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For Signs of Stability, Look to the Price of Gold

by Dr. Kent Moors | published August 26th, 2011

I am based in Pittsburgh. So around this time of year, if somebody mentions “Big Ben,” my thoughts usually turn to a certain football quarterback.

That is, of course, unless the subject is the chairman of the Federal Reserve.

Ben Bernanke gave a speech this morning in Jackson Hole, Wyoming. Actually, to say that he made a few comments would be a more accurate assessment. He offered an upbeat view of U.S. longer-term economic prospects but gave no indications of any new stimulus plans.

There is a tug of war going on – between those who believe the Fed has a more active role to play and those who believe that the QE (quantitative easing) experiences were a failure. And since this is already an election cycle, the latter camp has the upper hand (whether that’s based on any real understanding of economics or not).

Analysis is not driving the policy apparatus. Politics is.

Keep these two overarching matters in perspective…

First, the Fed cannot make fiscal policy decisions. That is the province of the White House, but especially of Congress.

Second, what the Fed does control – monetary policy – cannot, in itself, employ workers, renew investor confidence, or start new small businesses.

The problems faced by the U.S. economy are in those areas that Fed decisions do not (and cannot) impact. Unfortunately, that also puts them squarely in the crosshairs of a vicious partisan political war being waged inside the Beltway.

As a result, this morning the Fed’s Big Ben did the only thing he could do. He gave a rousing halftime speech… and punted.

The markets, in response, initially digested the non-event and continued to look for things to short.

The weakness exhibited today on the German stock index, the DAX, is disconcerting, since as Germany goes, so goes Europe. But it may be more an expression of the latest vehicle traders are using to circumvent restrictions on shorting stock in several European markets than it is a genuine statement of sentiment on German prospects (or whether Chancellor Angela Merkel is in political trouble).

Politics aside (and yes, that is a big factor to ignore), the volatility in the current market is about half a genuine view of economic data and half a result of blatant manipulation.

This is hardly a new thing. We are not in this to reform Wall Street ethics, anyway. Frankly, we want to make money as much as they do.

But we need to recognize that the market will only recover when two thing happen.

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