Yesterday’s stock market rally (on the news that savers will be earning negative real returns for the next two years) was all about Bernanke attempting to place another giant “put” option under risk assets by forcing cash into the market. Remember, at Jackson Hole he overtly indicated that Fed policy is designed to create a “wealth effect” by driving up the value of 401(k)’s, stock portfolios, and all things risk.
And it worked for a while. The market rallied 100% from its March 2009 lows. Never mind that the basic commodities required for luxuries such as eating were inflated as well. And never mind that food inflation is driving double-digit wage inflation across the emerging markets where our consumables are produced. But, that’s fodder for a different blog post.
The point of today’s blog is really to point out how short-lived was the new Bernanke Put. After today’s 4.4% loss, the market is only a fraction of a point from yesterday’s pre-Put opening level. European banking news and rumors swamped the Put. Whisperings of Soc Gen potentially being insolvent drove its stock down 20%. The major US banks were all down in the neighborhood of 10%. Gold continued to rally. Treasuries continued to rally. It looks like the Put had the opposite of its intended effect — it drove money out of risk assets and into safe haven assets.
Over the next few days we’ll see if the Put is able to recover for the longer term. If it does not, there may be no alternative left for the Fed but to launch QE3. At that point, it may well be a snake swallowing its tail.
For informational purposes, below is today’s Treasury market activity. It strikes me as a dramatic flight to quality.
Yield Change in Yield
2-Year 0.18% -8.37%
5-Year 0.90% -9.45%
10-Year 2.08% -7.36%
30-Year 3.48% -3.77%