- Money Morning Australia

The Wonderful Wizard of Washington


Written on 30 August 2011 by Aaron Tyrrell

The Wonderful Wizard of Washington

Ah Ben, you’ve done it again! US Federal Reserve chairman Ben Bernanke has moved global markets by hinting ‘something’ may happen at the next meeting of the Federal Open Market Committee in September.

Rumours are rife that QE3 is on the table. That’s why we saw such a sharp rally in the US on Friday night…

Bernanke really didn’t say much… Just that the US Federal Reserve has ‘tools’ that could keep the economy ticking over… But that was all it took…

The Dow Jones rose 1.21%.

The S&P jumped 1.51%.

And the NASDAQ leapt 2.49%.

The media pundits call it Bernanke’s ‘bazooka-in-the-pocket’ play. The logic is, if you say you have a bazooka in your pocket chances are what you want to happen will happen.

And you’ll never actually have to use your bazooka.

It’s like in The Wizard of Oz. The locals said the wizard was great and powerful. Dorothy and co. believed he had the power to give the scarecrow a brain. Because they believed, the scarecrow became one of the greatest thinkers in Oz. Even though he’d got nothing from the wizard but a bagful of sawdust stuffed in his head.

It’s the same thing with Bernanke. People believe he can save the market by pushing a button and pulling a lever. His vague talk of ‘tools’ was enough to lure buyers back into the market on Friday.

Is it 2010 all over again?

 

In the week following Bernanke’s 2010 speech in Jackson Hole, Wyoming, the Dow climbed 2.9%… The S&P 500 climbed 3.61%… And the NASDAQ jumped 3.59%…

That was the start of a seven-month rally that saw the NASDAQ, Dow Jones and S&P 500 put on an average of 20%…

And our own ASX200 got a 10% boost…

Will it happen this time?

Slipstream Trader, Murray Dawes, says we have now entered a game of cat and mouse with the Fed. The macroeconomic indicators are pointing south. But the market is going up because Bernanke has said he has more tricks up his sleeve.

We could see the market stage a rally ahead of the FOMC meeting in September, but odds – Murray says – the risk will be to the downside after the meeting. That is unless the Bernanke bunch embarks on a very large round of Quantitative Easing. The odds are low, but be aware that it could happen.

The S&P/ASX200
The S&P/ASX200
Click here to enlarge
Source: Yahoo! Finance

Aaron Tyrrell
Editor, Money Morning

 

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From the Archives…

The Real Reason Behind Buffett’s Billion Dollar Punt
2011-08-26 – Kris Sayce

Marking 40 Years of Financial Terrorism
2011-08-25 – Kris Sayce

The Strange Case of Dr Bernanke and Mr Market
2011-08-24 – Kris Sayce

The Bear King
2011-08-23 – Aaron Tyrrell

It’s Not BlueScope Steel’s Fault. It’s the High Aussie Dollar!
2011-08-22 – Aaron Tyrrell

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8 Comments For This Post

  1. TRB Says:

    Well AAron first post from MM that actually is very close to how the market really works.
    Mr Market works on irrational perception not on facts.
    Mr Market needs it’s daily dose of delusion to keep the herd happy.
    So you get your daily bread of extreme comments from the false gurus.
    Peter Schiff,Marc Faber,Gerald Celente,Jim Rogers,Alex Jones going into hyperinflation buy GOLD not food.
    What does the bible say “Man does not live on bread alone”
    Buying gold is like a mass religion, you need to buy it, to protest against the central bankers and corrupt governments of the world.
    We are good people us gold bugs chosen few, we don’t want hyperinflation or a financial blow up.
    Instead we buy gold to lose money and save the world.
    Give me a break, you gold bugs are only buying gold for a profit. Everyday you need your daily dose of the nasty FED to feel better.
    QE3 coming hyperinflation is nearly here gold going to $5000 ounce.
    Nothing wrong with a profit don’t try to take the high moral ground because there is none, you need doom and gloom to make money of other peoples misery.

  2. M&M Says:

    TRB

    So are what are you saying? Why would you suggest that liquidity is a problem and not demand?

    Are you suggesting that creating and handing money to the masses is a better way to sustain an economy (to grow jobs and standard of living)?

    That’s what the Bernanke and QE is ultimately trying to do. Create false demand through a helicopter drop.

    It can’t be anything but unsustainable. Surely it’s analogous to a dog chasing it’s tail…. Or what ever analogy actually fits.

  3. TRB Says:

    MM for a start I do not believe that the masses are getting trillions of dollars in cash given by the USA government.
    The facts are the FED creates a electronic cheque account then buys the bond places the electronic funds in this new cheque account.
    So no real cash gets to the masses as you gold bugs are always screaming money printing Zimbabwe economics.
    That my friend MM is the big difference USA population do not get the real cold hard cash,In Zimbabwe they do get the cash.
    The bond market vigilantes would slaughter the FED if it try massive money printing like Zimbabwe.
    Interest rates would soar to 20% in no time, remember we are yet to see the bond viglantes?
    The bond vigilantes do not live in Alice In Wonderland they are realist and rational thinkers.

  4. Fly Me to The Moon Says:

    TRB

    I would agree that the lions share of Fed QE (money printing) goes directly to buying bonds, and only a tiny amount ever goes directly to the masses (for “masses” substitute GEC, GM etc).

    However there is no ring-fence around this liquidity – and inevitably over a period of months more & more of it leaks out into the commodity markets. This is self-evident as we can all see there has been a sharp rise in household prices that can’t be explained by excess demand or lack of supply.

  5. M&M Says:

    TRB

    Totally agree. But isn’t the intent for money to flow to create demand?

    Eventually… to trickle down from an investor’s earnings which can be used in his/her demand which leads to more sales and more employment. Or to come out of bank reserves as a loan – stimulating demand.

    US, and now we hear businesses in Australia, are hoarding cash….

    When that’s released, there will be another bubble of speculation in a particular market (eg housing or another inflationary spike in retail goods or energy or food or health etc…..). We have to be smart enough to get in front of the curve.

    Then what? Interest rates will rise to curb the effects. That might bring out the vigilantes. After all some of them want a new world order.

    Again – I think it’s about creating false or unsustainable demand.

    Gold is just insurance. I don’t trust money printing.

    We cant have an economy where we’re all “economically speaking” satisfied by creating money and handing it to people (ok businesses and banks) when ever we want to ponsi up on the last bet.

    Some investors (banks & investors) have big kahunas and are front running the pack and purchasing equities before they rise – it’s the first port of call for money sloshing around in the system.

    They’re winning in this game so far – they’re good traders. I’m an investor so it’s a lot harder.

    The tax payer will ultimately lose in many ways.

  6. TRB Says:

    FMTTM your comment inevitably over a period of months more & more of it leaks out into the commodity markets.
    It’s self-evident.
    Is it self evident really?
    Is there really a direct correlation between FED money printing and increase in commodities?
    As Popper and Taleb would say give one example different a black swan your whole theory falls apart.
    Between 1980 to year 2000 the FED increase the money supply 3 times commodities sunk and gold fell over 70%.
    In the GFC of 2008 FED bail out many banks with trillions of dollars EARLY and still the DOW fell over 50%.
    Self evident I don’t think so?
    Self evident stands the test of time like honesty,integrity and kindness it does not apply to the world of nasty corrupt gold economics.

  7. M&M Says:

    TRB @ 6

    Surely there are compensating reasons for why money supply (as you say) grows 3x and certain commodities dont inflate.

    I wonder if that’s net 3x money supply Or gross money injected before private borrings are reduced (destroying money)

    Did anything else go up in that period…..?

    Money must have flowed somewhere.

  8. TRB Says:

    MM you assume alot of cash sloshing around looking for the next boom.
    Peter Schiff the great hyperinflation guru was wrong in 2008 the money sloshing around went to pay down massive debt in US dollars.
    Do you know the debts are still there?
    Still too much debt around for your investment game plan and the so call smart traders like Peter Schiff cost their shareholders big money this genius had investments in Babcock and Brown blind freddy could see it was levelaged to the eyeballs in debt.
    Macqaurie Bank is another sucker play for bullish smart traders.
    They just ignore all the debt in the system and think don’t worry the FED will inflate it away?
    Becareful the FED is yet to be sort out by the bond vigilantes and the Tea Party movement.



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