Fed's Asset Stabilization Strategy

In the past, Fed accommodations have helped to stimulate economic growth after a brief cyclical downturn.  This time a structural downturn is necessitating greater demand for relief through massive injections of liquidity to support a strategic plan to protect asset prices via the great buy hedge. Now, the EU's cheap euro strategy which is needed to facilitate repair of the economic conditions brought about by a de-leveraging world, is challenging the Fed's asset stabilization policy.  While the Fed has provided a covered hedge for assets such as stock prices, a cheap euro policy may ultimately force the hedge to be cashed-in as world pricing power wains, profits fall, and job growth remains weak. 

The world seems to heading towards a new standard of living set point.  The Fed's policy of asset stabilization may in the end be the difference between deflation and just a bit better than deflation.  Either way, the great buy hedge will see some pressure as some may take the opportunity to raise cash by liquidating against the hedge.

The Big Wean

Bernanke testimony this week clearly shows a Fed which would love to prepare the US economy for the beginning of the end of stimulus.  Without committing to further stimulus yesterday before the Senate and in his testimony before the House today, the Fed Chairman stated he did not see a double dip recession.  His message. The beginning of the big wean or the end stimulus is being cautiously prepared. 

The problem of course is if it were not for the European economic problems, Bernanke would be more confident in the initiation of the end plan. If Europe can repair itself even ever so slightly, then the markets will not need much more help.

Now the markets may not like the thought of growing ever so slowly all by themselves which is probably not good for owning equities right now.  In fact, it is the first time since 2008 the Fed has indicated it may not be the great asset enabler in the next investment cycle.  Thus the buy for equities was between March and September of 2009 and the potential end of that Fed enabling run may be March to September of 2012.