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November 4, 2009

President: “Mr. Gardener, do you agree with Ben, or do you think we can stimulate growth through temporary incentives?”
Chance the Gardener: “As long as the roots are not severed, all is well. And all will be well in the garden.”
President: “In the garden.”
Chance the Gardener: “Yes, in the garden, growth has its seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.”
President: “Spring and summer.”
Chance the Gardener: Yes.
President: “Then fall and winter.”
Chance the Gardener: “Yes”.
Benjamin Rand (nee Bernanke): I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.”
Chance the Gardener: Yes! There will be growth in the spring!”
Benjamin Rand (nee Bernanke): “Hmm!”
Chance the Gardener: “Hmm!”
President: “Hmm. Well, Mr. Gardener, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time. I admire your good, solid sense. That’s precisely what we lack on Capitol Hill.”


It’s a strange world and with every Fed utterance the reactions are always something to behold. The Fed just green-lighted a continued fall in the dollar and rise in commodity prices, and worse, they don’t seem to care. They talk a good game regarding “tame inflation” but markets know better. Commodity price increases such as we’ve seen are heralding massive future inflation and a declining dollar while the Fed turns a blind eye. Creating a liquidity bubble is the easy short-term political choice. It will have a large exit fee down the road. It’s appalling to me anyway.

Stocks can inflate along with a massive liquidity bubble since money is cheap and yields negative.

The fly in the ointment are bond vigilantes, both foreign and domestic, pushing interest rates gradually higher, and not just because stocks are higher, but because future inflation seems more certain despite official Fed policies. Deflation is the number one enemy for policy makers and traders in the pits know it.

The bottom line at the moment is we’re still in this highly manipulated “yo-yo” market and dip buyers thought they had another opportunity which faded quickly later in the day. Since the Fed statement was the same as September’s, we’re getting much the same reaction: “The first move’s the wrong move.”

Volume was typically higher for a Fed-type day but breadth was unremarkable.

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Source: Thursday Outlook: Creating a Liquidity Bubble