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Random Thoughts: Fed Dissesion and Financial Market Fatigue


The world's wildest reality show continues.


"The US central bank's commitment to keep interest rates near zero for two years may create a misperception it's aimed at boosting stocks, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher said yesterday. Lars Frisell, chief economist at Sweden's financial regulator, said it won't take much for interbank lending to "freeze. With zero interest rates and two QE's already finished, the Federal Reserve has ended all its ammunition, offered Komal Sri-Kumar, chief global strategist at TCW Group Inc."

Has anyone else noticed a shift in the vernacular regarding all things financial?

I suppose my prose has ebbed with social mood too. Yesterday, my Rage Against the Machine article on MarketWatch (dubbed Handicapping the Global Economic Recovery in the 'Ville) was one of two columns in the "top five" most read with the word "Rage" in it.

More recently, and as cited in the first passage above, investors have begun handicapping the Federal Reserve by estimating how much ammunition they have left in their stimulative gun.

As Minyans well know, we've been asking a question for a few years know: Will the Fed's Last Bullet be Pointed Inward? And I quote:

If we can agree that the last bullet in the Federal Reserve arsenal will be pointed inward, wouldn't that be triggered by a crisis of confidence?

And wouldn't that start with a negative market reaction to intentionally placed "positive" news?

The Bernanke Put is a walking, talking contradiction; it will arrive if the economy falters, but the economy won't improve without stimuli (or it hasn't yet, despite oodles of infusions).

The definition of frustration is doing the same thing over and over again and hoping for a different outcome. That also happens to be the definition of "stuck."

As employment and housing continue to flounder, folks are waking up to the fact that there's the market... and there's an economic reality. There's inflation in things we need (food, energy, education) and deflation in things we want (laptops, plasmas, cell phones) and most of America is stuck in the middle with you.

Bottom line: Policymakers have a "God Complex" and the simple truth is that nobody is bigger than the market. It's clear that they -- and "they" includes European policymakers -- won't willingly give up the ball.

The market will have to take it from them.

The issue we must wrestle with is, well, do they have blanks in that gun?

As a function of self-preservation, investors would be wise not to ask that question while staring down the barrel of QE 2.5, regulatory upheaval, or some other seismic shock. You can't blame them for being, pardon me, gun shy. We've talked about the cumulative game of chicken for four years now and by definition, it's one day closer to resolution.

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