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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8 Comments on "The Wonderful Wizard of Washington"

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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… Read more »


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.

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… Read more »
Fly Me to The Moon


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.

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… Read more »
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… Read more »

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.

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… Read more »