You Crazy!

I think Bernanke's going to signalthat we should not expect QE3 before next year. Therefore I think the market will take a hit. Uhh, wait a sec; the market really ought to rally, since the Fed's expecting the economy to pick up steam.

I think Bernanke's going to signalthat they will indeed implement QE3 before next year. Therefore I think the market will rally. Uhh, wait a sec; the market really ought to tank because the Fed believes the economy's going to weaken further.

Clearly, the market has signaled that the former in each of the above would be its position. Therefore it has no faith whatsoever in the Fed's predictive capacity. Think about it; if the Fed eases, the market rallies, but the market of course wouldn't rally if it thought the Fed was right - that things are bad enough to warrant a whole new round of money printing. Now if the Fed doesn't ease, the market sells off, but the market of course wouldn't sell off if it thought the Fed was right - that things are looking up and therefore more QE simply isn't necessary.

Or maybe it's the market that's all screwed up (market here btw = Wall Street traders). Maybe traders have it backwards. Maybe they simply don't understand that another round of QE would confirm that the Fed is sincerely frightened about our economic future, and, given the law of diminishing returns (after two rounds of QE), traders should be intently nervous in such event. Or, vice versa, that the Fed pulling the plug on more stimulus would be a huge endorsement on behalf of the health of the economy going forward, which should have them buying like crazy.

Or maybe it's traders thinking that retail investors (consumers) are all screwed up. That retail investors believe the hype that stimulus (fiscal and monetary) actually works. That since the economy always seems to find its way to the next expansion, and since stimulus always comes during the preceding contraction, that stimulus therefore always creates expansions. Thus, if the Fed does the QE, retail investors will stampede into stocks.

Or maybe this is the inflection point; where the Fed finally has it right. Or where the trader finally has it right. Or where the consumer finally has it right. Or where they all get it right at precisely the same time. But then what happens?

I guess you better stay tuned. Or, better yet, you better tune out. Because if you think you can understand, let alone time, market volatility, you crazy!