Graham Summers, writing for ZeroHedge, has pointed out that Fed head Ben Bernanke hasn’t done any new buying of securities despite his promise to do so back in September. The Fed publishes its balance sheet. You can see it here, in graphical form. As Summers said, if Bernanke was buying, how come the measure of money – the adjusted monetary base – is declining?
Would Bernanke lie? Oh, no!
The stock market jumped up nicely at the news, but has retraced most of those paper gains. Maybe the market has figured it out: it was all talk. All hat and no cattle.
As Summers says:
The Fed balance sheet is DOWN $50 billion year over year. This confirms that the Fed has in fact been engaging in mostly verbal intervention over the last year rather than actual monetary intervention.
The implications of this are of major import.
For one thing, it indicates that the market rally on hopes of more Fed juice is in fact based on a myth. The primary driver of all stock moves has been based on hopes of more liquidity from the Fed and other Central Banks. But the Fed’s balance sheet indicates that this hope is not based on fact. That does not bode well for the bulls.
So the correction in stocks that began last week just might continue and in fact possibly accelerate. But there’s more:
A second implication concerns the multi-trillion Dollar question: whether the Fed has in fact used up its gunpowder with all of its monetary schemes. After all, the market is roughly break-even since the Fed announced QE3. Could it be that the market is no longer reacting to Fed action?
That’s a major blow to Keynesian theory: that juicing the money supply will juice the economy. If Summers is right, and I think he is, then Bernanke will achieve nothing by buying more government securities, except water down the currency further. And so Bernanke is using the only other tool in his arsenal (the word arsenal way overstates the matter) – words. And for a brief time, it seemed to work, as far as the stock market was concerned.
Summer concludes: “The tide may in fact be turning regarding the success of the Fed’s actions in pushing stocks higher.”
What a sham and a farce.