Federal Resolve

Acting on your best behavior
Turn your back on Mother Nature
Everybody wants to rule the world
--Tears for Fears

I think John Hussman may be correct. Markets are levitating higher on the thesis that the Fed wants (needs) higher asset prices and is willing to pull out all stops to achieve that goal.

Few seem to doubt Fed Chair Ben Bernanke's resolve in this regard. And confidence in the Fed chairman seems to grow by the day (and with higher asset prices).

But what if Bernanke flinches?

Since the Fed announced its QE2 program in August with the stated goal of buying down long term interest rates, yields have actually gone in the opposite direction (divide the TNX value above by 10 to get the 10 yr T-note yield which currently stands at about 3.3%). Yields have risen because the bond market smells either a) increased economic activity, or b) inflation. Either way, the higher the yield, the higher the borrowing cost to the US government. At some point, higher yields could effectively shut down the bond market to US borrowing.

If interest rates continue higher, then, Bernanke may start to send signals that the Fed may have to cool things off. His problem now is that if the stock market gets even a whiff that Big Ben is having second thoughts, then stocks are likely to broadly come for sale.

The other thing that could make the Fed flinch is growing anti-Fed activism in Congress. Ron Paul is soon to be chair of the House committee that oversees the Fed. A number of Congresspeople are increasingly hostile of the Fed. If this hostility gains traction, then markets may become less confident of the Fed's all-encompassing power.

Either way, it seems that any doubts that the Fed will be able to prop up the world will be met with signficant selling.

position in TLT, SH