Monday, December 6, 2010

One Eye on The Fed: Now An Ally?

Bernanke has gotten a lot of resistance about the latest round of quantitative easing (QE2) since it was formalized on November 3. This weekend he has talked about the FOMC commitment to their strategy. Here are some statements attributed to the Fed Chairman from the transcript of his appearance on "60 Minutes". On the current condition of the mandated concerns of the Fed he said U.S. unemployment may take five years to fall to a normal level and that Fed purchases of Treasury securities beyond the $600 billion announced last month are possible (emphasis added).

We knew that unemployment has grown to be such a deep problem that it will be several years to recover to more normal levels. What is a more enlightening message is that the Fed does not have a ceiling on the amount of the current QE program. In other words, there is no backing away from, or hesitation to use as much new currency as is necessary to reflate the economy.

“Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”
Bernanke said he is “100 percent” confident that, when necessary, the central bank can control inflation and reverse its accommodative monetary policy.
“We’ve been very, very clear that we will not allow inflation to rise above 2 percent,” he said.
“We could raise interest rates in 15 minutes if we have to,” he said. “So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.”
“That time is not now,” he said.

With all these almighty proclamations, another time has come for another decision by investors like me. Increase risk or not? Maybe now is the time to pack and move to a new land while the ports are still open. With the Fed hell bent on reflating assets like real estate and, now explicitly, stocks while also claiming to have the capability to keep a lid on inflation, does it seem prudent to "fight The Fed"? As further evidence of the lengths The Fed is willing to go, consider the emergency loans made to many non-financial and non-US banks during the heat of the financial crisis. Here is a link to a NYT article describing the recent revelation. In summary, they will do anything within, or even outside, their authority to prevent the economy from slipping into another recession or a round with deflation. So despite the global financial concerns, investors today have the most powerful ally in the world on their side, bar none.

To consider the current technical condition of the S&P 500 Index and the US$ Index, here are a couple of charts from