Pavlov Rang the Bell

ilene's picture

Pavlov Rang the Bell

Excerpt from Stock World Weekly

Last week we wrote in To QE3 or Not to QE3, “The biggest hope for the markets may be another round of quantitative easing. Investors and traders have been carefully listening to the words of Fed officials, looking for clues of an impending announcement for QE3. Such a move might be bullish for the markets, at least in the short term.” On Friday, Ben Bernanke gave his much anticipated speech in Jackson Hole, Wyoming. He expressed mild optimism for the U.S. economy and did not explicitly announce a third round of quantitative easing. 

Bernanke acknowledged that while the housing market is bad, and the current rate of unemployment is unacceptably bad, the economy is not in terrible shape and can grow normally again. However, the U.S. government and European governments are going to need to step up to the plate and get involved. For as Bernanke put it, “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” The market initially sold off, but soon recovered as people realized that more easing is likely on the way. 

While Bernanke didn’t promise to announce QE3 at the September Fed policy meeting, he dropped enough hints to make the markets respond as if he had done so. The response of the market makes sense from the perspective of Pavlovian conditioning. First you ring the bell, then you give the food. After some repetition, all you have to do is ring the bell to make the subject salivate in anticipation of the food. While Bernanke may not have served the QE3 food to the hungry markets, he did “ring the bell” by dropping broad hints about how the Fed is “prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”  

So Bernanke laid the groundwork for justifying more easing at the Fed’s September policy meeting. That meeting had originally been scheduled for one day, but was expanded to two days so members could enjoy a “fuller discussion” of their options. St. Louis Fed President James Bullard pointed out that adding a second day to the September meeting would allow more time to review easing options. “If the economy is weaker and the inflation picture moderates, we could consider more action. The call is much more difficult this year than last year. We have a much different inflation situation than last year.” 

Bernanke was probably telegraphing to the market that some form of QE3 would be announced in September. As Bruce Krasting surmised, “This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s nonevent was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked..." (My read on the speech

Commenting on the media’s response to Bernanke’s speech, Phil wrote, “What more can the guy say – they WILL do what they can – we DO have problems that the Fed is able to address. They think inflation is under control, but unemployment is too high and liquidity needs to be improved. How can someone read this and not conclude QE3 is coming?...CNBC has stopped saying no QE3 and is now saying that Bernanke has ‘kicked the stimulus can into September.’ I guess enough people finally pointed out to them how ridiculous they sounded saying that there was no QE3 in that speech.” 

Bruce Krasting made the point he felt obligated to repeat - and we agree:  "I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo.

“It feels like we should just put up a tent, because a three-ring circus is what we are getting nonstop. And Bernanke is the strong man in the middle ring.” (My read on the speech

As reported by Zero Hedge, Jeff Snider of Atlantic Capital Management wrote, “His statement spoke volumes without saying anything. Yes, he disappointed the hardcore debasement enthusiasts called stock investors, but only at first. In between the lines of what he did say, it was crystal clear: Chairman Bernanke wants to do more QE. ‘Want’ is not really the right word because it doesn’t really go far enough into Bernanke’s canon. I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible... 

“He said QE 3.0, without really saying it.  The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents.

“If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius.  That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part.”  (Bernanke In A Box)

Not everyone expects QE3 to be delivered at the September meeting. According to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, “The move to a two-day meeting means [Bernanke] will work to build consensus. They will end up with QE3, but probably not in September. They will edge closer to it in the September statement.” (Bernanke May Seek Consensus on Easing)

Regardless of what eventually happens in September, expectations for more easing have now been established. The markets may now rise in Pavlovian anticipation of more free money from the Fed (or fall less than it may have otherwise). 


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chinawholesaler's picture

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Winisk's picture

The conditioned response to QE for every one not in the stock market is disgust.  

blueridgeviews's picture

IF the market is pricing in QE3 the last week what will it do after the Bernanke makes it official? Sell off?

We all know QE2 didn't do anything except pump stock prices and make the price of everyday commodities rise. What happens when the market sells off (presumably after QE3 is announced) and commodity prices continue to rise? Is that the endgame?

Madcow's picture

IMHO -Bernanke is saying "we're done - this is not our problem and not our fault - you people need to get your act together - we're done here - and thereis nothing more we can do.  tell the kids we're out of quarters. game over."  Maybe it is all deceit - but tha'ts what he's saying:

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With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate. ..

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability. …

This economic healing will take a while, and there may be setbacks along the way. …

The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.  …

The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability.  ..

The Federal Reserve also fosters macroeconomic and financial stability in its role as a financial regulator, a monitor of overall financial stability, and a liquidity provider of last resort. …

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. …

As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.1  …

Economic policymakers face a range of difficult decisions, relating to both the short-run and long-run challenges we face. I have no doubt, however, that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves. The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.

Tompooz's picture

The US will prepare the "freezing" of their people's gold holdings with a campaign demonizing illegal "trafficking" in gold and sleazing it by association with "money laundering and terrorist financing".

The treasury does not actually have to physically confiscate the gold; all  they need to do is compute/estimate the citizens'  physical holdings on US soil and claim it's owned by Uncle Sam.

Dirtt's picture

Buy toilet paper and feminine products!  And keep them dry.

When the shit hits the fan trying to hawk your (now made illegal sale of) precious instead of wooing the ladies might be something you wished you thought of sooner.

Make no mistake. Marc Faber is right. I won't own physical until I can secure it outside the USA.  It doesn't matter how "right" you are with owning precious metals in the USA if US precious metal dealers can go to jail for buying your metal.

So what then?  Think it hasn't happened before?  Guess again.  The Feds sold private citizen gold to the Chinese in the late 40's.  Gee.  LIKE that would NEVER happen again. LIKE. LIKE. Dude!

Not saying don't own it.  But please don't pretend that your shiny is the Holy Grail.  GET IT OUT OF THE USA.

Gmpx's picture

I do not understand one thing. There are hundreds of trillions of derivatives which are considered junk now. If we lived with the derivatives considering them as good as money 5 years ago, why cannot we simply replace the derivatives with money and keep living well as in 2006?

Why should we call this QE if we simply substitute what we valued as money into actual money? It is not QE, it is just RENAMING.

Please explain, my high IQ brain does not understand this...

narnia's picture

derivatives are zero sum risk trades.  one side wins the same amount as the other side loses.   

the world economy sees no net effect from derivatives transactions paying or not paying...  unless governments or central banks assume responsibilty to pay the loss side and print the money to do so.

the world has hundreds of trillions of $ of government promises that will not be honored.  i guess you could see "hundreds of trillions" of interest rate swaps really turn ugly if interest rates spiked volker style...  but we all know bernanke & co. don't play that way.

Setarcos's picture

Mark to market, comes to mind.

Say I bought a new car five years ago for $30,000 and still wanted to use that as collateral for a new loan, whilst I could really only sell it for maybe $10,000.

Banks are sitting on millions of car. housing etc. loans which are under water, but have been sold on as fake 'assets'/derivatives at face value.

It is not possible to monetize shit-loads of stuff which is now virtually worthless.

My brain has also had a lot of trouble getting its head around this crazy stuff.

Best I can come up with ... perhaps the Bernank has a better explanation, or Greenspan, or his gurus Ayn Rand and Milton Freidman.

Mind-bending eh!

Gmpx's picture

I do not see any problem in monetizing any shit.
Money is just a figure in the computer. So why would anyone bother that the figure reflects an old car or a new car.
Money is always fake. Any bank is always bankrupt from its beginning. It is only a game and I think we should keep playing it because if we stop, there will be a war.

Coldfire's picture

The speculation surrounding Bermonkey's "speech" reminds me of the hoary old days of Cold War Kremlinology. A divination derby. So consider the null hypothesis: Bermonkey said exactly nothing because he had nothing to say.

LMAO's picture

I do agree, it was a kind of no-comment-comment.

The only thing he did was buying time.

He's either extending, pretending and hoping the problems miraculously will go away or he knows some major shit is about to hit the fan and he is waiting for that to play out first.

The bounce in equities is kind of nonsensical. As to the brilliance of his speech it's the n-the example of a short time gain trade off against augmented pain further down the road. Thus far the 15 minute man hasn't solved any of the problems that we have been served by congress and the banking cartel.

I am still looking for a decent answer to my following comment regarding Bruce’s article.

Hmmm, no QE3 now, but the article seems to suggest that all market participants are reading between the Hilsenrath lines that it's on for the September meeting in some shape or form.  

If front running QE3 is the reason why the market is catching a bid are you suggesting that the market will sell-off once the latest easing / bailout scheme is announced at the September meeting? Does this not skew the whole stock-crash =  QE 3 paradigm?

This way the QE 3 half-life will be outlived by the time it's announced.


Or are we already front running QE 4 ?

bobosqueakers's picture

Wayne Angell says we're not going into recession and we don't have a flat or inverted yield seems the Fed has done quite a bit to manipulate that however...I wonder if the Fed did nothing what the yield curve would actually look like...low rates forever sounds very similar to Japan here...most of you on this blog seem like you would like nothing better than to just destroy the whole damn thing and replace with Libertarian utopia of some market or that vacuum would work or there's any historic evidence that absolute free markets would work....I'm sure Wayne is waay yesterday and the Fed is dogshit too, right?...I guess I'm just not sure other than buying gold from Glenn Beck and voting for Ron Paul what your best solution is....

max2205's picture

End the fed. We would have been in a huge recovery by now if the fed did nothing. And lessons would have been learned.

Tompooz's picture

Best solution is preparing an alternative "homeland" and voting with your feet.  Best destination is different for everybody.  

Soul Train's picture

Answer: get the self serving mega government off our backs and out of our pockets. Return to the liberty and freedom that many of our families fight for with their lives and souls. Easy solution is back to PM based currency to make it more finite and similarly precious.

Start with abolishing fiat money or just let it stay on its course and it will evaporate in value on its own on its current exponential course.

 We had silver coins and gold backed notes until the 60's and early 70's for a reason. And getting off the standard to pay for Vietnam and future wars was the beginning of the end of our dollar.

Our living standards to some extent have been paid for by inflation induced by our fiat money to overseas workers, whose currency is pegged to the dollar. These overseas workers have actually also been bearing the brunt of dollar inflation - like a tax, - amazing. That is true colonialsim and imperialism, stealthfully achieved by fiat dollar currency.

Fiat money is easily manipulated by the banksters and other beltway cronies to favor their interests in the name of "national good".

Fact is that if interest rates climb from today's nil to something more realistic, China owns a good % of us and would get a lot of our future sweat in payback. Right now, they get next to nothing and are trapped in a social political vortex, stuck in having to continue 8% growth to contain the masses.

So nil interests rates to 2013 are definitely Fed Bernanke true intentionswhile we play Russian roulette with Chinese autocrats and communists. It will be horrible when interest rates rise and our new found labor profit is exported to China in interest. Who the hell knows how this will be done, as a lot of our industrial base and advanced processes has been handed to the Chinese to build our toys.

Maybe Protectionalism is the future. It will happen about the time interest rates start to climb. It would have to - how else to repay the debt. Sell our National Parks???

Game is almost over with our paper fiat. Let it disappear and to all those treasury bond holders around the world - tough luck. It's gone. The NEWDOLLAR and its gold backing will not be excanged for the toilet paper dollar electronic digits of today.

Back to basics and fundmentals. Liberty to all. Goodbye Goliath governments. Cheers to David.

IBelieveInMagic's picture

Fear not, our National Parks are safe -- what will be traded off will be the Middle Eastern oil franchise, control of which will be gradually handed off. Hence Iraq and Libya. The ME will get new set of masters to drain the remaining oil...

Setarcos's picture

Well how about, as Lemmings sing,  "All over the cliff together, innit.  We dunno why we done it, 'cept blind instinct drove us to it.  Just could not take more shit."

Or, as Tom Leher sings on a more positive, kinda Fuchyoushima note:

Maybe there are no answers bobo.

I somehow doubt your impression that ZH comprizes solely Ron Paul supporters ... well count me out for starters ... where would he be if he had not been employed by BIG gubbermint for years (now his son)?

It's all academic innit.  We all fiddle as latter-day Rome burns.

Rant over.

Sambo's picture

Further increases in inflation rate accompanied by wide spread public outcry may lead to home grown terrorism within the US. The TPTB will then counter this threat with increased policing eventually leading to a fascist state. OBernanke may be pushing towards this goal. I see more mini 9/11s happening in the next few years.

The US may already have turned to fascism. See this link:


Alpha Monkey's picture

The US may already have turned to fascism.

May? Have you not been paying attention?

Setarcos's picture

Good point.  The military/government/industrial/corporate complex has been in place for a long while.  Mussolini's very definition of fascism.

adr's picture

Until QE actually does something serious to the dollar, ie losing reserve status, it will continue.

Bernpukey could care less about inflation as long as Obamas bought out voting block is intact

Double down's picture

Pavlov used a dog.

Fool me once...

Michael's picture

With all the bad economic news in the pipeline, the stock and equity markets will not make it to September 20th. QE3 must be announced as soon as possible to prevent even more market damage. Since QE3 is 100% guaranteed, why not do it now?