Lord of the Blings … or How Bernanke Became Maobama’s B**ch

Man do I want some of what those guys at the Marriner Eccles building are smoking!  Against the power of Mordor there can be no victory.  Lord Saruman, what does the Great Eye command?  Saruman here is Ben Bernanke, the great monetary Wizard.  Able to marshall forces as great as the winds and tides to flit the lesser entities of the world this way and that.  Yet no matter how great his power, it pales to the power of Lord Sauron himself, who is obviously the wizard behind the curtain, El Presidente, Obama the Magnificent with his great eye roving out from his grand residence on Pennsylvania avenue.

Is there any doubt who was pulling the strings here?  If Sauron and Saruman were cell mates in an american federal penitentiary, is there any doubt who would be wearing the pants and who grabbing their ankles?  I had been talking with my partner some days before the world changed on Thursday, September 13th, 2012.  We had been laying plans for what the market outlook would be when the 12 Great Wizards of the Monetary Policy Committee adjourned.  Distrustful of the apparent consensus and frankly incredulous that further LSAP could be the outcome we went into it modestly net short so I will be talking my book here.  Let us review briefly the situation going in.  Stock indexes are at multi year highs.  Check.  Crude and Gasoline are at dangerously high levels already.  Umm, check.  Economic data is fairly weak, but not in crisis territory.  Check.  So if they were going to expand their balances I suggested, then Obama was going to have to worry about escalating Gasoline prices or it could sink his re-election chances.  Stocks high good, gasoline, not good.  having become a gloomy cynic since watching Washington piss away our country’s heritage I thought that a move by the Fed would be blatantly political and therefore, if they are willing to be that political they would also be willing to use the threat of an SPR release or an actual SPR release to achieve their objective.  Well, in the couple hours before the announcement someone leaked to the media that there may be SPR releases.  OMG.

So basically Obama is so shameless that he no longer even cares about the appearance of impropriety.  And our culture has come to accept cheating so much that there is nary a peep when the rules are bent twisted and finally, as has happened so often the last 3 years now, just discarded altogether.

Ben at least evinced a modicum of shame.  I saw in his wavery voice and body language during the press conference that he was acting like a child who had done something very very bad and knew it but had been taunted into it by the class bully either by suggestions that he wouldn’t be cool unless he took the dare or there would be actual violence done to his person or position unless he toed the line.  So the most dovish Fed ever to exist delivered and delivered big.  QE of unlimited duration and which would not be stopped even if the economy started to heal.  No risk of that methinks with current policy.  The USA is like the fighter who keeps getting up no matter how much they are pummeled, but it is getting pummeled pretty hard right now on both the monetary (this insane policy will lead to the vast inflation in the prices of the things you need to buy like energy and food) and fiscal (Washington, need I say more?) fronts.

So having stopped pretending that they are pretending to be serious people, they crossed the line into complete fantasy.  Therein actually lies the risk I think.  The Fed has no further credible threat.  The infusion of money will cause a new cadence or rhythm in the market, a new cyclical happenstance.  But that will then become the  norm.  The market can then rise and fall.  And now that caution has been thrown to the wind, the government’s credibility is in tatters.  People will sense that we have left the rails.  They will become uncomfortable, especially once prices start getting out of control, even if the Fed refuses to acknowledge it.  At the end of the day the economy rests on confidence.  I think there is a real risk that rather than instilling confidence as Ben said he was trying to do in his press conference, the opposite will occur.  As the prices of food and energy rise to painful heights, at some point there is a risk that consumers just throw up their hands and stop spending, a phase change in consumer psychology like what happened in 2008.  Thus the unlimited QE may actually precipitate a crash.

Where will be the Frodo and Aragorn and the fellowship comprised of 9 fellow travelers come from Rivendell to save us at the last instant from the impredations of the Evil spreading from Mordor?  Romney?  He is no Aragorn, not a bad guy but not Aragorn.  Paul Ryan?  The more I learn the less I like, and I had been a booster.  No it will have to be someone not currently on the scene.  I want to believe, but right now I see only darkness, not light.

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