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Hope Bernanke is right

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by Peter Switzer

The US central bank boss Ben Bernanke did an Alfred E. Neuman of the infamous MAD magazine by virtually saying: “what, me worry?” While he admitted there were troubling issues, he insisted that the US recovery continues albeit “at a moderate rate”.

On another important concern, he said inflation isn’t engrained and is largely caused by the recent spike in higher average prices. He thinks the recent rises were transitory.

He also suggests with the labour market carrying such high unemployment levels, the likelihood of inflation coming isn’t expected.

This basically says that he doesn’t have to raise interest rates soon. Despite this, the Dow Jones did go from positive territory to negative during the time he was talking to a US conference.

Away from Bernanke, many US economists think the second quarter slowness is temporary and is due to higher oil prices and the impact of Japanese supply chain disruptions.

The trouble is that QE2 ends at the end of June and then the economy will have to grow without the Fed’s life support system. That will be an important test.

So the big question is, can we trust this view that the US slowdown is temporary?

CNBC pointed to Deutsche Bank’s US economist Joseph LaVorgna who thinks the Japanese hit to US car-making was bigger than expected.

Auto production fell 8.9 per cent in April and four per cent in May, which represents an annualised fall of 29 per cent for the second quarter and if it continues it would be the worst fall ever — even greater than the GFC!

"If there is good news here, it is that the negative hit to production is due to Japanese-related supply disruptions — they turned out to be much more serious than we had anticipated," he wrote.

If he’s right, it means the US recovery should pick up later in the year, which will help share prices.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, June 08, 2011

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