BERNANKE'S TAKE ON THE RECOVERY

Chairman of the Fed, Ben Bernanke will sit down on Capitol Hill Tuesday morning and tell lawmakers how he sees the economy to play out over the next six months or so. It's a big event as the chairman at the world's most powerful bank testifies and onlookers are gearing up for how he might even outline a so-called exit strategy from an embarrassing mount of taxpayer funds used to prop up the corpse of the dead economy.
 
Monday's equity market rally launched the Dow industrial average to a gain for the year. It also sent the S&P 500 index to its highest reading since June 11 when it threatened to break up. It wasn't so much powerful earnings data that propelled the day's gains as much as a better conclusion to the CIT saga.

Last week the financing company told a sad tale when it announced that it was unlikely to get assistance from the government. The Obama administration took a calculated gamble that the market would muster the confidence to buy CIT's assets, or that it would be successful at restructuring under bankruptcy protection. It worked as bond holders came to its aid and stumped up the cash.
 
Mr. Bernanke will have to steer a careful path. On the one hand the economy is not as bad as it was in the first quarter. But it's hardly the case that there will be a significant rebound. In other words it will be a long time before you'll see a sign declaring "Business as Usual" hanging outside the door.
 
Dollar-watchers will hang on every word of what Mr. Bernanke has to say. Confidence in an American recovery has been sufficient cause for investors to reach for riskier assets to the detriment of the dollar. At the same time bond yields have also risen indicating the growing likelihood of a Fed rate rise sometime. As we've argued before, the tepid state of economic activity is unlikely to usher any central bank into a rate tightening mode anytime soon. Several central bankers have already confirmed that.
 
Mr. Bernanke is poised perhaps to point to the emergency exits so as to give investors fearing inflationary pressures some reassurance that vast amounts of money put into the economy could be removed just as quickly.
 
Investors' expectations for inflation between 2015-2019 as measured by TIPS or treasury inflation protected securities at the beginning of 2009 stood at 2.10%. Recently perceptions shot up to 2.79% on the same measure, which is higher than the four-year average rate of 2.66%. Theory suggests that the money going into the economy today could create an inflationary shock. However, the Fed must get creative in withdrawing money or absorbing banks' future willingness to lend should the economy get hotter.
 
To start the week bond investors warmed to the prospects for what Mr. Bernanke might say. If he dashes recovery hopes by referring to the omnipresent risk of not being out of the proverbial woods, yields will do precisely what they need to do, which is to remain low.
 
Without low yields, the recovery will undoubtedly suffocate.

The Supreme Council of the Secret Order of Jurojin