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Advice for Investors, Informed by Ben Bernanke


“Supervision, oversight and monitoring of our own banking systems. Standing ready to provide backstop liquidity if necessary,”

-Ben Bernanke's depiction of the tools of the U.S. Federal Open Market Committee (FOMC), as stated in his Joint economic committee speech to congress on the state of the economy, October 4, 2011.

Speech Highlights

I've listened to many of our Federal Reserve chairman's recent speeches, and this one seems fairly interchangeable with the last. On the negative side, we are not making much economic progress. As the quote stated, the FOMC is doing what it is charged with and standing at the ready to maintain stability in the banking system. In other words, they are the creators and maintainers of US government monetary policy.

Bernanke's Main Points:

  • The economy both here and abroad is sluggish and is expected to grow slowly for the foreseeable future.
  • Payrolls were up 100k per month last month, 50% less than earlier in the year.
  • Unemployment remains around 9%.
  • Continuing sluggish growth is expected.
  • In the past, the housing sector usually drives the economic recovery. Because of the confluence of the past several years of housing turmoil, including the number of homes underwater and excess inventory of homes, the housing market is hindering the economic recovery.
  • Credit is tighter than normal.
  • There is more volatility in financial markets than normal due to macroeconomic worries both here and abroad and the downgrade of the U.S. credit rating by Standard and Poor's.
  • European sovereign debt worries.
  • Lower confidence in the economy by households and businesses.
  • Even the government sector is a drag on the economy due to the spending and employment cuts.

In sum, the uncertain future government fiscal policy adds to the overall economic fears. The remedies for this negative outlook are not new, but continuations of the previous monetary policy.

FOMC Recommendations

The overall government strategy is to continue to provide liquidity for our banking system. The strategies are not new; keep short term interest rates low through mid 2013, extend debt maturities and reinvest the earnings. Banking oversight continues to be a primary concern. As one would expect in this global community, the committee will work closely with Europe and their banking systems to maintain worldwide economic stability.

How Can we Restore Confidence in the Economy?

Bernanke's responses to the congressional joint economic committee suggest that they need to put together a long term sustainable economic plan. In sum the government must create clarity and improvement in tax and spending policies. The tax code must be reformed. Congress needs to make the hard choices and evaluate the quality of government programs. Bernanke further encouraged congress to improve the process by which long term government decisions are made. He implied, neither the tax nor spending programs can effectively continue without economic consequences.

Advice for Investors

There is no doubt that the economy is sluggish with little hope for a rapid reversal. For those investors who are not yet in retirement, this environment can be a positive. When the outlook is gloomy and there is excessive volatility in the economic markets, long term investors have the opportunity to make outsized long term returns.

Of course, no one can predict the future, but over the past 140 years, the overall trend of the equity markets is upward. With the exception of a few unfortunate 10 year periods during this duration, returns in broad based equity indices were positive.

Put in as much money as you can comfortably afford in tax advantaged retirement accounts; IRA's, Roth IRA's, employer sponsored retirement plans, 401(k)'s, 403(b)'s. If you have some cash unallocated, that you will not need for the next 5 or so years, invest in a broad based US and/or world index fund.

The time wealth is created is when equity valuations are low, fear is rampant, and the short term outlook is dire. Don't worry about short term volatility. If you believe over the long term that U.S. and world economies will continue to prosper, now is a time to take the news with a grain of salt and continue to invest.

Please do not construe this article as a recommendation to buy or sell any individual securities or market assets. Contact your financial advisor for recommendations suitable for your individual situation.

Posted-In: Ben Bernanke economics FOMCTopics Events Economics Markets General Best of Benzinga


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