Equities have recovered substantially from their lows as continued accommodation from the Fed persists in order to defends its asset inflation strategy. Given the Feds decision at their last meeting to keep their lending rates at zero for the next two years, they have committed to an all out assault on world banking bears, who for a while, seemed to be gaining credibility as sovereign debt and US debt ceiling confusion seemed to increase chances of downward pressure on equity prices.
In their collective mind, the Fed believes that its best and or last chance is to keep the top of the economic ladder fed. Knowing the middle class is left out of the stimulus and any real ability to generate wealth through economic expansion, the Fed is concentrating on increasing excessive cash overflow at all levels of the banking/Fed system in the hope the upper strata will be cushioned against almost any financial calamity. Protecting those with the most virtually avoids large flights of capital. The middle has nothing to move including their largest investment, real estate, which can hardly move at all.
The question is whether the Fed's strategy will work. Without broad economic participation by a growing work force, pumping money usually creates asset bubbles. The Fed believes the severely depressed real estate sector allows a world of flooded cash reserves in order to buy time for economies to have an opportunity to take on risk by expanding operations by creating jobs. The Fed however is fighting a ' less is more ' productivity model adopted by nearly all corporations with the advance of 'app' technologies replacing every other worker.
Equity price volatility has the Fed extremely worried and it is reasonable for the Fed to redo its theme of forever accommodating each time price dives appear. The worry is legitimate. The Fed has now placed its last ' I am warning you ' out there with not much left for influencing their top tear strategy. If prices were to return to a sharp volatile retracement of the current recovery, the consequences to price will be much harsher. Safe harbor credibility will be lost and repricing will mean equities liquidation on a grand scale.
