, Wall Street seems to have thought that that slowdown in housing, now that the economy is really slowing, evidenced by all the sell- offs we've had this week. What's your analysis of what Bernanke said?

BATTIPAGLIA: The street wants it both ways. They want a soft economy and ultimately rate cuts and what a good situation that is for stocks. My worry, actually, is the economy. The Fed has never engineered a soft landing. The data is more troubling than they are letting on too. They've already changed their language to that effect and I think it's a credit- driven problem in that consumers are tapped out, and so this may well be a consumer-led slowdown with the potential for a recession at 50 percent. The market certainly not looking for that and that's what's going to be more troublesome in the next several months. Add to that the persistence in inflation. You've got a very dangerous mix here.

GHARIB: But Brian, the message from Bernanke seems to be that the next move that the Fed makes on interest rates, when it does decide to move, that it will be up. It will be a rate hike not a rate cut. Is that your take on what Bernanke said today?

WESBURY: Well, I would argue that what he really said is that he wanted more flexibility. In fact, that's almost a direct quote. And that's why they sort of pulled back. But more importantly, one of the things he wanted to do was have the market stop being telegraphed the Fed's next move. He wants the market to be a little more uncertain about what the Fed might do. And one of the reasons that he wants that to happen is he wants long-term interest rates to go up. Remember, Alan Greenspan called the low, long-term interest rate the conundrum. Ben Bernanke has theorized that maybe it's happening because of a global savings glut or something like that. He's trying to get long-term rates up and one of the ways to do that is to increase uncertainty in the markets and I think that's one of the things he's trying to do today.

GHARIB: He did say that. He said he's going to give less guidance on interest rate moves. Joe, what does that mean for the market? Is it going to be much more volatile going forward?

BATTIPAGLIA: Oh, I would say so because if he is data centric here and looking for the next bit of news on the economy and on inflation, then he's no better off than the rest of us are in trying to figure out what happens next and right now his credibility is on the line because on the one hand, he wanted to be more transparent. If you want to be more ambiguous, that's not transparent. And the other is he wanted inflation below 2 percent but he doesn't have that. He's at 2.7 or 2.3, depending on how you measure it. Credibility at the Fed is at risk, Ambiguity is a problem and the economy itself has got very weak signals coming on, six months of slowdown in durable goods and a consumer that is gliding down the path of less houses being bought, less cars being bought, retail sales slowing down.

GHARIB: Brian, Bernanke also said that he didn't see any evidence that this whole sub-prime mess is affecting the broader economy. Is that really the case or was he just trying to reassure everyone?

WESBURY: No, I think he's correct about that. I think the sub-prime issue is a problem, but it's not a problem that will have a contagion effect that drags the entire economy along. And I think this is an important point. One of the reasons that we're in the mess with mortgages and housing that we're in is because the Federal Reserve lowered interest rates to 1 percent back in 2003. You can't drive interest rates down that low without causing people, some people to make decisions that they can't live with if interest rate goes back to normal and that's exactly what's happened. But interest rates today aren't high. And that's why I won't go as far as Joe does. Interest rates today, in fact, are still very low, especially given the inflation rates that we have seen. And, therefore, I don't think we're on the front edge of a recession or a big consumer--

BATTIPAGLIA: Here's the tip of the spear on this. I need to interrupt because most people are saying the same thing, except that the biggest asset that people own are their homes. Those prices are only starting to fall and they fall by 5, 10 or 15 percent or more depending on the market. And interest rates on the teaser side are going to be adjusted up, even with the low rates that Brian speaks to, they're going to double or triple from here and they can't refinance because their home values --

GHARIB: Joe, let me jump in. We just have a few seconds. Real quickly Joe, are you changing your investment strategy because of your views on what Bernanke said and the economy?

BATTIPAGLIA: We came into this with 60 percent equities 40 percent in defense of asset classes. In our equity programs we're at 50 percent cash looking for future opportunities. So we re definitely defensive and we've lowered our S&P target for the year down to 1430. So we're essentially looking for a flat year.

GHARIB: We're going to have to leave it there. Gentlemen, thank you very much, I appreciate your thoughts.

BATTIPAGLIA: You're welcome.

GHARIB: My guests tonight: Joe Battipaglia, chief investment officer for Ryan Beck and Brian Wesbury, chief economist at First Trust Advisors.

No comments: