Bernanke's Unspoken Message in Today's Speech

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Anyone who doubts Ben Bernanke's willingness to put the monetary pedal to the metal should read the text of his speech today at the National Association for Business Economics Annual Conference.

He argues that buying demand for products and services remains predominantly a cyclical problem, not a secular problem. That's a fancy way of saying: "If we just add a bit more stimulus to the U.S. economy, we can find 'escape velocity' and achieve a sustainable path to economic recovery." In other words, "QE3, here we come!"

This is a significant milestone that validates a recent shift in the willingness of institutional investors to reassume risk-taking. Many Wall Street strategists and economists have been raising their year-end S&P 500 price targets (from 1,330 at December to now nearly 1,400), and many bearish-leaning hedge fund investors have begun to capitulate and buy equities as well.

In fact, Bloomberg reports today that hedge funds, woefully trailing the returns generated by the S&P 500 Index since September, are buying stocks at the fastest pace in two years! They have no choice but to try and catch up with the market's rapid ascent.

Of course, a note of caution is warranted. For one, when every investor turns bullish, there are no marginal buyers left to purchase stocks (and gauges of hedge-fund bullishness and retail investor bullishness are nearing levels that traditionally signal interim market tops).

Secondly, whereas the European Central Bank may have recently stemmed a liquidity crisis and financial system meltdown with its brilliant LTRO program, the chronic economic problems of massive debt levels, uncompetitive labor markets, and unsustainably high levels of unemployment in Portugal, Italy and Spain make economic, political and social tensions omnipresent. It takes courage to be buying equities in the face of these strains.

Perhaps of most concern to U.S. equity investors: the U.S. economy is likely to decelerate in the months ahead in the absence of further monetary stimulus. Indeed, this is the unspoken message in Bernanke's speech today. Among the pressures soon to face U.S. GDP:
  • U.S. exports may slow as Europeans buy fewer products and China refocuses its growth on its internal consumption needs.
  • If $4.00+/gallon gasoline prices hurt now, imagine how high your gas bill may rise when the summer driving season unfolds.
  • Abnormally warm U.S. weather this winter distorted the reported strength of current U.S. economic conditions (because the U.S. Labor Department uses "seasonal adjustments" and increases reported payrolls during January and February under the assumption that poor weather prevents hiring workers). This means that the months looking forward will "give back" some of that reported labor growth with further seasonal adjustments generated by the government.
  • Warmer weather also lowered U.S. consumers' utility bills this winter, which aided their ability to purchase goods and services.
  • The pending U.S. presidential campaign will highlight the overwhelming $15 trillion U.S. deficit and the lack of a bilateral approach to working down this albatross. Uncertainty and fear will once again make the headlines and impact investor sentiment.
  • In the absence of changes in tax legislation, which will likely only come after the election is over, U.S. citizens face an onslaught of personal income, dividend and capital gains tax hikes that some economists argue will remove 3.5%-4.0% of annual U.S. GDP growth, effectively putting the U.S. back into a recession. We will likely witness another game of "Congressional chicken" with unemployment benefit extensions and the array of personal tax rates before year-end.
  • It's little wonder that Bernanke sees the need for QE3 given the magnitude of headwinds still facing the U.S. economy. And so, financial markets remain in a dual mode. Secular forces that would diminish economic growth should continue to scare any would-be investor, and such forces are being matched by an ever-happy U.S. Federal Reserve that aims to print money until the unemployment rate plummets and U.S. economic growth fervently and sustainably rekindles.
    Alan Zafran is a partner of Luminous Capital, a $5 billion financial advisory firm providing wealth management services to high net worth families. Alan has over 20 years of industry experience, previously serving as a wealth advisor for affluent families at Goldman Sachs and Merrill Lynch. Alan's experiences include facilitating the execution of credit default swaps on subprime residential mortgages in 2006 and 2007 before the market crashed as chronicled in the book, "The Greatest Trade Ever." Alan is a Contributor to The Street,, and Wall Street Week, and appears periodically on CNBC, Bloomberg and Fox Business News. Alan received his MBA from Harvard Business School after graduating Phi Beta Kappa from Stanford University. For the criteria employed by each publication, please see