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The Bad News Is That Market is Celebrating What Was, Not What’s To Come

The cash generated by the ECB’s second big LTRO operation hit the US banking system last week. At the same time the Fed is still pumping cash into Primary Dealer trading accounts, and it just completed a big mid month cash infusion. This was all part of the master manipulators’ master plan, of which they have made no secret, and which we have followed with keen interest. But now the consequences which they did not intend are beginning to loom a little larger.

With Treasuries over-owned and sentiment finally beginning to shift against them, any cash freed up by the Fed and ECB operations has flowed toward stocks and commodities. There appears to be no reason for that pattern to reverse in the short run. Rising commodity prices will force the central banks to keep their hands in their pockets, and at some point, probably a month or two down the road, that will begin to put downward pressure on stock prices.

But we’re not there yet. Because the Fed follows the slowest and least sensitive inflation measure, the core PCE, which ignores food and energy inflation, and is only calculated quarterly with a lag, Bernanke and Co. will be the last to know that inflation has gotten out of control. So they are not likely to tighten policy any time soon, and by the time they do, it will be too late. Fed policy is always reactive in response to what has already happened, never proactive in preparation for what is likely, because the FOMC has no clue as to what is happening concurrently, let alone what is likely. It is only capable of reacting to crises that have already occurred as a result of the unintended consequences of its past policy mistakes. So by the time the Fed reacts again to the unintended consequences of its latest policy blunder, those consequences will have already taken their toll. If you understand that simple dynamic, you are one step ahead of the Fed and the market.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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