to talk about bubble seems to be in fashion presently but…. should we really care to know if we are or not in a bubble since we live in an “Uber Financial “world where asset price inflation has been (and some still believe in this mantra) the main engine of the mother of all bubble… the credit bubble ! So yea…. we are already in a dying bubble…. and this is what keep our Central Banksters awake at night. Now that we have been pounded for years about the other mantra which is…. “don`t fight the FED”” we should start to look a bit more carefully about this infinite power promise that keeps the animal spirit awake and strengthen the herd mentality.
Bernanke well deserved reputation of “Helicopter Ben” due to his famous speech “Deflation, makes sure it does not happen here “done by the way almost exactly 11 years ago, on november 21st 2002 (http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/) has been able to implement extraordinary measures never seen before since policy makers trusted him as a great scholar of the great depression. Ben… initial BB… is actually getting out at the right time but I tend to believe that his fate will not be too shiny since he will have to probably revisit his famous speech and bring hypothetical adjustments he could have thought about while in charge.
Anyway.. what matter is the future and reading the recent past, we should pay attention to a few things.
1) I believe that QE has been able to achieve some results, lowering long interest rates, due to the fact that many market participants saw an opportunity to gain a free lunch, front running the FED.
2)The Tap Tap talk of april may 2013 has signaled to market participants that the free lunch party they had been accustomed to… could be over and that the game was now no to be caught.. holding the bag
3)The fact that the FED has decided to postpone “surprisingly” the Tapering implementation, is starting to show that the Emperor is somehow lightly dressed (Janet please… keep your clothes ). The name of the game now is to bring back the market participants to their usual QE free lunch but…. it does not seem to work since the perception which remains is that sooner than later… they might be caught holding the bag.
I do not have a crystal ball but to me the most important factor is to keep an eye on the long term interest rates
we can see that the Un…. tapering decision has in fact produced little impact in lowering importantly long term interest rates and it seems that the present QE program is somehow cornered.
Apprentice Ben, in his great knowledge about what do do to avoid the great depression, at first must have felt quite powerful seeing long term interest rates going down the slope but….. Apprentice Ben has forgotten or underestimated one great lesson is that it is the market who will decide about the fate of long term interest rates!
Bond investors have already taken quite a beating in 2013 and they have become more cautious since they were caught holding the bag. Janet…. will have a very difficult job, not for being a woman but for being at the wrong time and the wrong place since investors seem to have started to loose faith about the presumed all might powerful FED.
Sure.. some options are still on the table like…. implementing negative rate aggressively, cutting the deposit rate paid on excess balance to zero (that will prove a hard fight against wall street), buy lower quality debt instruments, implement an aggressive Mortage REFI program which will shorten terms to enjoy lower rate etc… including as a Central Bank, acting more and more as a commercial bank ! All this actions will probably continue to undermine the credibility of the FED which will face at some point in time a critical choice… the choice of preserving the currency but this will takes still some time in my view.
I wish Janet good luck, she expressed the will to be determined but… being determined facing a growing crowd of less or non believer in her mighty power will be a much harder task that she could have ever imagined.