First things first. The FED released its FOMC statement at 11:30 a.m. CST and, as expected, there was no change in the FED‘s policy and the “extended period” language remained as did the use of “transitory” to describe the recent run up in fuel and food costs. The markets initially showed little reaction as the “big event” was to be 90 minutes later. In fact, the U.S. DOLLAR actually remained a little bid and the precious METALS were on the offer as it appeared the market was HOPING for some strong words from the chairman of the FED. The most hyped event since Geraldo’s look into Capone’s vault, Bernanke’s press conference did nothing to assuage the fears that the FED was losing its credibility. The more Bernanke talked, the more GOLD and SILVER rallied and the harder the DOLLAR dropped.

Bernanke was asked a question about the DOLLAR–was he concerned about the DECLINING DOLLAR leading to a drop in U.S. living standards? The FED CHAIRMAN stayed on script and reiterated that the DOLLAR was the Treasury’s purview, but then went on to say that he wasn’t concerned because the recent decline in the DOLLAR WAS MERELY A RECOIL FROM THE RALLY THAT OCCURRED DUE TO ITS HAVEN STATUS POST-LEHMAN. We have heard this rational from Bernanke before about the DOLLAR and I believe it is flawed. The DOLLAR‘s safe haven status is greatly diminished as I wrote about last month when the DOLLAR failed to rally with the turmoil in the Middle-East.

The number of currencies that have made all-time highs in the past few weeks undermines Bernanke’s theory. Yes, the DOLLAR is not making new highs against the EURO or BRITISH POUND, but those currencies are struggling due to similar problems as the DOLLAR, yet the EURO is up 10 percent versus the DOLLAR since the end of 2010 and even the lowly POUND is up 6 percent.

There was no follow-up question on the DOLLAR to ask the CHAIRMAN if he would RAISE RATES if the DOLLAR came under a massive assault. The more Bernanke was comfortable with the DOLLAR‘s present position, the more the GOLD and SILVER rallied. It was not a good day for the FED trying to restore its CREDIBILITY.

Another question posed to the PRINTER-IN-CHIEFCAN THE FED REDUCE UNEMPLOYMENT MORE QUICKLY? Ben was firm that the FED was doing what it could to meet its DUAL MANDATE and was not yet satisfied with the employment situation. He did say that the FED might have to move if INFLATION BECAME UNMOORED, or maybe if INFLATION EXPECTATIONS began to rise. There was no follow-up to ask if that meant that the FED would raise rates even with UNEMPLOYMENT AT 9 PERCENT. I am still PONDERING WHAT IS THE BEST WAY TO MEASURE INFLATION EXPECTATIONS.

Bernanke keeps on talking about INFLATION EXPECTATIONS but it seems to be ill-defined. The market’s expectations for inflation can be found in the value of the DOLLAR and RECORD HIGHS IN THE GOLD. As usual, the FED CHAIRMAN CARES NOT A BIT ABOUT THE MARKETS BUT SOLELY WHAT THE FED MODELS PREDICT. And herein lies the new CONUNDRUM. There is a disconnect between the markets that deal in FED CREDIBILITY and THE FED’s MODELS.

Yes, the EQUITY MARKETS are rallying but at this point in time it seems that STOCKS are deemed a safe haven from the easy money policies. Better to buy stock in a company that can grow in an inflationary, low-interest environment than to buy a CD or MONEY MARKET FUND. In this sense, Bernanke stated that QE2 has been successful because stocks have rallied in a reduced volatility environment and there has been a significant reduction in CORPORATE CREDIT SPREADS. It seems that Mr. Bernanke should have flown to the press conference in a helicopter and announced MISSION ACCOMPLISHED! The biggest question that the market has left us with is the recent strength in the BOND MARKET. The fact that the DOLLAR is being sold, GOLD is making record highs and other asset classes are surging: HOW CAN THE BOND AND NOTE FUTURES RALLY?

All of this would be easy to absorb if the U.S.DEBT market was under pressure. The simple answer is that the NOTES AND BONDS are a result of the only place the FED is actively intervening so we may well have to wait until QE2 ends to get some resolution to our own CONUNDRUM: THE BOND RALLY. IN THE BERNANKE VERNACULAR, INFLATION IS NOT WELL ANCHORED ENOUGH TO COMMIT TO U.S. TREASURIES. As I remind the readers of NOTES–as KEYNES said long ago–“MARKETS CAN REMAIN IRRATIONAL LONGER THEN WE CAN REMAIN SOLVENT.” Which is why 2+2=5 but do your technical work to keep your losses low so you can remain solvent so as to be able to trade when the fundamentals and technicals support each other. That is the key to prosperity in the GLOBAL MACRO WORLD.

A quick aside: THE RBNZ MET THIS AFTERNOON AND KEPT KIWI RATES UNCHANGED AT 2.5 PERCENT. This was as expected but Governor BOLLARD did say in his release, “Higher oil prices and the elevated level of the NZ DOLLAR are both unwelcome.” I think that was a pretty good message to the U.S. FED.

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  1. whitewavetrader Says:

    This would be funny if it wasn’t so tragic for the Dollar
    Green light… Red Light Trading…
    The Green light was turned on after the London puke

  2. PBL Says:

    I think everyone has forgotten what Ben has really done. He obviously has bailed out the banks with their ease at riding the steep yield curve to large amounts of money but here is the real key—- he has saved the Federal Gov from some serious checkbook writing for pensions in private and public sector. He has pumped up their stock portfolios in a big big way. I think that may have been a major part of QE2 that was an unwritten object. Make no notice of the man behind the curtain!

  3. yra Says:

    PBL–you must be from Austria or at least been educated at the University of Vienna 90 years ago—you seem wise beyond your years.But I agree with you that the Portfolio Balance Channel eased the immediate Pain of some severely underfunded pensions–maybe next they will make Rattner the PENSION CZAR

  4. Danny Says:

    It seems like Bernanke showed his hand a little bit with regard to future rate hikes. He asserted that liquidating their substantial QE2 portfolio would constitute a tightening shift in monetary policy. This seems to indicate two things: 1. the fed is not about to raise interest rates while they hold a couple trillion worth of interest rate driven assets and 2. the first move for tightening will be the reduction of the portfolio itself rather than a more traditional rate hike.

    Doesn’t this make interest rate investments driven by cheap leverage (i.e. banks, mortgage funds, etc.) more compelling since it is indicative of very cheap borrowing costs for quite a while longer than the market was pricing in?

  5. yra Says:

    Danny–fair point but I would advise you to read the piece written by Richard Dennis many years ago titled–The Slower Fool Theory–it is very apropos for this discussion—it is like the three people running from the bear–you don’t have to be faster then the bear just the slowest runner

  6. Alan Rohrbach Says:

    I can only imagine that a parody of the “Popeye” theme song would be appropriate; but who’s got time to write it?
    Interesting bond perspective, and I am also very bearish across time. Yet I think they can rally for now for 2 reasons. Bernanke gave all the long side curve traders a minimum 4.5 month window prior to the risk a rate hike would burn them. Note how much more the Bund and Gilt took temporary fright from the ‘extended’ mentality. A lot like last September.
    Secondly, while you and I rightfully see it as historically incongruous, higher commodities (especially energy) might be creating enough margin pressure to put the equities at risk. A classic bond market ‘hostage to fortune’ rally, where they will need equities to crack to continue higher. We shall see.
    Great post overall, and agree with general mindless nature of current Fed approach. Kudos.

  7. Greg Bruno Says:


    Some very prominent consumer staples companies mentioned margin pressures in their earnings reports and stated that they are going to attempt to raise prices. This seems like a double edged sword for most stocks to me.

    If they are unsuccessful increasing prices, we could see diminishing margins. If they are successful, more inflation will flow through into the core CPI figure and potentially force the Fed’s hand. However, its pretty painful holding dollars right now. Consequently, I’m finding it hard to decide where to place my money.

    I’m trying to go fairly evenly split between cash and gold, with some blue chip tech / service stocks mixed in. Your thoughts?

  8. yra Says:

    Greg–I think that is a sound investment plan.I know everyone is earnings focused but I think they are tertiary to the issue of cheap money for that is the real driver.I have never been a fan of this quarter to quarter nonsense.The fact that stocks have been able to slough off all the bad news is the best statement about the cheap money being the key driver

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