Diary of a Financier

Bernanke Will Defer, So Why Do Bonds Look Weak & Stocks Strong in the Short-Term?

In Capital Markets, Economics on Thu 25 Aug 2011 at 16:33

The Federal Reserve’s Ben Bernanke speaks tomorrow from Jackson Hole, on the first anniversary of his QE2 intimation.

I’ve been quite vocal about the historically damning effects of persitant/anti-inertial Fed Funds Rate easing. I’ve also kicked & screamed about the long-term impotence of monetary manipulations--especially given America’s ZIRP regime.

I’m just trying to figure out what’s next. I still fully expect a QE3-lite a la HAMP, assuming the Fed is the agency forced to act. More on that later in this entry.

Technicals are a powerful tool because they communicate the psychological undercurrents in capital markets–which psychology often leads to predictable action. (I think of the Bank of Japan’s predictable interventions in FX markets as a good example.) To start, here’s what US capital markets are telling me:

I hold a half-sized position in TLT that I’ll be adding to in the near future. 30-year Treasury Yields (TYX) have given pause to the T-bond rally, in anxious anticipation of the Fed’s next move. While my analogues are still powerfully bullish alongside the long-term technical fractals, I see a short-term oscillation up as high as TYX 3.80-3.87 resistance from today’s 3.61:

TYX daily- due for short correction up to 3.80-3.87

That poses a substantial threat to short-term fixed income performance, but I choose to hang onto my positions given unequivocally bullish long-term charts.

In its most deterministic [monthly] fractal, the S&P 500 (SPX) stochastic shows remarkable ability to persist in overbought territory, clearly due to the monetary support savior:

SP v Fed Funds Effective Rate

Any Fed-led solutions henceforth will not call upon the Fed Funds Rate, as it’s zero-bound. (Quantitative Easing was the progression of monetary policy beyond ZIRP.) This persuades me to prepare for continued equity weakness.

Throughout this Diary, I’ve adequately communicated my thoughts about policymakers’ actions in addressing this [rolling] crisis. I’m adamant that monetary policy doesn’t render sustainable economic resurgence, rather, it builds a temporary bridge over troubled waters, which allows the economy to dam-up the floods and continue its merry way. The operative word therein is “temporary.” I suggest that the Greenspan Fed thought it had a magical recipe for prosperity. On the backside of the Volcker Fed’s interest rate hike, Mr. Greenspan deployed monetary easing that was anything but temporary–in fact, it was secular, chronic, disinflationary. It disincentivized innovation; it coaxed the proliferation of financialization; so on and so forth. I need not reiterate this part of the case.

When Mr. Bernanke penned his famous 2001 “Helicopter Ben” essay, I opine that he was cognizant of the limitations of monetary policy (i.e. providing temporary bridge support). The economy eventually needs to take the handoff. Much like our assumption ‘the housing market grows perpetually,’ Mr. Bernanke seemingly assumed the economy would find growth like a pig sniffing out truffles in a French field. Like that pig, a poorly trained economy would defer to its habit of playing in the mud, rather than roaming for mushrooms.

I’m setting-forth a few insinuations here. While price-stability & employment embody the Fed mandates, secular economic pursuance lay beyond both its capability and its design. I treat the Federal Reserve with more empathy than most of my contemporaries. The Fed has tested the breadth of its legally-authorized faculties to render more than two years worth of relative price stability and unemployment moderation. I ask, what tool in the Fed’s authorized toolbox can promote greater effects on the economy than this? None.

More than a generation of Americans now is accustomed to monetary policy as a driver of prosperity, and we’ve become pigs habitually rolling in mud. At this point, I recommend the only effective solution: intervention via fiscal policy. Policymakers need to retrain the economy by guiding it to moneymaking truffles. Surely, there have been sounder conditions for the US Treasury to invest (on margin), but this is the mudpuddle in which we’re stuck.

The grand conclusions is as follows… Mr. Bernanke would probably prefer to undertake further easing measures as soon as tomorrow. Yet core inflation has finally upticked, the Fed’s dissenters/critics are rebelling, and QE has empirically proven its inability to affect economic sustainability. Given his resources, his responsibility and his critics, Mr. Bernanke will defer further easing until either his critics are silenced by a crises or Congress rallies to complement the Fed’s efforts… otherwise, the Fed would be draining resources to continue pushing on a string.

In his last delivery of the Fed minutes, Mr. Bernanke already guided investors’ expectations in asserting the ZIRP regime through mid-2013. Tomorrow, he will re-emphasize the Fed’s ability to extend the composition (duration) of its holdings–a “Twist,” as it’s being called. So far, the Fed tactics are all according to the playbook proffered by FRBNY SOMA manager Brian Sack back in June.

Tie that back into the signals being broadcast by markets:

  1. Treasuries & Gold/Silver pulling-back after steep ascents: Long-dated Treasuries are most attractive to me given technical determinism in monthly fractals. Gold really shot for the moon this month, perhaps a bit overdone. Silver has reloaded after margin-hikes & margin-calls, and I really expect it to catchup in the coming days.
  2. Corporate credit looking bearish in coming days-week.
  3. Equities show little resolve in intermediate/long term, but short-term is quixotically constructive.

You’ll notice the contradiction between the short-term technicals and the anecdote about American policy intervention (the lack thereof). I’m still trying to sort thorough the storylines to figure out what’s going to push equities higher in the coming days. The Dow Jones Industrial Average (DJIA) looks particularly strong for that period. Perhaps I’ll have more to come…


  1. […] fractals, and I want to know how equities can rally from here. I aptly titled an entry last week, “Bernanke Will Defer, So Why Do Bond Look Weak & Stocks Strong in the Short-Term?” Posted before Ben Bernanke’s big Jackson Hole press conference, the entry was fully accurate […]

  2. […] aggregation of the aforementioned SPX 2008 analogue, SPX monthly fractal historically bailed out by monetary easing at this point in its descent, and Copper (HG/) having bottomed on its trading […]

  3. Five months later, someone catches onto my suggestion, as follows:
    “More than a generation of Americans now is accustomed to monetary policy as a driver of prosperity, and we’ve become pigs habitually rolling in mud. At this point, I recommend the only effective solution: intervention via fiscal policy.”

    Cue Mohammad El-Erian:
    “…the Federal Reserve, which is constantly lambasted for making all the wrong decisions, can’t fix the U.S. economy on its own.”

  4. […] all my blue-faced insistence, the main stream has begun to realize that the scope of monetary policy is limited. It’s an […]

  5. […] all my blue-faced insistence, the main stream has begun to realize that the scope of monetary policy is limited. It’s an […]

  6. […] a short-term measure that plugged a gaping hole in the system. The short term solution of QE/ZIRP should’ve been succeeded or complemented by fiscal stimulus. No, not the Bush stimulus (tax rebates) that mailed […]


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