Last summer, the Bernanke put had a strike range in the 1020-1050 SPX range. From what’s been seen in actual economic growth when it officially started in Nov was that it was of no help. It certainly though helped asset prices as stocks rose 30% and credit spreads tightened dramatically. We’ve now seen the wreckage that followed after it ended on June 30th, the entire QE2 equity rally has almost reversed. Here lies the fallacy with any short term stimulus, either monetary or fiscal. At some point it has to end and then we revert back to where we were with then a bill to pay either thru higher taxes or from the eventual exit of policy. The only thing that changes economic behavior in a substantive way is policy that has a long term view, not something that will end in 6-12 months. Rest assured though, the Fed doesn’t realize this (US Govt doesn’t either) and Bernanke will prep the market today for something at 2:15 although the law of diminishing returns is in full effect. China’s July CPI rose 6.5% y/o/y, a touch above expectations of 6.4% but is the fastest pace since June ’08. Industrial Production and Retail Sales rose slightly less than expected. The Shanghai index was the lone bright spot, closing unchanged and copper is bouncing back. An aside, as we’ve seen over the past week, an oversold market can just get more dramatically oversold but look at the German DAX on how extreme we’ve gotten. The 7 day RSI in the DAX is at 4.2 which compares to 5.2 in the SPX the day of the 1987 stock market crash.
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