Should You Trust Bernanke’s Forecast?

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Knowing my disdain for the current Federal Reserve Board as a group of omniscient economic forecasters, a friend sent me a quote from yesterday’s Market Commentary by Art Cashin of UBS Financial Services.  Art included part of an October 27, 2005 article from the Washington Post, which follows.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

That Bernanke is the central banker with more power than any other in the world to affect the course of the global economy imparts less than a high degree of confidence.  Whether past and present rescue efforts will ultimately prove beneficial, they have at least put a temporary safety net under the economy and the U.S. securities markets.  Belief that the Bernanke “put” has replaced the Greenspan “put” has emboldened investors to accept market risk despite highly precarious fundamentals both here and abroad.  It’s a fair question as to whether Bernanke’s perception and curative prescription will be any more effective this time than was his appraisal of the danger of the housing bubble just five years ago.

Should the Fed’s rescue efforts prove less than effective–worse yet, possibly counterproductive–we will undoubtedly look back and ruefully ask:  “How could we have conferred so much power on an academic theoretician with such a flawed track record?  What were we thinking?”

As an aside, pay attention to Art Cashin whenever you have access to his insights.  Few others combine the historical background and incisive understanding of short-term market influences that Art possesses.  And he delivers his observations with a heavy dose of humor.  Do yourself a favor and catch his frequent appearances on CNBC.  He’s typically interviewed a couple of times a week in the 45 minutes that precede the market’s opening bell.  You can also replay his appearances on the CNBC website.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.