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The response of the markets Wednesday May 22 to remarks May 21 by James Bullard, President of the St. Louis Federal Reserve Bank and to comments May 22 by Fed Chairman Ben Bernanke showed how frail the much-lauded "recovery" is, how fragile the indices are and how dependent upon continuing injections of liquidity and bond buying (monetization of the national debt) by the Federal Reserve.

Speaking ahead of meetings with his ECB peers, Bullard urged the ECB to proceed with quantitative easing to avoid becoming mired in multi-decade stagflation like Japan. In addition to pressing continued debt creation and devaluation of the euro, Mr. Bullard added that it would be a mistake for the Fed to cease buying Treasury debt because there is "no risk of inflation," that is, America's economy is sluggish. By jawboning the Germans to relax their opposition to more debt - liquidity as a way to stimulate Europe's moribund economy Bullard also was protecting the strength of the USD relative to its main peer, the euro (57% of the DXY index).

QE or debt creation is steering the economies of the West into a no-exit double hit of lower bond yields and artificial equity highs and then a deflationary depression when they try to unwind the debt. That's the hard road to a new world economic order and end to the fiat system.

Then on Wednesday, Chairman Bernanke confirmed views about the reliance of American markets on QE. After Bullard's comments had led to large gains the morning of May 21, the chairman speculated that there could be a tapering down of bond buying "over the next few meetings" of the Fed, over the next few months although now it would be "premature." The indices tanked with the DOW ending the day down 80 points and the USD rising at the suggestion that debt creation might slow, especially relative to Europe. The Fed has become adroit at giving ambiguous, "on the one hand and on the other hand" guidance that confuses but does not guide. In this it is like the market itself.

"More confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases" read part of the May 01 minutes. Then, after stating that "monetary policy [QE] is providing significant benefits" the Chairman spoke of tapering and the markets dropped. There's the experiment and the proof that this is a sovereign-debt fueled, that is, an unsustainable recovery heading sooner or later for the inevitable deflationary depression that von Mises described as the result of debt-creation. If the enormous "credit expansion" as he called it was available to consumers rather than largely held by Banks to anchor their derivatives or to invest we already would see the classic inflation than depression model.

The drop in bond prices is a warning to those who have long-term fixed income instruments to move them to intermediate or short term investment grade, cash or even physical metals (NYSEARCA:PHYS) or (NYSEARCA:PSLV) or (NYSEARCA:AGOL) at current depressed levels. Yes yields rose as did the USD, but bond and equity prices fell. The Swiss franc regained safe haven appeal as fears that the Fed would reduce QE dropped the Euro Stoxx 600 index 2.1%. A market geared to sovereign debt creation will not sustain a rally: any crisis could gut the bull.

The reaction of prices and trading to the comments and minutes on May 22 showed that the markets are ruled by Fed policy and detached from economic realities. Consider yourselves on notice. The makers of policy can goose or tank the Humpty Dumpty markets as they choose: it depends on their vision for a transformed America. The economy is not the main determinant for market behavior. Indeed, fiscal policy is designed to screen the effects of a sluggish economy from prices.

The rise in the USD was assisted by one of its peers in the DXY basket: on Wednesday in America the yen plunged and the Nikkei index soared. On Thursday things reversed: the shattered yen rallied, the Nikkei dropped and the USD dropped. However and per our primary focus: USD strength (or weakness) is relative to its fiat peers and its relation to the main U.S. indices and to PMs no longer is regular. For example, as the DXY index fell on Thursday from its 52-week high at 84.498 to 83.81 stocks also fell. The price of gold was modestly up $14 to $1380/oz while silver was down a few pennies. After hours gold rose as the fear of "tapering down" QE gave PMs safe haven luster.

The amount of debt creation by major fiat CBs has made the markets unreliable and the relation of currencies to equities difficult to read. Both the rise of the yen (and plunge of the Nikkei, the largest daily drop in two years) and the slump in US equities were attributed to "speculation" about Mr. Bernanke's hints on whether the Fed might ease back on debt creation / buying T - bills in the coming months. It is not likely but no one can say for sure and speculation about the CB has displaced fundamentals in market behavior. It has become like court news and gossip. "U.S. stocks fall on speculation the Fed may cut bond purchases" Bloomberg wrote in a typical story.

Ten-year Treasury bond yields have risen above the dividend rate on the S&P for the first time in a year. Despite speculation to the contrary, this does not mean the economy is sound, it simply shows that both major asset classes are tied to fortune-telling about the Fed's intentions. Real incomes, net worth, under-employment and part-time employment, plus a plunge in applications for first time home mortgages Reuters reported May 15 and the anemic rate of retail sales (lower lows and lower highs since 3Q 2011) all signal an economy in distress.

The economy depends on retail buying but overleveraged consumers are trying to pare debt rather than take on more. That is good for them but trouble for markets. If debt creation does not continue the action May 22-23 hints at a significant slump. Cautious buying in the depressed PM sector and profit-taking in the indices are reasonable responses to this situation. At mid-day May 23, the sector showed strength with major producers like Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG), the miners (NYSEARCA:GDX) and junior gold miners (NYSEARCA:GDXJ) all showing gains: so too did Spider Gold (NYSEARCA:GLD). Mid-tier producers Kinross (NYSE:KGC) and IamGold (NYSE:IAG) also added to weekly gains and held them through the close.

Trading tip: after 19 consecutive green Tuesdays half the S&P gains YTD have been on Tuesdays, with the second best day being Friday accounting for about 23% of gains. For day-traders the day to buy is red Monday and to sell Tuesday or Friday afternoons if you play by trends. Are these patterns coincidence, a result of psychology, wave undulation, Tarot cards or intervention by strong hands? No way to tell but it shows how tricky and artificial market action has become. If the pattern persists and given problematic fundamentals you might want to bank some gains on Tuesdays and Fridays: indeed, bank some in any case and go to shorter duration bonds.

Adopt a more defensive posture unless your income stream is strong and utterly secure. Your nest egg and future are in the hands of policy makers committed to debt creation. Washington is not giving direction that will enable the economy to heal.

Disclosure: I am long ABX, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Chop And Unease On QE Reveal Fragility Of Bull Run