"…The private sector's revised outlook for the policy rate also appears to reflect a growing appreciation of how forceful the FOMC intends to be in supporting a sustainable recovery." (Ben Bernanke at Jackson Hole, Wyoming in speech titled "Monetary Policy since the Onset of the Crisis")
This statement was just about the only new news I could discern from Ben Bernanke's speech at Jackson Hole on August 31. It serves as a reminder that the Federal Reserve will continue to take strong measures to address persistent economic weakness. In a more subtle sense, it communicates to any who will listen that if you did not believe the Federal Reserve is ready to act again when it sees the need, then you need to hop on the train of "growing appreciation" before you get left behind. I am guessing in that spirit, silver (SLV) and gold (GLD) rallied forcefully and long-term Treasury yields dropped. Gold broke out from its downtrend, silver looks ready to do so, and TLT jumped over final resistance. This trading suggests the market is getting ready for action although the S&P 500 (SPY) ended in a stalemate.
Gold finally breaks out
SLV is on the verge of a breakout from a long downtrend
TLT breaks through resistance
The S&P 500 closed right on resistance from the May, 2012 high. The solid, black horizontal line in the TLT graph represents the previous high from the 2008/2009 crisis.
The rest of the speech was an accumulation and/or compilation of opinions, projections, and policy pronouncements that have been made in the past. In particular, I noted Bernanke's likely reference to U.S. Federal Reserve Vice Chair Janet L. Yellen's economic modeling that suggests the Federal Reserve is still not as accommodative as it should be:
"…A number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates…"
Yellen and Bernanke actively fret that sustained high levels of unemployment (and under-employment) will exert long-term harm on the economy. So when Bernanke states "…unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time," he provides a reminder that his bias remains toward further Fed action. He clears the way for such action by continuing to insist that he sees "little evidence of substantial structural change in recent years" when it comes to employment in the U.S. In other words, monetary policy can continue to improve employment levels.
One small twist that did catch my eye was Bernanke's claim that the Federal Reserve is not providing an "unconditional promise" when it states that exceptionally low rates will remain in place until at least 2014. Bernanke did not specify which part of the statement is conditional. When I read "at least," I understand that to be a promise for rates to remain low for that span of time. Instead, Bernanke stated that "…it is a statement about the FOMC's collective judgment regarding the path of policy that is likely to prove appropriate, given the Committee's objectives and its outlook for the economy." I doubt anyone is worried about the remote chance that the economy will rebound strongly enough to warrant reneging on the promise of exceptionally low rates, so this claim of conditionality is something I will just tuck in the back of my head in case of an emergency.
Since Fed policy is supposedly conditional, it is worth summarizing Bernanke's recognition of the potential costs of unconventional monetary, in particular large-scale asset purchases (LSAPs):
"…Conducting additional LSAPs…could impair the functioning of securities markets."
"…Substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time."
"…Risks to financial stability."
"…The Federal Reserve could incur financial losses should interest rates rise to an unexpected extent."
Bernanke addresses each of these risks and concludes that none of these risks currently present dangers to the economy or policy: "the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant." I will not cover Bernanke's point-by-point response to these risks except to note that Bernanke claims the Fed is ready, willing, and armed to back off the gas if and when needed:
"The FOMC has spent considerable effort planning and testing our exit strategy and will act decisively to execute it at the appropriate time."
So, overall, Jackson Hole appeared to provide a summary and confirmation of the Federal Reserve's readiness to act if deemed necessary. I did not interpret this as a statement the Fed WILL act at a specific date. I can only assume the market's apparent willingness to act right now is predicated on an assumption that the U.S. economic numbers will materially weaken. This creates the non-intuitive dynamic where asset prices can increase on bad news even with the S&P 500 scratching at 4+ year highs. For now, I am positioned for a continued slide in the S&P 500 as the technical indicators maintain a slight bias to the downside.
The currency markets took the dollar index (UUP) down on the heels of Jackson Hole, but it was not a large move relative to the slow decline already underway. The dollar index closed at a marginally new 3-month low and even bounced off its lows for the day. The index remains above its 200-day moving average (DMA) support. Most importantly, the dollar has decisively backed off its "QE2 reference price" and as such provides the Federal Reserve more buffer and time before acting. That is, dollar liquidity is less of an issue right now. This relief of pressure is especially evident in the ability of the euro to steadily rise over the past month.
The dollar index sets a new marginal 3-month low but remains in an overall uptrend
The euro has drifted higher off recent lows - June's highs loom as firm resistance.
Source for charts: FreeStockCharts.com
In currencies, I continue to prefer the British pound for playing further weakness in the U.S. dollar (FXB) (for example, see "The British Pound Is Back In Fashion"). I think the euro (FXE) will eventually tumble again as Europe's growing recession "requires" still lower currency levels. I remain a staunch bull on gold and silver as currencies remain locked in a race for a collective bottom, and I continue to recommend buying the dips.
Be careful out there!
Additional disclosure: I am also long SSO puts. In forex, I am net short the euro and likely to soon initiate fresh longs on the British pound.