Everyone is walking on pins and needles as we await what the Fed, and, specifically, Ben Bernanke is going to say on Friday.
Will Bernanke announce QE3 and rally the markets? Will he shy away from references of further QE? Inquiring investors want to know!!
Memories of Jackson Hole 2010 are resounding in investor’s minds. They have their fingers on their buy buttons, ready to act as soon as they hear the words Quantitative Easing.
In reality, this is all much to do about nothing! Contrary to popular belief, the Fed does not have the power that people perceive it to have! It is truly astounding to me that quote after quote can be found that supports this notion, but the public seems to completely ignore what Fed insiders continually say.
In fact, let’s ask Alan Greenspan what he thinks:
During his tenure, and in several hearings in front of the Joint Economic Committee, Mr. Greenspan noted that the idea that the Fed can prevent recessions is a "puzzling notion" . . . Rather, the stock market is driven by human psychology and waves of optimism and pessimism.
Well, maybe Easy Al does not have the same sway that he used to have with investors. When asked about his thoughts last year in Jackson Hole in an interview with the New York Times on August 27, 2010, former Vice Chairman of Governors of the Federal Reserve System, Alan Blinder, stated:
“The Fed has run out of the strong tools, and is turning to weak ones. When you’re fighting in a foxhole and you’ve used up the machine guns and hand grenades, then you pull out the sword and start throwing rocks.”
So, if Fed insiders do not believe in the Fed’s omnipotent ability to control the direction of the market, why do market participants?
Everyone seems to point to the announcement of QE2 as the rally call that "casued" the markets to move over 200 S&P 500 points.
In truth, if we really look at the timing of the Jackson Hole speech last year, you would have to note that the market had already completed a mini-correction and was already beginning a new rally phase when this “famous” speech was made. The announcement was just made at the right time, and did not actually “cause” the rally.
In truth, if we really look at the timing of the Jackson Hole speech last year, you would have to note that the market had already completed a mini-correction and was already beginning a new rally phase when this “famous” speech was made. The announcement was just made at the right time, and did not actually “cause” the rally.
However, if you truly believe that the Fed “caused” this rally, and you are “intellectually honest,” then you must be one of the very few people that think that the Fed “caused” the decline in the stock market in 2008. After all, it announced QE1 just before the largest 3 week decline in stock market history.
Ultimately, the Fed has run out of ammunition, as Alan Binder clearly states. Furthermore, it is highly unlikely that the Fed will actually engage in much more aggressive asset buying which the masses are eagerly awaiting, such as buying equities. Any perception of a weakening Fed balance sheet will cause the exact opposite of the desired effect, as it would force interest rates to rise, as the US would become viewed internationally as a much more serious credit risk, just like any entity with a weakening balance sheet. Even during the Great Depression, only 9% of the total Fed balance sheet consisted of non-Treasury assets.
Ultimately, the only action that has the potential to cause broad-based inflation is the printing of actual greenbacks, which is something that Bernanke does not have the legal authority to do. Only the US Treasury has the legal power to print greenbacks, whereas the Fed is relegated to monetization. Monetization creates more credit in the system - not greenbacks - and unless there is a public desire and appetite for more debt, monetization will be a failed policy.
Therefore, I would highly suggest that the public at large start paying heed to the quotes coming out from Fed insiders regarding the Fed’s inability to affect the equity markets in any meaningful way. And, even if the market does begin to rally later this week or next week (which most market participants expect), remember that the market is extremely oversold and is due a larger rally at this point in time. The news follows the cycles.
Disclosure: I am short SPY.
Additional disclosure: I could not pull the exact quote for Greenspan from the minutes of the Joint committe, so I paraphrased. However, I did note the quote from Blinder.
