Back in January, I noted that the Federal Reserve had subtly changed its language regarding the effectiveness of QE as a monetary strategy.
The first indication came from the Fed’s December 2012 FOMC minutes (the meeting during which the Fed announced QE 4). Since this time there have been several key developments. They are:
- Bernanke has announced he will not be attending the Fed’s annual Jackson Hole meeting.
- The Fed’s favorite reporter at the Wall Street Journal, Jon Hilsenrath, has written a story indicating that the Fed is considering tapering off its QE efforts before the end of the year.
- Bernanke all but admitted that stocks are in a bubble as well as the possibility of a “sharp move.”
Regarding #1, Bernanke claims he can’t make the Jackson Hole meeting due to a scheduling conflict. This is akin to the President of the US announcing he cannot give the State of the Union address due to a scheduling conflict. It is, in a word, impossible.
Much rather, Bernanke is signaling that he is looking to step down at the end of his term as Fed Chairman in January 2014.
If this is the case, then Bernanke is likely thinking about his legacy. Will be leave the Fed with not a pinch of ammo left in its arsenal?
Not likely.
Which brings us to item #2. Jon Hilsenrath is the Fed’s favorite means of leaking its policies to gauge the public’s reaction. Indeed, Hilsenrath broadcasted the Fed’s QE 2, 3, and 4 announcements well in advance of the official Fed announcements.
With that in mind, Hilsenrath’s latest piece about the Fed tapering QE off before the end of the year is very likely a signal from the Fed.
If Bernanke is going to step down (as hinted by his decision to skip out on the Jackson Hole meeting) he’s not going to want to leave with the Fed going at QE 3 and QE 4 full throttle.
Instead his best bet would be to take his foot off the gas a little bit, giving his replacement a little room to maneuver if things get ugly.
And now onto item three, Bernanke’s dreaded “sharp move” for assets.
This is simply a guarded admission that stocks are in a bubble.
I want to draw your attention to the following:
- Margin debt levels (money borrowed to buy stocks) are at record highs.
- The S&P 500 has been in rally mode for 90 days without a single 3+day pullback (this is an all-time record… the second closest record is just 38 days of buying with no significant pullbacks in 1987).
- Tobin’s Q ratio (the single best predictor of major 20%+ corrections in the market) is registering readings similar to those that occurred during the bubbles of 2000 and 2008.
This confluence of indicators tells us point blank that stocks are in a bubble. If I know this, I can assure you that Ben Bernanke and the Fed know it. And this is why the Fed is in deep trouble.
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Best Regards,
Graham Summers