DOW – 45 = 13,124
SPX – 2 = 1402
NAS + 1 = 3075
10 YR YLD -.08 = 2.29%
OIL -.36 = 106.91
GOLD -.70 = 1651.10
SILV +.01 = 32.27
PLAT – 16.00 = 1646.00
Federal Reserve Chairman Ben Bernanke testified on Europe to the House Committee on Government Oversight and Reform. In his prepared remarks, Bernanke said:
“Financial strains in Europe have also shown through to our financial markets. During times when financial conditions in Europe were at their most turbulent, investors around the world retreated from riskier assets. In the United States, these pullbacks decreased stock prices increased the costs of issuing corporate debt, and reduced consumer and business confidence. In addition, U.S. financial institutions that were thought to have substantial exposures to Europe saw their stock prices fall and their credit spreads widen.”
“The difficulties in the euro area have affected the U.S. economy,” Bernanke said. “The European Union accounts for roughly one-fifth of U.S. exports of goods and services. Not surprisingly, U.S. exports to Europe over the past two years have underperformed our exports to the rest of the world. In addition, weaker demand from Europe has slowed growth in other economies, which has also lowered foreign demand for our products.”
Bernanke said: “U.S. financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree as the European situation has evolved, but the risks of contagion remain a concern for both these institutions and their supervisors and regulators.”
In particular, Bernanke warned of potential danger to the financial sector.
“The recent reduction in financial stresses in Europe is a welcome development for the United States, given the important trade and financial linkages connecting our economies. However, Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilization.
“Although progress has been made, more needs to be done,” Bernanke says.
Now, there are some people who would argue that the Federal Reserve and the FOMC do not control interest rates, but instead market forces do; the argument is that the target rate is only part of the picture and it can be largely discounted by a fickle market. Wilbur Ross, the billionaire president of WH Ross says: “I think the greatest bubble that is about to burst is the 10-year and longer Treasury, because the idea that inflation is gone forever and for all time, and therefore these artificially low rates can last, is silly.”
To bolster the argument, you need look no further than the past week or so of trading; the market has pushed yields higher while the target rate remained unchanged. Of course the Fed can print money, but can they effectively lower rates? When the FOMC raises rates, it has an immediate influence on the market, but when they lower rates, it can take months to influence the market. But when they print money, we cannot even be sure if the effort will have a meaningful influence at all.
Bank of America Merrill Lynch conducted a survey of fund managers, and the common belief is that investors are more upbeat about the future and the prospects for growth and they no longer expect further quantitative easing measures to be taken by the Federal Reserve or the European Central Bank. The era of quantitative easing-a process by which central banks buy assets such as government bonds to inject funds in the markets-may be coming to an end. The conclusions of many fund managers is that QE has worked; that central bank policy is working; that the fight against inflation is working; and they can’t seem to make the argument for QE3.
And so, many people are looking at the recent improvements in the economy and thinking the Fed won’t be printing money in the immediate future. There are of course, some negative repercussions to printing money willy nilly. Imagine a scenario where the world became uncomfortable with the mounting debt of the United States, where they became uncomfortable with the devaluation policies that the FOMC would be forced to use, where market forces influenced interest rates higher, not because the economy looked somewhat better, but instead because the prospects for prudent fiscal and monetary policy actually failed to appear.
But the reality is that the world has not become sufficiently upset with US debt and the Fed is not going to allow the Euro-crisis to drag down the US economy. Bernanke defended the Fed’s actions to lower the cost of U.S. dollar swap facilities than enabled foreign central banks to provide dollars to banks in their home countries. Usage of the swap lines peaked at $109 billion in mid-February and has fallen back to about $65 billion recently. Bernanke also said the European Central Bank’s decision to pour $1 trillion of liquidity into the European banking system has alleviated concerns about near-term prospects. This seems to mean the Fed may sit back and see where the money flows, but it really doesn’t tell me the Fed has stopped. And the Fed is going to do what all central banks do; they will print more money; they will push down rates in the bond market because rising rates are anathema to growth. And for those who think the Fed won’t step in, just listen to the words of Fed Chairman Bernanke: “Although progress has been made, more needs to be done.”
There is an old saying, don’t fight the Fed.
A Brazilian federal prosecutor filed criminal charges on Wednesday against Chevron and drill-rig operator Transocean for a November oil spill, raising the stakes in a legal saga that has added to Chevron’s woes in Latin America and could slow Brazil’s offshore oil boom.
The prosecutor also filed criminal charges against 17 local executives and employees at Chevron and Transocean, owner of the world’s largest oil rig fleet. Among the defendants is George Buck, 46, a U.S. national in charge of Chevron’s operations in Brazil.
The prosecutor said: “The spilling of oil affected the entire maritime ecosystem, possibly pushing some species to extinction, and caused impacts on economic activity in the region. The employees of Chevron and Transocean caused a contamination time bomb of prolonged effect.”
The charges stem from a 3,000-barrel leak in the Frade field, about 120 km (75 miles) off the coast of Rio de Janeiro state. They include: failure to realize protocols to contain the leak; failure to take steps to kill the well and stop the drilling process; breach of licenses, legal norms and regulation, including altering documents; and failure to meet legal and contractual duties.
So, an American faces criminal charges overseas for an oil spill of 3,000 barrels. Remember the BP Gulf Oil Spill? The Deepwater Horizon spill gushed out nearly 5 million barrels before it was contained. Nobody was charged criminally. The United States must import oil. Brazil is energy independent and they are a net exporter of oil, and that was before they found enormous reserves off the coast of Rio de Janeiro; reserves that rival Saudi Arabia. Brazil is an important ally. They have a nationalized oil company, Petrobras. The Brazilians don’t put up with any stupidity from an oil company. And the lesson we’ve learned today?
Don’t mess with Brazilians’ beaches.