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Ben 'Buzz Lightyear' Bernanke and the Fed's New Challenge Ahead

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Having achieved market compliance, policymakers face more difficult obstacles than they and investors think.

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Maybe it is just me, but the investor sentiment of this certainty (that the Fed is willing and able to deliver effective monetary policy to continue to propel markets higher) is saturating. But what I see as a result is no longer well-reasoned belief, but self-assured capitulation and compliance. To talk with investors, the choice is that there is no choice. We believe because we must believe, particularly as everyone else believes as well.

Ironically, what I am afraid that the Fed (and the ECB) has created is a golden cage in which compliance is generously rewarded, while a failure to comply results in financial water boarding. Again, the choice is that there is no choice. As they say in the film The Ten Commandments, for the markets, it is now, "Row and live."

My concerns with this resulting position for the Fed are twofold. First, having announced and resorted to its nuclear option of "unlimited demand for an unlimited period," the Federal Reserve has communicated to the markets that from here on out, we have "unlimited bid, limited offer" markets.

What I am afraid that neither policymakers nor most investors appreciate is that it is not actual demand, but rather perceived demand, that drives market prices. Because markets are driven by social mood and confidence, they are inherently forward looking. And what is perceived to be ahead matters more to price than what is on the table today. Unfortunately, I am afraid that by their actions recently, central bankers globally have taken the perception of future demand to such an extreme that any incremental private sector demand is meaningless. When you already have a market perceived to be made up of "unlimited bid, limited offer," how does another $100 or $200 billion in cash on the sidelines really matter to price?
Position in SH and JPM.
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