Unless you’ve been living under a rock, you know that recent data suggests the economy could be falling into recession. What can you expect from Ben Bernanke’s speech, Thursday?
Deutsche Bank Chief US Fixed Income Economist Joe LaVorgna joins the panel for this conversation.
Following is a summery of LaVorgna’s main points.
--The economy is not in recession. This is apparent from employee tax withholding receipts which continue to expand.
--Real interest rates are extremely low; recessions typically do not happen when the inflation-adjusted fed funds rate is under 2%.
--The inter-bank funding crisis is pretty much over--Libor spreads have been tightening dramatically over the last month, yielding just about 15 bps over the fed funds rate.
--Bank lending--in all areas (consumer, industrial and real estate) continues to boom; the banking sector, at least away from the money center banks, is healthy and functioning.
--Consumer spending will slow but not roll-over.
Conclusion: LaVorgna thinks Bernanke will probably disappoint the markets by not saying enough to calm people down.
What’s the trade?
If you don’t think the economy is going into recession then bet against aggressive Fed easing, LaVorna counsels.
