Did Bernanke detonate the markets, or it was the inflation...?

Today a hesitating talk from Bernanke has made most markets to explode, starting a new rally, motivated by inflationary expectations. Bernanke said he is not sure, but maybe he will print some more money to help further the economy that already has given some signals of recovery... At the moment investors heard this, the markets of almost everything skyrocketed, killing irreversibly any hopes of bear-investors.

It is interesting to point that in past the same type of hesitating talk with the opposite direction did not initiate a crash on the markets. There was no a bear anti-rally when Bernanke created doubts of whether a QE3 will exist.

This comparison of 2 identical situations point the real trend on the markets. In one case the words create a rally and in other - create nothing. That is so, because of the existing of fundamental factors in one case, and their lack in other. A talk, backed by fundamentals makes a rally. A talk without fundamentals makes nothing. It's just a talk.

After 3 years of intensive money-print, the markets are so much flooded with liquidity, that even the most weak reason can detonate them. And no word or talk can press them down. There is an intensive inflationary situation on almost all markets. The inflation on markets means a bullish rally up.

Generally no one on markets believes that FED will start soon an anti-inflation policy by increasing interest rates and pumping liquidity out of markets. In fact, most of investors are just waiting for QE3.

There is no chance of avoiding QE3 or of raising interests. The US government is in de facto a default situation. 40% of the budget is loan-funded and 2/3 of this funding is from FED. This means than about 1 of every 3 dollars that Obama is spending is form FED. This type of financial situation can exist only while keeping both low interest rates and high level of bond purchases by FED. If 1 of these 2 things disappears, the government will go bankrupt. Without FED buying bonds there will be no enough buyers. And if the interest rates go up then the government payments on the old (100% of GDP) debt will skyrocket that again leads to a bankrupt.

So it is clear enough for the most of investors that the right question is not "if" Bernanke will print more money with QE3, but "when" Bernanke will do this. As it is unthinkable the government to go bankrupt just before the November elections, so the time left to Bernanke to act is lessening with every passed day. The markets are nervous while waiting the QE3, so every hint on closing it can detonate a bull-bomb.

In fact the money flood on markets (not only from FED, but also from ECB and BoJ) is so huge, that soon even no trigger (talk) will be needed to start a bull-rally. In all inflation-crises there was a moment of no more controlling the situation, after which, the inflation is self-creating itself, pushing the markets in so called inflation-spiral. I don't think we are far away from this point. Today Bernanke has one of his last talks that still can have any influence.

Dobri
March 26th 2012

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