Bernanke Plays it Perfectly
From last week's opening segment:
"Another way to look at it is that the market's fate appears to rest with the jawbone of the man about to speak at Jackson Hole on Friday."
From last week's closing 'Wrap Up' segment:
"I think the theme now is that if you are a trader and if you have profits it is a logical time to take some or all of them."
We know that the decelerating economic backdrop (with inflation measures in check) is supportive of a Fed going unconventionally dovish in unleashing QE style policy if it so chooses. We also know that the political backdrop is not supportive, with Republicans sounding off about a gold standard and a soon to be former Fed chief.
Ben Bernanke walked a middle ground on Friday, giving the market - especially the precious metals segment of it - enough of what it wanted to hear without actually having to announce a policy move. The implication is that bullish price activity can continue and if it doesn't - especially if markets decline along side a more acutely decelerating economy, the Fed stands ready, willing and able to attempt to inflate the system.
The Fed chief is stuck between a rock (poor economy and thus, a poor jobs picture) and a hard place (Republicans ready to lynch him if an announcement of unconventional and market-moving policy is made). He chose to remain consistent as the Fed is on guard to do what it has always defaulted to; print money if needed to attempt to devalue the currency in the name of economic growth.
We are only two months from the election so it is time to start looking past it and that maybe what Bernanke is doing. Though the doomsayer websites (and emailers) would have us squatting in our homes with shotguns out the front windows at the ready for attacks by everyone from dispossessed former McMansion owners to government death squads, the market - and the world - not only refused to end this summer, they have been grinding onward and are well-intact.
Two months sounds like child's play after what we have been through since the Euro crisis first exploded well over a year ago. Still, this newsletter continues to highlight the rising risk profile, although Bernanke's skillful walk of the fine line and the market's reaction on Friday force me to wonder if that was it; if that was the correction prior to the 1460 target on the S&P 500.
The US Presidential election year cycle highlights three potentials. Once again we review the chart courtesy of Ned Davis Research.
Friday's post-Bernanke action implies the market seems to think that Barrack Obama will hold the White House. When the incumbent party is to win, there is an August rise into an accelerated rise (top example). We have been operating under the middle example, which is the average of all election years, to be on the safe side. In that scenario, we prepare for the routine yet notable correction of the middle example as well as the severe correction and potential bear market that could follow the bottom example, when the incumbent party loses the Presidency.
To review where we have been, the blue box highlights the time period when market risk was low - as pervasive bearishness gripped most casino patrons market players - and a bullish risk vs. reward stance was appropriate. A bottom was ground out into June and per the three examples (green box), it has been all bull all the time during a process of sucking the frightened players back in. We are evidently still in that process, judging by the immediate market reaction after the nimble Fed chief spoke on Friday.
However, the green box can carry a few days into September. Since the US market will not open until the 4th, we are basically there. This week could be the pivot to an interim correction per the average cycle, a harsh correction or worse, or in the event of an incumbent victory, a continuation and upward acceleration. This paints the coming one or two weeks as very important, don't you think?
Of course this is just election cycle analysis, which by no means has to continue working well with the current market situation. I am not a gambler, but don't they have a saying about riding a hot hand? The Presidential cycle has been taken seriously by this letter writer since May and that helped keep the analysis on the right side over a very difficult summer. What more can you ask from an indicator? We'll continue to respect it.
Back on Fed Watch
One continues to wonder if QE will even be necessary any time soon. Sure, the current US financial system - along with those of so many other nations - is technically insolvent and is locked into a regimen of periodic and officially sponsored inflationary policy in order to service a massive debt load and continue to function normally; with "normally" defined as "kicking the can down the road as long as possible, but doomed to an ugly demise at the hands of a real and undeniable deflationary unwinding or an increasingly intense inflationary panic."
So never mind the talk about the Fed standing ready to aid the economy as if it just needs another boost to finally get the sucker humming again. The economy is broken because it has been locked into a recurring nightmare of inflation on Demand ever since Alan Greenspan began using such policy in an ever more intense manner against the bear market of 2000-2002. He initiated a massive credit bubble that is still being dealt with today, only with government debt having replaced free market debt as the major driver.
The full text of Bernanke's Jackson Hole speech is available at MarketWatch: http://goo.gl/WJokU, but here are some pertinent snippets that betray a massive ego on the part of intellectual monetarists:
"One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin [ http://goo.gl/Am4Ib ], Milton Friedman [ http://goo.gl/cbir ], Franco Modigliani [ http://goo.gl/b9ZPi ], Karl Brunner [ http://goo.gl/OoThu ], and Allan Meltzer [ http://goo.gl/EZBia ]. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors' portfolios."
These names are trotted out as gods instead of as economists. They are trotted out like the great social, cultural and scientific thinkers who have actually changed the quality of peoples' lives as opposed to simply learned and taught about how to manipulate paper money. Our dear Fed leader is reverential toward these men and cut from the same cloth.
It is all about mechanisms, theories and formulas to them. Gold - the barbarous anchor to stability and one-for-one value retention - on the other hand, is much too simple. Why have simple when you can have overly complex and fraught with risk?
"Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors."
What he does not mention is that the need for such measures is the direct result of decades of manipulation of credit conditions and thereby, paper money. He does not mention that "tail risks such as deflation" only come to things that have first been inflated by being printed not only to excess, but right off any sane macro balance sheet and into the sublime. He does not mention that the use of ever more powerful monetary tools toward new inflation will bring ever more powerful corrective forces into play down the road, just as current problems were brought into existence by previous inflationary monetary policy.
These people - and here we include the likes of today's "brilliant" thinkers like Paul Krugman, Larry Summers and the monetary rock star himself, Nouriel Roubini - actually believe their own bullshit, and that is dangerous because they are setting our policy.
This segment could go on and on, but I've got a newsletter to write. They make the rules and we play by them. So let's get to it.