When we discussed Wednesday's action in the stock market yesterday – referring to the big give-back of the post FOMC rally, we noted that:
"The market essentially took back Tuesday's rally in its entirety, but we would caution bears that this has merely left it in the same oversold position it inhabited before. Unless the system really blows a gasket here and now, chances are that we are approaching a rebound in spite of this renewed decline. As always, the short term action is very difficult to forecast, and we acknowledge that risk remains elevated. Alas, experience tells us to be wary, whereby we must caution that it is our impression from anecdotal evidence that there is still a lot of nonchalance out there about this decline."
Sometimes the market complies in spite of the difficulty inherent in forecasting the very short term outcome, especially in volatile markets. However, be aware that this recent 'down-up-down-up' sequence on the daily chart does not yet preclude that we will see one more wave down in the near term. If such an additional wave down were to occur, it would however almost certainly create divergences with various momentum oscillators such as the RSI, so it would also not change anything said in the above quote. If the market were to exceed Thursday's intra-day high on a closing basis, one could be reasonably certain that a bigger rebound is underway, whereby our working assumption remains that such a rebound would likely test the broken support/neckline on the daily chart (approx. at the 1250 level for the SPX). However, we wouldn't necessarily mortgage the farm on that assumption. Consider our remarks on money supply growth at the end of this missive as well though.
Vertigo-inducing action – down, up, down, up….in daily ranges we normally don't get to see every day – click for higher resolution.
This by the way prompts us to briefly quote something Steve Saville said yesterday, as it really hits the nail on the head:
“It's just as well we have central banks to stabilise the markets. Otherwise there would be huge volatility, with the Dow Industrials Index regularly moving by more than 400 points in a day.”
Indeed, the recent behavior of the financial markets is yet another rather obvious indication that central planning doesn't work – as the current market volatility is in principle nothing but the symptom of yet another one of those plans gone wrong. It's not that the 'planning' of central bankers is very sophisticated – as we read elsewhere in a spot-on characterization of Ben Bernanke's policies, 'to someone with a hammer, everything looks like a nail'. Aside from lowering interest rates below the natural rate and pumping up the money supply by a variety of means, there isn't anything in Bernanke's bag of tricks. It hasn't occurred to him – and likely never will – that to decree that the cost of capital shall be zero can only hamper economic calculation and investment/resource allocation.
As Dr. Marc Faber recently remarked in an interview at Bloomberg, 'the best the Federal Reserve board could do for the economy would be to collectively resign'.
Unfortunately that is unlikely to happen anytime soon, which, as Bob Moriarty at 321gold.com remarks, 'forces us all to be speculators' until further notice. Further notice will be given either by the markets themselves – the markets one day may simply take away the Bernank's 'toolbox' to his vast surprise – or by a bigger 'palace revolt' at the central bank. Let us not forget, every bureaucracy is first and foremost concentrating on its own survival and enlargement and if other members and representatives of the banking cartel feel that the helicopter pilot is endangering their foremost institution's survival, they may take action to depose him. For now, the facade of unity remains intact, in spite of the recent dissents at the August FOMC meeting. As the WSJ reports, dissenters Fisher and Kocherlakota are 'full of praise' for the mad hatter.
“On this occasion, I dissented from the committee’s decision,” Mr. Kocherlakota said in a statement to the Wall Street Journal, in response to a question about Mr. Bernanke’s leadership of the Fed. “Regardless, I have nothing but the highest regard for the acumen, integrity, and ability of all other FOMC meeting participants, including the chairman.”
This report was brought to us by the Fed's premier press mouthpiece Jon Hilsenrath (the current 'man with access') and essentially it is designed to give us the message 'don't worry, the establishment is still firmly embarked on the same course that has brought about the recent string of catastrophes. No-one is as of yet truly deviating from the party line. Neither Keynesian nor monetarist recipes have worked thus far, we just need to try out more of the same. One day they will work. Honest.'
By the way, we also do not doubt the good chairman's integrity or his acumen. He's neither corrupt nor stupid – he's just misguided and dangerous.
