Yesterday we were quite amused to note that following the Hilsenrath leak (pre-backpeddaling as a result of some FRBNY spanking) of a sterilized QE that for supposedly tries to avoid "generating" inflation (hence confirming that QE does in fact stimulate inflation instead of being a tool to lower rates and make housing affordable) the market reaction was... inflationary, with stocks rising, but far less than crude and gold. So much for the Fed's trial balloon to see if it can intervene in the market without costing Obama a few million ballots. Today, Art Cashin observes precisely the same paradoxical response in his daily note.
So the Fed is looking for a way to lower rates without producing any inflationary pressure. That’s because critics have claimed the inflationary impact of prior easing managed to push up oil, gold and other commodities. It also weakened the dollar.
Okay, now put on your Sherlock Holmes hat and examine yesterday’s action. Stocks rallied but so did gold and oil and lots of commodities. The dollar also fell. Those actions were just the ones that the supposed new program was designed to avoid.
In other words, it is safe to say that with Brent in the mid-$120s (or much higher courtesy of the perpetual threat of an Iran attack), any and all incremental dollars courtesy of iCTRL+B(ernanke) will go into commodities first, and stocks (whose margins now get disproportionately whacked due to rising input costs) a distant second. Which in turn means that just like in the summer of 2008, a major exogenous deflationary event may be needed soon to purge the system of latent leverage and inflation concerns.
So the question, again, is - who will be the next sacrificial Lehman?