Month: February 2012

Greek Default: Why now may be best time to do it

As sovereign debt defaults go, there may be no better time than now for Greece.

Global investors are clearly in risk-on mode, with the US stock market off to its best start in 15 years and equities in many emerging markets faring even better.

Friday`s job report helped assuage at least one of the primary fears regarding the US economy, even though the housing market remains a shambles-an improving shambles, but still a long ways from healthy.

Last week in general gave life to the recovery theme, with 15 of 23 indicators beating expectations and causing some economists to raise their growth outlook for the full year.

So, with sentiment running so garishly positive, why not go ahead and get that pesky Greek default and all of the accompanying futile denial out of the way already?

“In the last six months, there`s probably been no better time to let Greece strategically default than right now,” said Citigroup credit analyst Jason Shoup.

Shoup was quick to point out that a Greek debt default is not Citi`s “base case,” or most likely outcome, but one that needs to be taken seriously if the markets are ever to absorb the magnitude of Greece`s problems and come out intact on the other side.

One key reason is that the window could be small for the present enthusiasm to last.

Some economists consider the startling jobs growth-a 243,000 surge in payrolls and an unemployment rate drop to 8.3%-unsustainable and as much a product of statistical anomalies as a jump in hiring. Specifically, a revision that saw the workforce drop by 1.2 million and a consistent drop in the labor force participation served as troubling signs.

If the recent uptick in economic indicators is indeed transitory, policy makers may want to consider attacking the Greece situation now while the market can still bear it.

“Letting Greece default either after a (Private Sector Involvement) haircut or in lieu of may have been unthinkable just a few months ago, but it wouldn`t surprise us if resistance to such an idea may be weakening in the halls of Brussels and Frankfurt,” Shoup said. “Certainly, buoyant markets seem to be emboldening policymakers to take more of a hard line even while Portuguese bonds oscillate.”

Indeed, there`s the Portugal problem.

It`s hardly a secret that Greece will be only the first of several dominos likely to fall in the Eurozone sovereign structure. Several of its neighbors face burgeoning obligations that they cannot meet, and Greece`s importance as much as anything is that it will serve as a signpost for how future crises will be handled.

An orderly Greek default in which panic is limited and bondholder haircuts are contained means future defaults may not capsize the markets either. But let the crisis spread and the fallout could be catastrophic.

Bob McKeee, chief economist at Independent Stratedy, a London-based research firm, told CNBC that Portugal will be next on the agenda. The nation is far more stable than Greece, which is why the eurozone needs to address its problem children first and then work on more manageable problems.

Concerns over Portuguese debt have come since the nation`s 10-year bond rates hit their highest level since the creation of the European Monetary Union. That came after a debt downgrade from Standard and Poor`s. In a supposedly solid country with a new government, investor confidence remains a problem.

“We believe this is a sign that, despite the tentative progress made by eurozone leaders on a `fiscal compact` and increased liquidity support from the (European Central Bank), the eurozone remains in crisis,” London-based Capital Economics said in a research note.

News over the weekend that no agreement has been reached in Greece mildly spooked the markets in Monday trading.

The developments show that despite liquidity assurances through the ECB`s Long-Term Refinancing Operations, the market wants some closure on how the European crisis will be handled.

Making a decisive move at a time when global markets have stabilized and appear ready to handle shocks, and before other debt obligations in nations such as Italy come to the fore, likely will be just the right medicine.

“While a sovereign debt default in Greece or Portugal might not trigger the end of the euro,” Capital wrote in its note, “such an outcome in Italy could very well do just that.”

Copyright 2011 cnbc.com

Emerging markets stocks may be best bet now

Last year`s losers, emerging markets may be this year`s winners.

A new Morgan Stanley report concludes that emerging market stocks look much more attractive than equities in the United States, Europe and Japan.

Morgan Stanley analysts compared and ranked the four regions using a variety of standardized accounting, valuation and growth metrics.

They found emerging market stocks are cheap and have the second most attractive valuation among the regions, after Europe.

Emerging market also got the highest scores for profitability, leverage and growth. The region has the highest operating margin, which averaged 11.9% since 1995.

However, emerging markets have scored worst on the earnings quality and volatility.

Is this enough to offset all the other metrics?

“The market thinks so today, but probably won`t several years from now, if earnings quality improves,” concludes the report.

Europe was ranked second by the Morgan Stanley analysts. It was seen as cheapest across a range of valuation metrics with the highest dividend yield and lowest trailing P/E ratio.

Europe also showed relatively good earnings quality and relatively low earnings volatility.

Moreover, “Europe does derive the highest percentage of revenue from the emerging markets, a positive for relatively long-term future growth relative to the other developed markets”, says the report.

However, its track record in terms of growth, profitability and leverage is inferior to other regions.

The US multiples are among the least appealing. While, profitability is high, and earnings quality and credit ratings are more compelling, growth relative to the emerging markets has been very weak over the last ten years.

Morgan Stanley analysts expect this trend to continue as US exposure to emerging markets is below that of Europe.

On the positive side, the US has shown significant improvement in cost management, especially in more recent years. Its margins averaged 10.4% since 1995 and are forecast to be at record levels by analysts this year, according to the report.

Japan came in last, getting lowest scores on profitability, leverage and growth. It ranked as third on valuation and earnings quality.

“Although its valuations are cheap to its own history, they are not attractive versus other regions,” says the report. Morgan Stanley analysts believe it`s a function of both “strength of the Yen, as well as supply side issues.

Japan`s margins averaged only 5.9% since 1995, around half the operating margins currently of the other three regions on average.

Japan is also doing poorly on the global IPO market. Its share remains very low compared to other regions.

On the other hand, emerging markets have been making substantial gains, growing to 35% in 2011 from 11% in 1995.

Europe`s share in global IPO market has come down to 25% from 48% in 1995; and US`s current share is down from 2001- 2003, but at similar level to that in 1995.

The MSCI Emerging Markets Index is up 14% so far this year, compared to 8% for the World Index.

Last year, emerging markets were down 20.4%, Japan was down 13.9%, Europe was down 13.8%, while returns in the US were flat.

Disclaimer

Copyright 2011 cnbc.com

Bullish on Europe, looking at Austria, Romania: Mark Mobius

Investors are waking up to the reality that the European Union and the euro will survive, Mark Mobius, the executive chairman of Templeton Emerging Markets Group told CNBC on Friday. He added that he was looking to invest in the region, particularly in Eastern Europe.

“Reforms are taking place now in Europe, the effects will kick in next year, and then you`re going to see a much stronger regional community,” Mobius said in Singapore.

According to him, the takeover of companies in Europe by Chinese and Middle East investors was another factor that would drive a recovery in the region.

Mobius said he recently returned from Austria and Romania, where a recovery was already under way. In Austria, he said, he was looking at banks that have all their holdings in Eastern Europe.

Mobius added that he liked the Russian market given strong commodity prices and growing consumer demand. Templeton has investments in the country`s oil, gas and mining sectors via their open-ended mutual funds, but the big opportunity for the future, according to Mobius, was in consumer products.

“On our private equity side we`ve made very good money in companies involved in retail, trade, in automobile tires, in fruit drinks and that sort of things.”

Emerging Markets to Outperform

Mobius also said the increased confidence over Europe and greater liquidity would help emerging market stocks post a strong recovery in 2012.

He blamed the flood of initial public offerings (IPOs) in emerging markets during 2009 and 2010, which he said took USD 540 billion out of the secondary markets as the primary reason emerging market stocks suffered recently. He said a reduction in IPO activity would help these stocks rally.

Copyright 2011 cnbc.com

China addressing capital crunch facing banks: Analysts

China`s Central Huijin Investment Co.`s plans to cut the dividend payout ratio for three of its “Big Four” lenders, is a sign that Beijing is waking up to capital constraints facing the banking sector, Fraser Howie, Managing Director at CLSA Singapore, said.

“It`s not necessarily a crisis, or a collapse (of the banking system), but basically the dividend ratio has been too high and their capital base has been getting eroded because of poor loans…this is a move that was certainly needed,” Howie told CNBC Monday.

Chinese banks, which were encouraged to go on a lending spree by the government to boost liquidity and spur growth post the 2008 global financial crisis, now face capital strains and the risk of rising non-performing loans.

According to the state parent company Huijin`s website, the move will reduce the ratio for Industrial and Commercial Bank of China, Bank of China and China Construction Bank by 5 percentage points to 35% of their 2011 earnings. Analysts say this will allow the banks to save 10-15 basis points of their capital adequacy ratios per annum.

“It shows that Huijin is willing to allow the banks to adopt a more sustainable capital strategy,” adds Mike Werner, Senior Equity Analyst, Chinese and HK Banks at Sanford C. Bernstein.

However, Jim Antos, Chinese banking analyst at Mizuho Securities says the impact of a 5 percentage point`s dividend payout reduction is “trivial” for the large lenders.

“We estimate Industrial and Commercial Bank of China could put an extra 10.5 billion yuan (USD 1.67 billion) into retained earnings. For Bank of China, the savings would be around 6.1 billion yuan (USD 968 million),” Antos said.

Antos, who has a neutral call on CCB and ICBC and an underperform call on BOC, says this decision has not changed their investment view on the Chinese lenders, adding that the move was expected.

In addition to helping the banks preserve capital, Werner believes there is another motive behind Huijin`s move to lower the dividend payout.

“Huijin must generate a certain amount of cash in order to pay off the debt issued to purchase their stake in the Chinese banks from the PBOC in 2007 as well as the debt issued in 2010 that was used to participate in the banks` rights offerings that year,” he said.

Copyright 2011 cnbc.com

Asian cyclical stocks to surge 40% in 2012: Analyst

Asian stocks rallied on Thursday, after global manufacturing data eased worries about a slowdown. But, according to one analyst, the economic picture is much more mixed and central banks will continue to ease monetary policy in 2012, a factor that will boost cyclical stocks in Asia by up to 40%.

“When there’s free money being thrown around, it’s the cyclicals that perform the best,” Erwin Sanft, Deputy Head of Asian Equities Research at BNP Paribas said on Thursday. Sanft cited record money supply growth in the US, the European Central Bank’s Long Term Refinancing Operation (LTRO) and China and India bringing an end to their tightening policies.

Sanft says Asia stands to benefit the most from a global rally in cyclical stocks, including technology, commodities and industrials, because the region has the highest proportion of cyclicals in the overall market, at 43%.

Another factor that should favor the group are their valuations.

Sanft says Asian cyclicals are trading 30% below their long-term valuations, and when compared with defensive stocks such as utilities. They’ve been this cheap only twice in the last two decades – once during the Asian financial crisis in 1997 and the other during global financial crisis in 2008.

Sanft is particularly bullish on Asian tech stocks, which he says have been lagging behind their US counterparts that have rallied in recent months. He believes major chipmakers such as TSMC and Hon Hai Precision will benefit from inventory restocking in the sector.

Copyright 2011 cnbc.com

Dividend stocks lose favor as investors seek more risk

Investors are moving away from dividend-paying stocks this year, highlighting the flight from so-called high-quality companies into those that have been beaten down the most.

So far, it’s been one of the better trades in 2012.

Non-dividend-paying stocks on the Standard and Poor’s 500 are up 8.3%, while dividend payers are down 1.3% and the index as a whole is up nearly 5%, according to data from Bespoke Investment Group.

That marks a sharp contrast from 2011, when companies paying dividends jumped 10.4%, easily outpacing the market as investors clamored for the yield they couldn`t get from fixed income.

Part of the move is probably a natural rotation that the market sees from one year to the next.

But there also are underlying reasons why the big names are faltering – in particular unspectacular earnings that have some investors concerned that the market`s upper echelon has reached a plateau.

“You stretched the valuation for a lot of these dividend-payers. The utility companies and the larger bluechip companies that don`t grow a lot received an awful lot of money,” says Rob Lutts, president and chief investment officer at Cabot Money Management in Salem, Mass. “Sure they pay a dividend, but sooner or later you need to have earnings growth.”

At the same time, the big price moves for top-quality helped push down dividends, making them less attractive from both a yield and growth perspective. The Dogs of the Dow, a popular strategy that employs buying the bottom-third of the bluechips to gain yield, has lagged the market significantly.

Lutts questions the growth potential for otherwise well-run companies like McDonald’s and Yum Brands even though both are solid, well-run companies.

“We`re seeing rotation into pure growth today,” Lutts says. “They`re popular trades that have gotten extended and need to rest. That`s partly why the Dow is the lowest-performing of the major indexes.”

The dividend-payers are a subset of a larger group lagging a rally this year that has given the S&P 500 a 4.36% price return and a 4.48% total return including dividends.

The 50 stocks that gained the most last year rose just under 1% in January, while the 50 worst-performing stocks have soared 11.8%.

Also, domestic stocks are underperforming multinationals this year, another trend reversal. And mutual funds had a banner January after badly underperforming last year, with the 50 largest funds gaining 5.6% so far, according to data from Birinyi Associates.

The trend even extended to fixed income, where triple-C paper gained nearly 5 percent for the month, outperforming its better-rated but still high-yield competitors, according to Citigroup.

“It was almost a perfect storm last year…People were tired of sitting in cash and getting no return, so they decided, ‘Let’s buy large dividend-paying companies, which are on the uptick,” says Michael Bapis, managing director and partner at HighTower Advisors in Chicago. “This year, the underlying trend in earnings growth is slowing.”

To be sure, while the trend seems well-embedded, there are perils.

Investors entered January less risk-averse and thus were willing to take on more cyclical names in the materials and financial sectors, which featured the best returns. Should volatility return and the risk-off trade re-emerge, that could send money back into the defensive names that have lagged.

In fact, Goldman Sachs strategists, in a bearish overall outlook that sees the S&P 500 retreating to 1250 by year’s end, is recommending domestic dividend-payers and a select group of cyclical stocks.

“While we do not believe that low quality will continue to outperform, historically, when low quality has outperformed in January, it has retained leadership for the full year,” Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, said in a note that underscored the conflicting currents.

The market`s message thus far has been a difficult one to decipher in a long-term sense, as inflows to mutual funds have totaled just USD 645 million so far against USD 11 billion for the same period in 2011.

At the same time, the Federal Reserve’s stated intention of keeping interest rates low for the next two years would boost the dividend argument.

But money has come off the sidelines from money market funds for the past two weeks, and equity mutual funds saw USD 1.17 billion in inflows last week after losing money three of the last four weeks and, in fact, every month since May 2011.

HighTower’s Bapis thinks that as long as earnings stay weak and valuations are high for dividend-payers, lower quality will continue to lead.

“There`s more of an appetite for risk,” he says. “People were so conservative last year. Now there`s an appetite for risk, so it`s not as sexy to be in dividend stocks.”

Copyright 2011 cnbc.com

Job creation improves in January, but slowly

Employment growth in January was likely more sluggish than in December, but one tiny glimmer may be an increase in hiring by small and startup businesses.

“We’re starting to see it under-the-radar, and that’s exactly what you’d expect to see,” said Diane Swonk, chief economist at Mesirow Financial. For one, “The quit rate started to pick up.. and people don’t do that unless they have another job. It’s a little bit of a silver lining in what’s still a very dark cloud.”

Economists expect to see about 150,000 nonfarm payrolls added in January, down from a surprise 200,000 in December, and they warn the seasonal factors that drove up December’s data may impact January’s report. In December, 42,000 courier jobs were added, to accommodate holiday package deliveries, and it is likely those same jobs will be lost in January, as they have been in past years. Retailers, in both November and December, added a total of 67,000 workers.

“It will be a soft report, a payback for December,” said Moody’s Economy.com chief economist Mark Zandi.

“Weather helped construction, and if you take those two (loss of seasonal jobs) things into account, we’ll probably get a total 100,000 increase in payrolls. The average for December and January is 150,000, and that probably is where job growth is today,” he said. “It’s okay in an economy at full employment, we’d be happy with that. But given where unemployment is, it’s discouraging. But we are moving in the right direction, and slowly but surely the jobs market is improving.”

Zandi agrees that small business and startups may be adding more employment. He said the last official government data on hiring by business size was released a year ago, and at the time, companies with more than 1,000 employees were leading hiring and small businesses were lagging.

“I sense that small business growth is picking up, and that would be consistent with the household data,” said Zandi.

The household survey is a sample survey based on data from households versus the nonfarm payrolls, based on payroll data from businesses and government agencies. Since August, the household survey has averaged job increases of about 268,000 per month, outpacing nonfarm payrolls.

Swonk said that small business creation may be showing up in those household numbers but it would still be a trickle. “We’re still talking about marginal numbers…We’re cautious because it doesn’t take much to snuff out a small business,” she said.

William Dunkelberg, chief economist for the National Federation of Independent Businesses, said he`s not looking for much in terms of small business job creation though he had not yet reviewed January NFIB data. “I’m not looking for a strong number (in the jobs report),” he said, noting the 150,000 consensus sound about right.

“I`m not looking for a lot since a lot hasn’t really happened. It looks like things slowed down in December, and November was best,” he said. But he noted, like the other economists, that the small business creation data will be hard to decipher.

“Those data we only get with a long lag. It was true in 2010 , we started to have more (business) births than deaths,” he said.

The government is releasing revisions dating back three years with Friday’s employment report, which is released at 8:30 a.m. EST. Economists also expect to see the unemployment rate stay unchanged at 8.5%.

Who’s Hiring

Swonk said she believes there’s a trend underway, similar to one in the 1990s, where small business development is being fostered by larger companies that are outsourcing and are reluctant to add workers to their own payrolls. She expects to see nonfarm payrolls for January of 118,000, with 127,000 additions in the private sector.

To illustrate her point, Swonk said she recently discovered a program in Chicago where big health care companies are spurring new job growth by working with local universities and fostering business formation. The program is not new, but it highlights an important trend and one that is not just linked to the pharmaceutical industry.

Todd Smith works at a small biotech company in Chicago that has been adding workers. Smith is senior vice president of marketing and business development at Horizon Pharma, which has grown from 47 employees to 188 in the last year. He and the company’s CEO both had worked previously at Abbott Labs.

Horizon last summer raised USD 49.5 million in an IPO, as it prepared to launch its first drug in the US, DUEXIS, an osteoarthritis and rheumatoid arthritis drug, for patients with gastrointestinal sensitivity. “That’s allowed us to be one of the fortunate ones to be hiring people in this economy,” he said, adding there are a lot of good candidates available from big pharma that also have smaller startup experience.

Smith said the company is also planning to add more staff later on. It has a second drug pending FDA approval for rheumatoid arthritis, called LODOTRA, which is now being sold in Europe.

Pharmaceutical industry employment was hit hard in the recession. Industry employment peaked in 2007 at 295,000 workers, and fell by nearly 10%, to a trough of 269,100 in early 2011, Zandi said. It has slowly risen to 275,000, as of November and those jobs could include tiny startup biotech firms, as well as major pharma, which laid off tens of thousands of workers due to mergers and regulatory changes as well as drugs coming off patent.

“It’s one of those times in history where you have some of the best people – in spite of what they do – losing jobs,” said Smith. Smith said Horizon hopes to continue adding as it grows.

“As we continue to meet milestones, we will continue to build out,” he said.

He also said because his company is in Chicago, he did not need to move and there are plenty of professionals that can be hired locally. He said the same trend has been apparent in places like New Jersey, where biotech firms are growing up around bigger industry names.

Besides the jobs report, another clue to hiring will be reported in Friday`s non manufacturing ISM number, which shows service sector activity. The number is released at 10 a.m., as are factory orders data.

Questions? Comments? Email us at marketinsider@cnbc.com

Copyright 2011 cnbc.com

Current slowdown ‘nothing like 2008’: Goldman’s O’Neill

While many earnings reports in January 2012 have disappointed investors, stocks performed strongly last month, igniting fears of a market plunge similar to the drop witnessed in the middle of January 2009.

But while there are plenty of risks to an economic recovery, the start of 2012 is nothing like the 2008-2009 crisis, Jim O`Neill, Chairman at Goldman Sachs Asset Management told CNBC on Thursday.

“The key to this market movement over January is that people were worried about everything that could go wrong, literally across the board. And with it, (there was) a staggering amount of cash around,” O`Neill said.

“So just the cessation of bad news itself has sort of appeared (to be) a bit of a positive,” he said.

“We came into the year with people full of fearing (a repeat of) ’08 if not worse…and the evidence from all over the place is that it`s nothing like ’08,” O`Neill said.

He pointed out that at the core of the euro zone, Germany appeared to be accelerating.

“So one third of the euro zone that’s supposedly falling apart is actually improving,” he said.

China appears as though it’s getting closer to a soft landing, he said, and the United States was also showing signs of moving forward.

China had become a driving force in global growth, he said, adding people would have to acknowledge some of the positive news coming out of the region at some point.

“China has created USD 1.4 trillion dollars of GDP in a year, that’s 10% of the euro zone in one year,” O`Neill said,

“I used to say China creates the equivalent of another Greece every four months. It’s now less than every three months. They’re creating half a United Kingdom every 12 months,” he added.

Copyright 2011 cnbc.com

Zuckerberg’s reign over the Facebook kingdom

Facebook’s S-1 revealed a number of interesting facts about the company`s advertising business, its mobile risks, and its pile of cash. But perhaps most striking is CEO Mark Zuckerberg’s stunning control over the company. He is sitting on a massive controlling stake – the largest by a landslide – and he’s putting forth a distinctive, ambitious social mission that could alienate investors.

Zuckerberg controls 1.1 billion class B shares, which give him a nearly 57% stake in the company – he owns about half of them, the rest he exercises proxy voting authority over. He also holds 42.2 million Class A shares, giving him 36% stake of that group.

Zuck, as he’s affectionately called around Facebook, IS the company. At just 27 years old, he controls its strategy and he can prevent its sale of takeover. Investors` evaluation of the company is largely an analysis of Zuckerberg`s management potential. And he`s making an argument that he`s benevolent, even if he might have the power to be a dictator.

The CEO is sending a message with his commitment to ownership of the company – he hasn`t taken any money off the table. His only sales are to cover the tax costs associated with exercising options. And he’s not taking much of a salary – his payday in 2013 will just be USD 1, after receiving just USD 500,000 a year.

Of course his stake in the company will add up to big bucks. His 28% stake of Class B shares will likely be work between USD 21 billion and USD 28 billion, if the company’s valuation is in the expected USD 75 billion to USD 100 billion range.

So what is his vision for Facebook? It has a lot less to do with business than it does with changing the world – which could be provocative to Wall Street. Zuckerberg wrote a long letter to potential investors in the company’s S-1, detailing his commitment to connecting the world and his focus on building products, rather than purely profits. He writes: “Simply put: We don`t build services to make money; we make money to build better services.”

Zuckerberg also lays out how his approach could yield strong returns for shareholders. He believes that users will appreciate his vision, writing “I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.”

But intrinsically, Zuckerberg believes that connecting people will transform the marketing business, which will translate into profits: “We hope to improve how people connect to businesses in the economy… In addition to building better products, a more open world will also encourage businesses to engage with their customers directly and authentically.”

Translated into capitalist-speak, that means Facebook is a conduit for brands to speak directly to customers who want to hear from them, which means much more effective, valuable marketing.

We`ll see whether investors agree with Zuckerberg`s high minded approach to his business, or whether Wall Street will lash back at this attack on its overt desire for profitability to be a priority.

Copyright 2011 cnbc.com

Rising deficits pose major threat to economy: Bernanke

Rising federal budget deficits are posing a significant threat to the US economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

The Fed, following its meeting last week, stopped short of announcing another round of asset purchases, commonly known as quantitative easing.

Bernanke reiterated that stance, as well as the central bank’s intention to keep its targeted funds rate near zero through late 2014.

“While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed,” he said. “Moreover, the sluggish expansion has left the economy vulnerable to shocks.”

Unemployment has improved but remains at 8.5 percent, a level likely to hold when the government releases its January jobs report on Friday.

Bernanke faces a Republican-controlled House whose leadership has been critical of the Fed’s monetary policy and the risk it poses to inflation. The Fed’s Open Markets Committee statement exacerbated those concerns when it stated the central bank would be willing to accept some inflation over the short term in an effort to grow the economy and bring down unemployment.

“We are not seeking higher inflation, we do not want higher inflation  and we will not tolerate higher inflation,” Bernanke said in response to a question from committee Chairman Paul Ryan, a Wisconsin Republican.

The Fed’s balance sheet stands at $2.9 trillion, swelled by purchases of assets such as Treasurys and mortgage-backed securities. The goal of quantitative easing  has been to bring down interest rates and encourage investors away from low-yielding fixed-income vehicles and into higher risk such as stocks and real estate.

The stock market has wiped out much of its losses during the financial crisis, but housing remains mired at Depression-era levels.

“Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing, both residential sales and construction remain depressed,” Bernanke said.

But Ryan pinned blame on the Fed for its easy-money policies in the last decade as the root cause for the current lag.

“A lot of us believe the Federal Reserve was too loose for too long in the 2003 to 2005 period and that in part was what led to the asset bubble and the malinvestment that occurred and the problems we have today,” he said. “I know you don’t agree with that. But because you don’t agree with that, our fear is that you’re just going to repeat these same mistakes again but by orders of magnitude that we can’t even comprehend right now.”

Ryan also said the Fed’s policies are hurting savers by keeping rates so low, and cautioned the chairman against trying to “bail us out” in Congress and its actions that have led to the high budget deficit, expected to be near $1.1 trillion in 2012.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

Daily Newsletter

Subscribe

Tags

#Russia #Ukraine #UkraineRussiaWar #Sievierodonetsk #RussiaAttack #Global #World #HelpRussia

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow