A Trapped Fed and a Doomed Market ~ The Risk Averse Alert

Tuesday, December 11, 2012

A Trapped Fed and a Doomed Market

Yet another gap higher in the NYSE Composite Index(!). Can't help but attach an exclamation point to this extraordinary feat whose occurrence of late has been notably frequent. This astonishing achievement is most noteworthy especially considering the fact that, by no means does the market's advance find upside participation broadening. Nor can it be claimed the market is "climbing a wall of worry." Quite the contrary, in fact. More like frolicking in a field of fraud. Yet there positively is no need to cite outstanding fundamental circumstance giving evidence to a fantasy-filled reality whose only secret is that the fraud behind it is the worst kept secret no one of any market moving importance dare mention. Besides, technical evidence belying every misplaced hope and delusional dream born of the market's "inexplicable" resiliency provides more than ample reason to suppose both scammers and the scammed alike—each group being weak hands possessing varying degrees of limited resources—are about to become pledges at the fraternity located, unfortunately, yet aptly, right next door to Animal House...

If you wish, you can review any bit of technical evidence presented here over recent days and weeks and you will find positively no change in the weather, only clouds but darker and all the more ominous.

Yet weak hands basking in the moment no doubt are all probably asking for "another." So, here it is...


Oh boy. Yet one more dark technical cloud to "assume the position."

The contrast noted in the bottom panel, where the NYSE Bullish Percent Index's momentum (MACD) reveals both marked similarities and subtle differences mid-2010 to mid-2011 versus late-2011 to present, offers food for thought regarding the market impact of policy evolving from the Capo Confetti regime at the Fed, as well as supplemental shenanigans coordinated by the Brussels Reichsbank.

In the first instance there had been much talk of Fed "exit strategies" that, as fast as a "flash crash," suddenly gave way to squeals coming from bailout junkies whose "fix" was delivered via QE2. Much like stock index momentum measures at that time, too, $BPNYA's momentum confirmed the market's joy at receiving another shot of hyperinflationary happiness from the Fed (see green line).

Not so, though, following the October 2011 "God save our sinking ship" panic whose wherewithal and basis, both, were predicated on the Fed's proven propensity to throw moral hazard to the wind, which confidence was only further emboldened by September 2011's "Operation Twist." Last year's panic and aftermath being largely driven by way of an extortionary attack launched against sovereign European treasuries at the euro-zone's periphery was accompanied by still louder squeals for more central bank juice. which gave rise to assurances Europe possessed the necessary resources to manage its banking system's insolvency vulnerability, leading to the ECB's LTRO late in 2011 and again early 2012. Yet following this liquidity gusher, though, $BPNYA's momentum (again, much like stock index momentum measures) failed to confirm the utility of further central bank bailout programs. Thus, the "subtle" difference early this year with technical circumstance surrounding 2010's QE2.

Now, the long momentum fade (which once again has been mimicked by stock index momentum measures) finds the NYSE Bullish Percent Index's technical circumstance appearing a lot like that last year preceding the market's summer swoon. Duly noted here once again, though, are circumstantial matters making the present moment considerably more fraught with danger than was the case last year, this from an objective, strictly technical perspective.

So, then, what to make of anticipation of tomorrow's FOMC announcement finding everyone and yo' momma expecting a QE4 to replace "Operation Twist" expiring at year end?

Well, let's check the calendar and remind ourselves when QE3 (a.k.a. insolvent MBS bailout in perpetuity) was announced...

Why, it was September 2012. Oh yeah, that's right, immediately following the stock market topped.

Wait a minute! Doesn't the stock market love it when gravely challenged central banks (I would argue already insolvent) prop up hopelessly insolvent money center banks?

Apparently not when they are damned if they do and damned if they don't...


Any idiot arguing the Fed, with its hyperinflationary bailout policy, is trying to coax money into the most speculative risk assets, like stocks and commodities, simply ignores the fact stocks suffer from a confidence plague (as contracting volume starkly exposes), the likes of which the CME and HFT only thinly masks, while a collapsing physical economy (as most recently witnessed by a manufacturing PMI shockingly indicating contraction) all too likely cannot abide rising commodity prices, particularly given how poorly the physical economy has fared over the past, nearly two years as commodity prices have receded somewhat.

The Fed is trapped. I don't care what they announce tomorrow. All I know is they are risking an interest rate reversal on account of the fact it is only a matter of time before bond holders realize the odds of being paid back in dollars maintaining their purchasing power are rapidly diminishing with each new central bank intervention. Once bond holders start throwing in the towel it's over. The Fed would be better off risking death and forcing the credit market's forbearance, rather than making it easy for bond holders to abandon ship and so force interest rates higher (and in so doing only the more trap the Fed in a Weimar Germany like dilemma).

Word on the Street
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