An Intimate Chat with Dr. Ben Bernanke
Yesterday afternoon the Surevest Investment Committee had the pleasure to be part of a small group that enjoyed a live video conversation with Dr. Ben Bernanke. As many of you are aware, Dr. Ben Bernanke served as the 14th Chair of the Federal Reserve from 2006 to 2014. Most importantly, he is one of the top authority figures when it comes to crises as he studied the Great Depression and was the man in charge during the financial crisis of 2008-2009.
Naturally, we were all curious what he thought about the 2020 COVID-19 crisis and where he thinks the economy is headed over the next 12-18 months. Dr. Bernanke said he thought the current Fed Chair Jerome Powell and Congress responded well to the situation and did what was necessary to keep the economy from falling off a cliff. Going forward, Dr. Bernanke shares our view that things are looking bright for the second part of 2021 and first part of 2022. However, he does caution that the COVID-19 variants can pose a challenge if the current vaccines turn out not to be as effective as initially thought.
Dr. Bernanke went on to address the Fed balance sheet, which now stands at $7.5 trillion and the national debt that is roughly 100% of GDP. He believes that the debt now does not pose a concern because real rates are negative, which has caused the debt service ratio (available cash flow to pay current debt obligations) to be better today than in the past. He did concede that the debt issue will have to be addressed, but it is not urgent, and he does not think it will lead to higher-than-expected inflation. He made an excellent point that our economy today is less prone to economic inflationary shocks than in the 1970’s when inflation became a real problem.
Dr. Bernanke also talked about the current housing situation and said even though home prices have moved up quickly, it is nothing like what we saw in the mid-2000’s. Today the quality of the mortgage market is much healthier and the home prices relative to rents is more reasonable now than in the past.
He finally discussed China and affirmed our view that the Biden Administration is much more likely to use a multilateral approach and be slightly more cooperative than the previous administration.
It was helpful to hear Dr. Bernanke’s insights on the macroeconomic environment as this is crucial to understanding the stock and bond markets. Ultimately, our investment outlook remains the same as we expressed in our quarterly commentary. In today’s environment, having an underweight to cash and bonds makes sense because rates are so low, and the yield curve continues to be flat. Having an overweight to equity is the right position here, although that may come with some volatility in the short run. We value your continued trust in us and will continue to monitor the market environment to keep you updated.