Ben Bernanke Speaks In Denver

Mark Brown and the Brown and Company team attended a luncheon with Former Fed Chairman Ben Bernanke in Denver on November 28^th.  Dr. Bernanke is now an advisor to PIMCO, one of the largest fixed income managers in the world.  The lunch was a forum put on by PIMCO in order to better understand Chairman Bernanke’s current insights on the markets.  It was a very interesting lunch and it was particularly exciting to hear Chairman Bernanke’s thoughts about the financial markets, interest rates and politics from the seat of a private citizen.  David Braun, a fixed income portfolio manager at PIMCO, joined Chairman Bernanke on stage to ask questions and engage in a dialog. Bernanke has been an advisor to PIMCO since 2015.  Prior to his role in the private sector, he served as Chairman of the Federal Reserve during the George W. Bush and Barack Obama administrations. The following are Dr. Bernanke’s thoughts from the event as he made general comments and then addressed questions.

• The economic expansion that we have experienced in the U.S. is now 10 years old. “The era of low volatility is now over” and investors should expect greater volatility in the next 5 years
• Bernanke was surprised during the first three quarters of 2018 at how buoyant the markets have been. He was not surprised by the recent volatility in October
• He noted that the Trump tax cuts in 2108 were “quite unusual” because we are adding fiscal stimulus into an economy that is already close to capacity. Typically governments don’t add fiscal stimulus in this environment
• We are expecting about 3% headline GDP growth in the U.S. for 2018. This is largely due to a healthy economy and the added boost from tax cuts
• There is broad consensus that the global economy is slowing, though growth is still positive
• Fiscal stimulus from the tax cuts should add roughly 70 to 80 basis points of growth to the U.S. GDP number this year and 30 basis points to the 2019 calendar year
• In 2020, the current year’s tax cuts will actually have a slightly negative impact on headline GDP
• “Expansions don’t die of old age, they get murdered.”
  • Hurt by the Fed, in order to stem inflation
  • Hurt by financial disruptions, like the 2008 mortgage crisis and the 2000 tech crash
• Still, there is a relatively low risk of recession in the short term and economic fundamentals remain solid
• Commercial real estate and corporate debt are overheated, but this is not yet a cause for broad concern
• Today, banks are much better capitalized than they were in 2008
• The financial system in general is much stronger today than it was 10 years ago
• With respect to future GDP growth, there will be two primary factors: population growth and productivity growth
• Hard to see population growth at much more than 1% annualized
• Productivity growth will have to be the driver of growth to get above 3%
• So far, things like artificial intelligence (AI) and self-driving cars have contributed almost nothing to productivity, although they could in the future
• Current Fed Chair Powell gave a recent speech in which he indicated that the Fed was close to its lower range of the “neutral rate” for the economy
• Powell’s speech was, in Bernanke’s opinion, “no new news” because the Fed had already given its targets for the neutral Federal Reserve rate
• Bernanke talked extensively about the Fed unwind from QE
• It has generally gone quite well. The unwind has been quite simple—all maturing bonds are allowed to roll off the balance sheet
• Europe and other central banks are watching the U.S. closely to monitor how well this process of unwinding is going. Because it has gone well, Bernanke expects the European Central Bank to follow suit in 2019
• Bernanke mentioned his great respect for current Fed Chairman Powell
• “The Fed is the most non-partisan institution in Washington.”

1. The economy is relatively strong and will continue to be solid in 2019.
2. The Fed is managing the monetary part of our economy quite well. It is being responsive to growth and keeping a good balance between growth and inflation.
3. 2020 looks like it could be a tougher year for the markets and the economy.
4. The Fed may well engage in a new round of QE in the next recession, because interest rates remain low compared to long-term averages