Rev the Engines Helicopter Ben

The market was completely run today by the reaction to Ben Bernanke’s speech at Jackson Hole. No surprise since “the market” is now a completely rigged game run by computers. But this does provide a reason to go into the speech and the reaction in more detail.

First the market’s reaction. Everything went up by virtually identical %. Hardly the sign of any times-of-yore parsing of sentences about winners and losers. Everyone and everything will apparently win. More accurately, those who run the markets and own the country using leverage were reassured today that the Fed has their back and will not allow any change and will pump in whatever liquidity is needed. So the few remaining shorts covered (see chart) – and the market then slowly drifted up as sellers disappeared. Don’t fight the Fed. However, the bounce today did not even get any end-of-day volume. There are no buyers sitting on the sidelines here. The trend will remain down.

The speech itself:
1. The Fed could not point to a single specific part of the private sector that has a good chance of picking up the rest of the economy or being the next bubble. Which probably means there isn’t one — and the economy is in for at least one more year of recession or no growth. In that environment, the only things worth owning are a)things which provide income or b)things which aren’t in the US or c)things which are in bottleneck/shortage. And the latter are really rare (and don’t include equities of companies who issue options – even if they do sell something in bottleneck).

2. If the Fed is forced to fight deflation by monetizing debt, it will only be doing so at lower levels because currently the risks of doing that are perceived as outweighing the benefits. IOW – what the Fed actually did was guarantee an upside for T-bonds – not an upside for stocks or the economy. Therefore if cash/liquidity is needed before the economy turns around, the only options are a)cash in the mattress or b)T-bills/bonds.

3. If the Fed fails in fighting that deflation by monetizing debt, the result will be hyperinflation. Not inflation. Hyperinflation – the destruction of a currency by destroying its ability to function as a medium of exchange. In that event, the only things to own are a)food/staples; b)physical energy source (maybe); c)possession of shelter; d)a black market medium of exchange; and e)a black market means of ensuring that you retain possession of the previous four. All else will be worthless. Odds of this are still low – but not negligible. Be prepared for it – and hope it doesn’t happen is the best advice.

4. If an actual economic recovery happens; then the problem the Fed will face is how to withdraw liquidity. This would be the problem that the US faced in the 1970’s (stagflation). But this time round, the “solution” is much easier — ANY increase in interest rates will immediately kill the housing market and thus choke any economic recovery. The result is that there will be no economic growth – no “potential bottlenecks/shortages if the economy rebounds a bit”. Other countries – particularly emerging markets – may face this scenario – but not the US/Europe/Japan.

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