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Ben Bernanke goes to the hill on Tuesday and Wednesday to testify to congress on the state of the economy and the Fed's strategy.

Once again (it's relentless, isn't it?), equity markets (SPY) are relatively jubilant on hopes that Big Ben will come through with at least hints of imminent QE3, which most expect to be balance-sheet expansionary and consisting primarily of MBS. Early Tuesday morning, Dow (DIA) futures were up about 60 points.

My recent article, 10-Year Treasuries Telling A Much Scarier Story Than Stocks, explains the lack of a risk discount in the equity markets and the more efficient pricing mechanism currently present in the bond market. The conclusion being that the strength in bond prices (and therefore record-low yields) are indicative of a massive flight to safety and a deflationary environment, while stocks are ignorantly ignoring deteriorating earnings prospects in response to QE-hopes.

Although the gold market isn't exactly full of QE expectations, with each new Fed event that comes and goes without a favorable headline for gold, the metal funds (GLD) and miners (GDX) have been sold heavily. This seems to be the result of news/event driven traders who buy in the days leading up to Fed announcements hoping to profit nicely on a risk-adjusted basis (the idea being downside is limited considering muted expectations, and upside is huge for the same reason), and selling afterwards. Additionally, the simple lack of a price catalyst for gold seems to be enough for weakness.

Both equities and gold will get sold in response to Bernanke's testimony since further QE will not be announced for the following reasons:

  • Oil is trading near $90 again: with crude up around $90 once again and the peak of driving season coming up, easing would lead to further price increases, stunting already marginal US growth
  • Food prices in huge uptrend: in response to the unfortunate Midwestern drought, the entire grains complex has soared in the past few weeks. With a ton of speculative interest already present, announcement of QE would create a frenzy of activity, driving prices to create serious difficulties for consumers
  • Equities are near 2012 highs: Fed LSAP programs have typically been implemented only after 15-20% declines in the S&P 500, not a mere 5% off the highs
  • Easing so close to the election may be taken as a sign of Fed and Presidential collusion: I've mentioned this point before, only to be met with responses that "the Fed already doesn't have credibility." That may or may not be true, but the Fed does in fact care about their public perception. Additionally, Republicans may take any Fed intervention and use it against the Obama campaign

Conclusions

The Bernanke testimony will bring absolutely no new meaningful information or hints at QE3, and equity and gold prices will fall as a result.

Despite a slowing economy, commodity prices are in powerful uptrends and are already having negative effects on consumers. Further easing would create a perfect storm of speculative activity and inflationary commodity price pressures - the last thing an economy growing only marginally over 1% needs.

Traders should be short ahead of the next few trading sessions.

Source: Expect Another Smackdown In Gold And Equities In Response To Bernanke's Testimony

Additional disclosure: Short SPY via longer-dated puts. May enter short S&P 500 futures position