Macroeconomics, many economists agree, is as much an art as a science. And sometimes it requires the 'reading between the lines' skills of a Kremlinologist during the Cold War.

Here's my reading between the lines analysis of recent Fed statements on housing: more housing-related write-offs (and pain) for certain banks and others with mortgage-backed debt.

Yellen, Bernanke speeches: Signals?

The evidence: first, San Francisco Federal Reserve President Janet Yellen, currently a non-voting member on the Fed's Open Market Committee, delivers a low-key, candid-but-not-alarmist speech Monday to the San Diego Economics Roundtable in which she warns that "things could get worse before they get better" and that problems affecting the financial system could stick around "for some time."

Economist David Wang said Yellen's speech could be interpreted "as her staking out a claim on the dovish [interest rate cut] end of the Fed" were it not for the fact that the measured, always dispassionate Yellen "is not known for politicking or embellished commentary."

Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston's 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he said, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."

The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates may be raised as early as the end of this year. But as I have stated previously in my book, Follow the Fed to Investment Success, "Watch what the Fed does, not what it says."

This speech reminds me of the famous "irrational exuberance" speech by then Chairman Alan Greenspan in late 1996. Greenspan said that "irrational exuberance" had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.

However, the Fed did not raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, almost five years later.

Fed Chairman Ben Bernanke was in Massachusetts on Monday, speaking at a conference, according to this article. As you can imagine, he had some things to say about the economy. Believe it or not, they were actually encouraging, and it should cause many to feel at least a little more comfortable, even though the world appears to be ending thanks to really expensive oil futures. In fact, if Bernanke is to be believed, we don't have a lot to worry about.

Well, we do have to worry about a few things, but Bernanke believes that a "substantial downfall" in the economy is not as guaranteed as recent market action has suggested. I'm not sure if he's correct about this. With gas prices hitting a record of an average $4 per gallon, the psychological fallout is going to be immense. Add to that the recent employment data, and the economy seems to have found a wonderful recipe for disaster. But what I like about Bernanke's comments is that they too can hold psychological sway. He believes that the net outlook isn't any worse than before, and many observers suspect that he is done lowering rates. While some might look upon that stance as a harbinger of positive tidings, I think we have to remember that Bernanke's hands are tied right now, and that he has been put in a damned-if-you-do-damned-if-you-don't scenario. If he drops rates any further, then the dollar becomes less valuable on a global basis and inflation becomes increasingly problematic. If he pauses, then what about growth? It all goes back to oil and the dreaded specter of stagflation.

Bloomberg News reports that Ben Bernanke's talk about not cutting interest rates is strengthening the dollar. The result is that speculators are covering their short positions on the dollar and dumping their long commodity trades. These moves are causing crude oil, sugar and copper prices to tumble.

All I can say is -- fantastic! As I've posted, a weak dollar has boosted commodity prices and a strong one would reverse the tide of rising commodity inflation. These rising prices have squeezed consumers, whose spending accounts for 70% of GDP growth. If Bernanke's talk about putting a halt to interest rate cuts continues to strengthen the dollar, commodity prices could fall further.

In cutting interest rates from 5.25% to 2%, Bernanke has contributed to a rapid rise in commodity prices. But the accumulating evidence of building inflationary expectations has him returning the Fed to its roots as the defender of the dollar. Paul Krugman's weak defense of Bernanke's pro-inflationary policies appears to have marked their end.

Let's hope Bernanke will back up his strong dollar talk with a rise in interest rates.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Today is a day that could be marked as Ben Bernanke either defending the dollar or saying the rate cycle was done. Either way, the dollar got stronger against the Euro and oil was down over $3.00 per barrel to under $125.00 per barrel. Nervousness over financials and the economy prevailed at the end of the day. Below are the unofficial closing levels:

• DJIA 12,400.74 (-103.08)
  
• S&P 500 1377.51 (-8.16)
  
• NASDAQ 2480.48 (-11.05)
  
• 52-WEEK LOW CLUB
• TOP 10 ANALYST CALLS

Auxilium Pharmaceuticals Inc. (NASDAQ: AUXL) shares were up over 4% at $32.91 in the final minutes of trading today, although shares were mysteriously lower at the end of the day. The company posted positive data on one of its treatments for a condition in diabetics.

Cheniere Energy Inc. (AMEX: LNG) saw a rise of 12% by the final minutes of the day to $6.14 after the company said it would receive two new cargoes in June.

Lehman Brothers Holdings (NYSE: LEH) saw shares plunge again on worries about its health and on rumors that the investment bank had to tap the Fed window for liquidity. Its stock was down 8% at $31.10 in the final minutes of the day.

Ever had too much to drink and been cut off by a bartender? Federal Reserve Chairman Ben Bernanke did the same thing to the U.S. economy today, and investors reacted as if they had been denied their favorite alcoholic beverage, angrily sending the stock market tumbling.

In a speech today to the International Monetary Conference in Barcelona, Bernanke pointed out that the Fed has "eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. . . . For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely."

Bernanke also expressed concerns about the weak U.S. dollar, which has helped boost the earnings of some large multi-national companies. The Fed is "attentive" to the implications of the declining greenback for inflation and inflation expectations. In other words, investors expecting yet another Fed interest rate cut should not hold their breaths. Bernanke is going to close the candy store sooner rather than later.

But unfortunately for investors, this news came amid growing worries that Lehman Brothers Inc. (NYSE: LEH) may report its first quarter loss and raise billions in new capital. This comes a day after Wachovia Corp. (NYSE: WB) ousted its chief executive Ken Thompson. Shares of Merrill Lynch & Co. (NYSE: MER), Morgan Stanley (NYSE: MS) and Bank of America Corp. (NYSE: BAC) also tumbled.

This really may be the last call for lower interest rates for a while. A bartender realizes that drunks will keep buying as many drinks as they pour. But the benefits of increasing the bar's bottom line are outweighed by the dangers caused by an intoxicated person getting behind the wheel of a car. The same tough love is being applied to investors and though it may be painful at first, it's the right thing to do in the long run.

Fortune, which shares a parent, Time Warner Inc. (NYSE: TWX), with BloggingStocks, struck out this week. What I mean is that it published three articles -- each of which I think completely missed the boat. I really like when Fortune gets an in-depth interview with interesting business leaders. But sometimes, it goes too far praising its subjects.

That may have been what happened in the three stories where I think Fortune whiffed:

• Providence Equity Partners. Fortune had a cover story praising Providence Equity Partners for closing the biggest private equity deal ever. Unfortunately, as I posted, that $52 billion deal fell apart this week. To be fair, Fortune updated its online version of the article with this information. Strike One.
• Bernanke saves the day. Fortune posted an article praising Bernanke for stopping the slide in the stock market with his fast interest rate cuts and emergency lending. This week that illusion was burst as the Dow lost 507 points. Strike Two.

Federal Reserve Chairman Ben Bernanke addressed the Federal Reserve Bank of Atlanta Financial Markets Conference in Sea Island, Georgia this morning via satellite. He discussed in detail the recent provision of liquidity by the Fed.

He discussed the shift in Fed monetary policy from its primary reliance on open market operations to lending tools used to address the credit crisis more directly. He mentioned the increased use of the Term Auction Facility (TAF) by commercial banks" from $20 billion at the inception of the program to $75 billion in auctions this month" and indicated that the Fed is willing to increase the use of these auctions as necessary.

He also discussed the extension of Fed credit to primary dealers through the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF). He mentioned that extending credit to primary dealers was an extraordinary move driven by the potential for a scenario "in which a cascade of failures and liquidations sharply depresses asset prices, with adverse financial and economic implications." He indicated that although improvements in the credit markets have occurred, there are still substantial problems that remain.

U.S. Federal Reserve Chairman Ben Bernanke is urging both mortgage lenders and government officials to step-up efforts to help homeowners avoid foreclosure, Bloomberg News reported Monday.

Bernanke, in a speech in New York on Monday night, also underscored his preference to have lenders forgive a portions of mortgages for selected struggling homeowners, Bloomberg News reported. Bernanke qualified his remarks by stating that the proposal should be tightly targeted to avoid providing an incentive for default.

Bernanke's speech came about one week after the Bank of America (NYSE: BAC), a major mortgage lender, announced it will modify at least $40 billion in troubled mortgage during the next two years to keep customers in their homes, Bloomberg News reported Monday. The action could help as many as 265,000 homeowners, the bank said.

Recently, I had the opportunity to speak with Robert Reich about some of the problems facing our economy and humanity. Those are two very big topics that could easily fill days of talk-time and we managed to scratch through it in 20 minutes or so.

Professor Reich is a wise gent who brings us closer to understanding what is needed in an ailing economy that has seen its share of economic disasters. What is needed is a good old belt tightening, it seems, and significant change in the mindset of Americans. It seems that since China and India are consuming everything in sight, it is up to us to make sue that there is going to be enough food and drink for our future generations.

We went on to discuss how the Oil Sector and Agriculture with stocks such as Potash Corp./Saskatchewan (USA) (NYSE: POT), The Mosaic Company (NYSE: MOS) and Archer Daniels Midland Company (NYSE: ADM) are the natural leaders as they will need to bring much more product to a hungry world.

Federal Reserve Board chairman Ben Bernanke inherited a real mess from Alan Greenspan and the Bush Administration who were all asleep during their watch when noteworthy financial minds Warren Buffett of Berkshire Hathaway (NYSE: BRK.A) and John Bogel, the founder of the Vanguard Group, and numerous other people of substantial financial knowledge and integrity were sounding the alarms.

'My pal Warren' went as far as to call derivatives toxic waste and the true weapons of mass destruction. In the design and construction industry we commonly hear the phrase, "There is never enough time to do it right but there is always plenty of time do do it over!" Perhaps it is a common refrain in other professions too.

Well today, the Fed Chief urged preventive action. This is a crying shame. I do not doubt his wisdom on this matter, unfortunately the horses have long left the barn and now he wants to close the doors simply to prevent the barn from collapsing. We will need the barn if we can ever round up those horses again. Mr. Bernanke was none too fast to react to the serious nature of our economic problems but he is plenty serious now.

Last year I wrote a very positive Chasing Value article suggesting that USG Corp (NYSE: USG) looked like a value proposition when it was trading around $52 a share. We bought it and to say we were way too early would be very very kind because it dropped with the market in the summer and has only recovered slightly.

Even worse, Alan Greenspan and Ben Bernanke are finally talking about a recession and USG is still laying off more workers, attempting to balance labor and product demand in a weak housing market and soft economy.

Berkshire Hathaway (NYSE: BRK.A) is still the largest shareholder, owning over 17% of the outstanding shares. Most of what I liked last year holds true but the depth of the economic downturn shows little signs of improvement. Housing and most related construction service industries are just trying to survive. They have all cut back production.

There is little consensus when the economy might start to show significant signs of improvement, but there are few people who think it will be soon, and I have spoken with many in the business community who think it will be 18 months at least. However, timing the market is always difficult so I believe that the best you can do is try and buy solid companies on the cheap. The difficulties that USG is weathering now will turn into strengths in the future as it streamlines the enterprise, reduces debt, and plans for the future.

American high school students know little about the basics of finance and economics, and the problem is getting worse, according to a report from the AP today.

The majority of high school seniors answered basic questions about finance incorrectly in a nationwide poll conducted by the Federal Reserve. Fed chairman Ben Bernanke called for better financial education, and linked the woeful state of basic economic knowledge to the housing crisis.

Bernanke said, "In light of the problems that have arisen in the subprime mortgage market, we are reminded of how critically important it is for individuals to become financially literate at an early age so that they are better prepared to make decisions and navigate an increasingly complex financial marketplace."

It's hard to disagree with him on this point, but a cynic might wonder if a poorly educated population is really the source of the housing crisis. Sure, Americans don't know much about the power of compound interest or how to calculate net present value, but that's not why the economy is in trouble. The housing bubble was produced by people who knew what they were doing -- mortgage brokers who winked at "liar's loans" and sophisticated bankers who created new financial instruments to get rid of the bad debt. All of these people were highly educated in economics and finance. The problem isn't ignorance but a lack of integrity and regulation.

Reuters reports that jobless claims jumped to their highest level since 2005. Specifically, U.S. workers applying for unemployment benefit rose by 38,000 last week, posting the highest reading since September 2005. I guess Fed Chairman Ben Bernanke had the statistics on his side when he testified that "It now appears likely that real gross domestic product [GDP] will not grow much, if at all, over the first half of 2008 and could even contract slightly."

The key is how the statistics performed relative to expectations. The 407,000 jobless claims reported in the week ended March 29 was way above economists' estimates of 370,000. If consumers lose their jobs, they'll have even more trouble borrowing to pay their rising costs of living. Although government statistics hide it -- anyone who drives or buys food knows that prices are rising.

Bloomberg News reports that job losses are coming from homebuilders and housing-related businesses, including lenders and financial service companies with exposure to mortgage-backed securities, are also stepping up firings. It also quotes an analyst who said, "400,000 is usually a trigger point when we consider recessionary times." I credit Bernanke for knowing a bit more about what's going on -- unlike the President who was shocked to learn about $4 a gallon gas. .

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Federal Reserve Chairman Ben Bernanke testified before Congress today on the economy, the credit crisis and the Fed's involvement in the sale of Bear Stearns to J.P. Morgan Chase. While much of the testimony summarized the Fed's recent actions and positions, there were several high points in the testimony.

First, the Fed Chairman discussed the possibility that the U.S. economy may contract in the first half of 2008. The market temporarily reacted negatively to this announcement and then rebounded. This was probably due to the realization that this also means that the Fed will continue to maintain a loose monetary and credit policy for the near future.

The Fed also showed how close to a global financial meltdown we came. The testimony detailed the reasoning behind the Fed's action to prevent the bankruptcy of Bear Stearns and facilitate its sale. It made clear that because of the interconnectivity of the world financial community, a bankruptcy could have resulted in a meltdown on a global basis, not merely one in U.S. markets.