Market Talk

Above the din – this furiously gleeful, Fed-induced, QE-inspired rally — there’s something very mystifying about it all.

It comes down to this: While a parade of Fed officials have gone to bat for QE II and espoused its supposed benefits, we’ve heard maddeningly little from them on the transmission. How exactly will it really (no BS) help get us out of our current economic predicament?

Stop with the academic blah, blah, blah and the hypotheticals, the ifs, ands and buts. How will QE create jobs?

Here’s the best Bernanke could do in a speech yesterday: “Additional purchases have the ability to ease financial conditions.” No mention of whether he said that with a straight face. Ben, please. Ease financial conditions? ZIRP, going on two years now. Enough said.

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US stocks surge, as does just about every “risk” asset, after the Bank of Japan tries again to arrest the yen’s rising, the most note-worth move among several from different central banks, including those in Australia and Brazil as well as the looming bond-buying program from the Fed, that have “currency war” written all over them.

DJIA jumps 193 (1.8%) to 10945, its highest close since May 3. S&P 500 rises 24 (2.1%) to 1161, Nasdaq Comp surges 55 (2.4%) to 2400.

It’s not just stocks: gold, crude, the euro all rise sharply, as investors are betting on a widespread bout of competitive devaluations among central banks. That’s good for nominal asset prices right now, but seems to us it’s bad for everybody in the long run.

It isn’t clear why the Fed seems so intent upon launching into all this dollar bashing, unless they think the economy is weaker than they’re letting on. If the recession’s over, and the economy’s recovering, why do something so dangerous destabilizing?

The Chicago Fed’s Charles Evans today said the central bank should do “much more” for the economy. Why’s that? “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” he said. “This is a far grimmer forecast than we ought to have.”

This Friday’s jobs report will be an interesting one. While the sell siders and White House tout the private-sector jobs created, the fact of the matter is that over the past three months, the economy on the whole has shed jobs. Now, the jobs market doesn’t have to disgorge half a million workers a month for it to be bad. The economy needs to create at least 100,000-150,000 some-odd jobs just to keep up with population growth. To get the unemployment rate down, it’ll have to be closer to if not more than 200,000. So losing 54,000 may not sound so bad, but it is, because it just means the the employment picture is slipping for another month.

If we’re not creating jobs, it also stands to reason that wages aren’t growing, since there’s no upward pressure on employers to keep employees. If you ask me, the Fed’s afraid that this situation will slowly drag the economy back into recession. Coming as it would with an economy that hasn’t recovered from the first recession, the worst in our lifetimes, and coming as it would with a nasty bout of deflation to boot, it appears the Fed has plenty to worry about.

This is just a brilliant insight from Peter Boockvar of Miller Tabak, writing at The Big Picture. The bubble isn’t in gold, or bonds, or even stocks. No, sir. The bubble is in printing money.

If you have it, the Bank of Japan will buy it. The BoJ cut interest rates from .1% to a range of zero to .1% and announced a 5T yen fund to buy not just JGB’s but corporate debt, commercial paper, ETF’s and Japanese REIT’s. If you live in Japan and thought about selling stuff in the closet on EBAY, hawk it to the BoJ instead. Bernanke in the Q&A of a speech on Fiscal Sustainability last night responded to a question about QE and said “I do think that the additional purchases…have the ability to ease financial conditions.” Another round of QE seems inevitable with the size and pace being the only question. It’s no wonder that gold is rising to another record high. Gold is not in a bubble, money printing is. Emerging economies however are not happy with the rise in their currencies. Brazil doubled the tax on foreign purchases of fixed income and South Korea said banks who do FX trades will face audits.

Maybe it is a currency war. Or just a big game being played by big players.

We weren’t the only ones who seized on the comments yesterday from Brian Sack of the New York Fed. Gluskin Sheff’s David Rosenberg also realized just how telling they were.

The line in the speech that set us off was this: “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” Perry Mason couldn’t have teased out a more incriminating statement. Rosenberg thought so, too. From his comments today:

I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.

Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission. Then again, this is what the Fed has been all about since the LTCM bailout of 1998. We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success. There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means, is irresponsible at best, dangerous at worst.

These central bankers all walk around in their suits and ties, and talk in these dull monotones and use a lot of big words, and most people have absolutely no idea what they’re talking about. A stance that would match their words better, would make their intent much clearer, would be if they were running around like the nutty professor in Back to the Future, and holding a big, round black bomb with the fuse lit.

The Bank of Japan announces a monetary easing program to spur economic growth, and cuts its interest rates to essentially zero — again — and the reaction is, well, this may help, it may not. Our central bank chieftain, Ben Bernanke, last night speaking to college students, opined ever so dryly that “additional (asset) purchases have the ability to ease financial conditions.”

What he should have said was “fire!”

This is just ridiculous. Do you see what they’re doing? The Japanese are trying to debase their currency. The Fed here in the United States is doing the same thing, although they’ll never say it. The Chinese don’t debase it, exactly, but have been ruthlessly suppressing it (and, actually, it seems to be working out rather smashingly for them.) Debasing the currency is about the most desperate thing a central bank can do. It never ends well. But this is the path they’ve chosen, and to change direction now would cause even greater carnage.

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Fed officials continue to talk up the economic benefits of the central bank potentially purchasing more assets, the latest coming from Chairman Bernanke late yesterday afternoon. In turn, the US dollar gives back yesterday’s gains — hard to make much positive progress when Fed officials seem so open to bloating the balance sheet.

Tokyo rallies after BoJ surprises with some big-time easing of its own, essentially cutting rates to zero, and establishing a fund to buy public and private assets. Sounds familiar. Imitation is the sincerest form of flattery, right Japan?

Yen cools, Euro presses closer to $1.38, European stocks a little higher. Sept ISM services index due at 10:00 a.m. ET.

S&P futures up 2.50, Dow futures up 17. Ten-year higher, yield at 2.45%.