Bernanke's Unspoken Message in Today's Speech
NEW YORK ( TheStreet) -- Anyone who doubts Ben Bernanke's willingness to put the monetary pedal to the metal should read the text of his speech today at the National Association for Business Economics Annual Conference.
He argues that buying demand for products and services remains predominantly a cyclical problem, not a secular problem. That's a fancy way of saying: "If we just add a bit more stimulus to the U.S. economy, we can find 'escape velocity' and achieve a sustainable path to economic recovery." In other words, "QE3, here we come!"
This is a significant milestone that validates a recent shift in the willingness of institutional investors to reassume risk-taking. Many Wall Street strategists and economists have been raising their year-end S&P 500 price targets (from 1,330 at December to now nearly 1,400), and many bearish-leaning hedge fund investors have begun to capitulate and buy equities as well.
In fact, Bloomberg reports today that hedge funds, woefully trailing the returns generated by the S&P 500 Index since September, are buying stocks at the fastest pace in two years! They have no choice but to try and catch up with the market's rapid ascent.
Of course, a note of caution is warranted. For one, when every investor turns bullish, there are no marginal buyers left to purchase stocks (and gauges of hedge-fund bullishness and retail investor bullishness are nearing levels that traditionally signal interim market tops).
Secondly, whereas the European Central Bank may have recently stemmed a liquidity crisis and financial system meltdown with its brilliant LTRO program, the chronic economic problems of massive debt levels, uncompetitive labor markets, and unsustainably high levels of unemployment in Portugal, Italy and Spain make economic, political and social tensions omnipresent. It takes courage to be buying equities in the face of these strains.
Perhaps of most concern to U.S. equity investors: the U.S. economy is likely to decelerate in the months ahead in the absence of further monetary stimulus. Indeed, this is the unspoken message in Bernanke's speech today. Among the pressures soon to face U.S. GDP: