Fed Bernanke clarifies his two tier approach to normalisation

Dear All,

I will apologies in advance - this is written @ 1:06 AM  meaing plenty of mistakes and general errors without my excellent editor team behind me... but I feel time to market is more important than the grammar and spelling. 

Steen

Bernanke tries a one-two approach to normalization

I am disappointed in myself:  Last week ECB and Draghi turned 180 degrees in their economic outlook from "all is fine" to being concerned about the downside of the economy plus a desperate need to signal  interest rates will remain lower for longer (forward guidance), so it should not have been a major surprise to me that Ben 'over-easy' Bernanke did exactly the same thing!

Less than one month ago Fed stunned the world with an inflation forecast below their own target without reacting to it – 'inflation effect was transitory'… well only for one month. Today came the reaction.

Bernanke now feels he is behind on both his mandates:  Inflation and unemployment.

Indicating to the market that: Highly accommodative policy is needed for a foreseeable future

The über dovishness continues:

• BERNANKE: 'TOO EARLY' TO SAY U.S. 'WEATHERED FISCAL' RESTRAINT
• BERNANKE SAYS INFLATION, JOBS SIGNAL MORE FED STIMULUS NEEDED
• BERNANKE SAYS FALLING INFLATION CAN BE BAD FOR AN ECONOMY
• BERNANKE SAYS `OVERALL THRUST' OF POLICY HIGHLY ACCOMMODATIVE

Source: http://www.zerohedge.com/news/2013-07-10/gold-bonds-and-stocks-soar-bernanke-promises-moar

To some extent this should not surprise: Bernanke famously promised Milton Friedman on his 90^th birthday in a speech that he would not allow Fed to tighthen monetary policy too early – his 2002 speech ends:

'Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.  Full speech link here

The lesson? Clearly is this: Bernanke believe in a two tier approach to normalization:

1.       Maintaining rates accommodative for a very long time and pre-warn market of incoming changes via targeted macro objectives.

2.       Reacting to increased bubbles via the macro prudential framework:  A good old "margin call" on the banks to increase capital and downsize the leverage instead  of creating excessive and depressed prices in high yield and mortgage markets (Fed Governor Stein February 7^th speech: Overheating in Credit Markets: Origins, Measurement, and Policy Responses)   & new regulatory capital demand:  Regulators seek stiffer bank rules on capital (capital need: 89 bln. US Dollars)

Bernanke will not allow market to set rates too high relatively to the economic cycle but he firmly believes any leaning into bubbles should be done via the 'macro prudential framework' – I.e: regulation and capital demand on the banks.  Between 1934 and 1972 the main macro prudential tool was the direct margin of the banks. Fed, themselves, produced an excellent paper in May 2013 called:  The History of Cyclical Macroprudential Policy in the United States which actually explains a lot of what is going on right now. (Try do the classic F9 search for 'margin' in the document!)

Bottom line: Bernanke once again rode the rescue of the BTFD crowd but the price could be big – the reason for this being that Fed, like ECB, is left "talking to the market" instead of operating in the market. QE or rather tapering will now have the needle on December at the earliest from September post the Non-farm, but underneath all this central banks needs to realize the truth BIS delivered recently:

"Can central banks now really do 'whatever it takes'?" the BIS asked. "It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions."

Furthermore central banks can't ensure fiscal restraints or enact structural reforms – Central bank "borrow time" and Bernanke just did exactly that: Pretended-and-extended one more time.

Strategy

I turned my overall net risk-off positions around tonight to now:

Long EURUSD @ 1.2998, Long AUDUSD @ 0.9193, Long S&P 1661.75 (2x units – delta vs. Legacy shorts)

Massively long USD put JPY call x- 94.00 August 7^th (5x leverage vs. AUM – 20 delta's=, Long EUR call USD put July 17^th 1.3050

Legacy shorts in DAX, MIB40 which will cost me tomorrow….

SPX target now 1.700 on final rally before reality sets in:

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&st=2009-01-01&en=(today)&id=p25591830315&a=206450505