It seems that Ben "Helicopter Drop" Bernake is getting a jump-start on expectations that he will be an ‘easy money’ Federal Reserve Chairman. The Fed undertook the largest one day open market operations since the week of September 11th, 2001 during this past Wednesday. This massive stimulus followed a heavy week of liquidity injections during the final week of 2005.
Source: BullandBearwise.com
This massive liquidity injection partially explains the run-away stock and gold markets of the first week of 2006. And it also explains the rapidly weakening dollar…
But while the liquidity injections in September 2001 made sense, the only ‘crisis’ that I can see occurring right now is the retirement of Charmian Greenspan. Could the Federal Reserve be so insecure about incoming Chairman Bernake that they risk destabilizing the financial markets with huge and unnecessary liquidity injections? Does outgoing Chairman Greenspan think so highly of himself that he believes no one else is up to the job of without an added boost of adrenaline? Or is the economy not growing fast enough for the embattled Republican administration that they feel an extra boost is need for their popularity polls?
Whatever the reason, it’s a highly disturbing event because it implies a much more aggressive management of the financial markets by the Central Bank. And that’s a dangerous precedent because in the near term the additional liquidity is highly stimulative. But the effects are similar to the experiences of a habitual drug user. The Fed will have to inject more and more liquidity to stimulate the markets which will eventually lead to complete collapse.
While I have used the Federal Reserve open market operations as a secondary indicator of stock market market performance, I will now make a primary indicator. And I would advise anyone trading the markets to do the same.
I think one of possible reasons is inverted yield curve which everybody is talking about. Greenspan openly talked about this subject many times and rebuffed the inverted yield curve as a harbinger of weaker economy. He surely is right because the Fed is the ultimate money-printing machine. As an investor, I can never underestimate the power of the Fed. Remember the end of 1999 when all the media was talking about Y2K and how destructive it could be. The fed injected more liquidity than you could imagine. And As everybody knows, NASDAQ continued its miraculous upward rise at the beginning of 2000 after some 80% rise of 1999. So unlike many naysayers on economy and the stock market, I think the inverted yield curve might be a blessing particularly on the stock market. The longer the inverted yield curve stays, the more liquidity the Fed will pump into the market. The indication is that the Fed wants a cooler housing market (thersfore it raises Fed fund more than 10 times) while keeping the economy moving (injecting the liquidity). So while everybody is expecting the Fed will be done raising interest rate at 4.5%, I won’t be surprised to see it overshoot and stops @ 5%. If that is the case, one should sell his house in southern California and put all his money to the stock market because the Fed has already seen enough housing bubble and wouldn’t mind a little fuel added to the stock market by ejecting enough liquidity.
It would be as absurd as it would be Wi ked for him to attempt to
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