Long-time readers know that for years we have inveighed that there is a huge, historic disconnect between the stock market and the economy due to funny money. Easy Al and now Benito have transformed the stock market and other markets from gauges of the economy to generators of economic activity via their deployment as asset bubbles.
Ergo one must now be a technician to not only navigate and profit in the markets but to insure against a career-ending misadventure, either on the downside or upside.
Yesterday Bernanke said the recession has probably ended. If the recession has ended shouldn’t the Fed at its meeting next week at least stop QE and the massive monetization of mortgages?
Benito: “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time”.
Most everyone realizes that despite Bernanke’s assertion, there is no exit strategy for the Fed and US government so the implementation of an exit strategy is months into the futures.
The problem is inflation is on the march. The usual suspects trumpeted the better than expected retail sales number but ignored the disturbing 1.7% surge in August PPI just as they have been ignoring the record surge in prices paid (inflation) in purchasing manager surveys.
Traders and investors must contemplate what course of action the Fed will announce and enact after next week’s FOMC if ‘the recession is probably over’.
If QE, which is due to expire, is renewed, stocks should rally but commodities, gold and inflation plays should rally far more. The dollar should tank. China should go apoplectic. Benito will look foolish for saying “the recession is likely over”. Bonds might rally initially but then look out below.
If QE is not renewed, stocks and commodities should tank; the dollar should soar and bonds after initially declining should rally. China will be appeased. Benito will have validated his rhetoric with action.
Given that the select few have been informed about coming policy before the non-connected, it is incumbent upon investors and traders to scrutinize the usual suspects for hints about Benito’s next ploy.