Gentle Ben Bernanke gave a big speech yesterday at Jackson Hole. There were two main themes in the talk. The first was an overview of where the economy has come since the Panic of 2008. In paragraph after paragraph, he gives the little bit of good news, followed by an immediate, "however…" It’s the "howevers" that have concerned us and continue to. His rhetorical pattern reminds of dealing with teenagers.

“Hey, you didn’t cut the lawn like I asked.”

“Yeah, but…”

A rule in our house is, no saying, “Yeah, but…” I suppose Chairman Ben can’t help it, but the economy remains weak and he’s got to spin the news as best he can.

The other major theme of the talk is Ben’s recurring drumbeat: We will do whatever it takes to fight off deflation. About the only thing the Fed can do at this point is to reach out into the treasury bond and mortgage bond markets and buy bonds by the truckload. This will help to drive down interest rates and pump cash (newly printed) into the economy. If that cash works its way into net new bank lending and equipment financing, then it might help spur the economy. So far, that cash has worked its way into the bonus checks at the “too big to fail” banks. Partners at Goldman Sachs are living large; the average American household has got nothing to show for the Fed’s $2+ trillion purchase of bonds so far.

For a while in 2009, the Fed was allowing its portfolio to shrink as its mortgage bonds paid back principal. As that principal repayment has accelerated (due to refinancing and foreclosure), it is now reinvesting that cash into long-term treasuries. The annual amount is in the $250 to $300 billion range. Do you need any further explanation about why long-term treasuries and mortgage rates are falling? What do you think will happen when the economy begins to recover in earnest and the Fed pulls that buying support out of the market?

Chairman Bernanke’s much-anticipated Jackson Hole speech did nothing to change our tactical outlook for our clients’ portfolios. We are underweight stocks, and our bond investments are concentrated on the short end of the maturity range. When the Fed finally pulls its support for long-term bonds, we might find some buying opportunities.