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Bernanke’s comments today were mostly meaningless! Why?

June 19, 2013

Today’s comments by our Fed Chairman suggest to me that he has NO idea where our economy is heading going forward. Basically, he concluded that he and his committee will watch and react to events as they transpire. Ben basically indicated that he will change policy depending on how events play out going forward. This means that nothing meaningful emerged from the FOMC meeting for our economy. If rates go up, than Ben will act. If unemployment goes down, than Ben will react. If the markets produce negative outcomes, than Ben will react. What does this mean? I would suggest that he has no idea where our economy is going and he made it clear that he and his committee will react with policy changes DEPENDING on what happens. This implies that the Fed is mostly an institution which changes policy depending on market events. The Fed is essentially ‘at effect’…not ‘at cause’!

Basically, Ben and his Committee sent a message that Changes are Coming…but What Changes…are totally Unknown and Unknowable!

My personal view is that the markets are very unstable and uncertain. This means that we are likely to experience increasing volatility in the markets for the remainder of 2013. Since markets now move via Emotion, Psychology, and Geo-Political events we could witness substantial changes in the coming weeks and months. The situation in Syria seems like a black swan event to me. This situation could really change our markets and eventually create a downward trend for stocks and an upward trend for gold and silver. Like Bernanke, I must qualify all my projections with qualifiers like IF and THEN. In reality, no one knows the future with certainty. The best we can do is base our judgments upon sound logic and evidences from prior history.

This image reveals a message of vagueness when we speak about the future!

The one certainty that seems predictable, however, is that our current economic situation will not remain stagnant or stable. We now live with a Centralized monetary policy which will continue manipulating the markets and continue to distort asset values as events occur. My sense is that our Keynesian Economic Model has reached an end-point for being effective in growing our economy. Our past accumulation of unsustainable debt, huge derivative obligations, and inflating asset values could be nearing an end. The coming Deflationary and Deleveraging trend could grow with a vengeance going forward. If our Stock Market should crash this factor could set in motion the deflationary scenario (which I envision) for years to come. At some point our DEBT must be liquidated and removed from our accounting books!

We witnessed the beginning of the Great Deflation when the housing bubble burst in 2008. Since then we have witnessed a minor reflation going into 2013. As interest rates increase and wages continue to stagnate, however, it is very likely that another deflationary trend will emerge in the real estate sector (later in 2013 and early 2014). The affordability index has not improved and this factor is likely to dampen demand for housing later in 2013. Any real change in the confidence level of consumers could initiate this deflationary trend. Watch what happens as consumer confidence wanes later in 2013 and 2014.

As interest rates increase housing affordability decreases. Demand for existing housing units changes with affordability! Consumer wages are now mostly stagnant and this is likely to affect demand for housing going forward! As demand wanes, values are likely to start another decline! Watch what happens to interest rates and wage levels going forward!

To summarize, our economy is vulnerable to rapid downward change given all the negative events now emerging in our Global markets. Nothing has changed fundamentally from the prior problems which caused the 2008 crisis. This means that another huge financial crisis is looming down the road. That is my perception and judgment. Watch the markets for clues! I am:

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