August 2008

In thinking about this month’s FYI, I could not help but wonder if Chairman Bernanke was asked that question regarding the economy during his recent testimony before the Senate. You see, after the last Federal Open Market Committee (FOMC) meeting held on June 25th, the following FOMC statement was issued,  “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.” That statement sounded as though the Federal Reserve believed, based on their analysis that the economy was improving. It would not have been out of the question for one of the Senators to ask, “Are we there yet?” Have we finally turned this thing around? Unfortunately the answer would have been, “Not yet.”

A couple of things have happened since the last FOMC meeting that questions the economy’s recovery. First, FNMA and Freddie Mac’s long-term health have been called into question. Their purpose for existing is to promote the mortgages in this country, and we all know what has been going on in the housing market. The U.S. Government is being forced to make the “implied guarantee” an explicit guarantee. The second thing, which is also associated with the mortgage debacle, is the failure of IndyMac, a 32 billion dollar financial institution in Pasadena, California. I have recently read it is the second or third largest financial institution failure in the history of the United States.

In his July testimony before the Senate Banking Committee, the Chairman did a little back peddling. He said that “significant downside risks to the outlook for growth” and “upside risks to the inflation outlook have intensified.” Further the belief is “Consumers spending is likely to be restrained over coming quarters.” Also “businesses are likely to be cautious with their spending in the second half.” These statements reversed the statement following the June 25th FOMC meeting. He went on to say; “The effects of the housing contraction and the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power.”

On July 15, a wonderful thing began to happen. The price of a barrel of oil began to decline. Yes I said decline, and after declining for three days, a better description is “falling.” It fell a total of $15 over the three-day period. The markets rallied and the short sellers scrambled to cover their shorts. As I said, it was wonderful.  At least for now, you could say the mood has changed to be more positive. We are closer to getting there, but we are not there yet.

Mid-Atlantic Corporate will continue to do what we have been doing all these years. We realize it is not our money, it is your money. Our investing philosophy of safety, liquidity and yield remains unchanged. This storm will pass, and we will go back to more normal times, I promise.

So if a passenger in your vehicle asks, “Are we there yet?” Tell them what I am sure Chairman Bernanke would say, “Not yet, but we are still on the right course and we are getting closer.”