Fed passes the ball to Congress

By now everyone knows the outcome of Ben Bernanke’s speech at Jackson Hole Friday, Aug. 26. For those looking for a cure-all from the chairman of the Federal Reserve, his speech was a disappointment.

Overall, the markets were not nearly as disappointed as one might imagine. I suspect the smart money was not expecting much in the way of new programs. Of course, Chairman Bernanke promised to take another look at the economy on Sept. 20, when next the Federal Open Market Committee (FOMC) meets, but don’t hold your breath.

Although the Fed still has some tools it could use if necessary, the Fed is not omnipotent when it comes to stimulating the economy. There is, of course, quite a bit that Congress, the Senate and the White House could do and the chairman made it clear that the ball was now in their court. He also warned those who are hell bent on cutting spending in Congress to be careful what they vote for. He warned that the economy is as fragile as an eggshell right now.

To underscore that point, the second quarter Gross Domestic Product (GDP) was revised down again on Friday to only 1 percent from 1.3 percent just a few weeks ago. At that rate, we are teetering between a recession or sub-par growth. I still give a double dip recession less than a 50 percent chance, in my opinion, but more ineptitude in Washington or a new, negative shock from Europe could tip us over the edge.

The stock market is at an extremely precarious level right now. The averages could go either way, but I believe there is still more downside risk than upside potential over the next few weeks. As a result I remain defensive and nothing that I have seen this week has changed my mind.

Some investors were encouraged when Warren Buffet announced he was taking a multi-billion dollar stake in Bank of America. Yet investors should remember that Buffett is a long-term investor and is not fazed if the prices of stocks he invests in subsequently go lower, in some cases, much lower, before finally rebounding. And in some cases, his investments do not pan out at all.

I would continue to use any rallies to reduce your most aggressive equity holdings and instead focus on dividend and income investments. Now, even the Fed is looking to our dysfunctional government leaders for new initiatives to reduce unemployment and increase economic growth and that does not give me a warm, fuzzy feeling.

The stock market is in the middle of a bounce right now, and I expect that both volatility from Europe and additional selling pressure from concerned investors will drive the averages back to their recent lows. There is a high probability that those lows will fail to hold.

As for this weekend’s arrival of Hurricane Irene on the East Coast, experts are predicting that it could cost billions in damages, not to mention loss of life. Hurricane Katrina was considered one of the costliest natural disasters to hit America in years. It caused $125 billion in damages and lopped 0.05 percent off the nation’s GDP.

Let’s hope and pray that Irene does not prove to be that bad. The last thing we need is another economic catastrophe, but as the saying goes —“When it rains, it pours.”

Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Schmick’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Schmick at 888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

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