Bernanke is playing poker and doing it well for now - Analysis of Bernanke speech at Jackson Hole.

This morning I wrote a piece called: Less QE and more radio silence please Mr. Bernanke and it seems the Chairman did listen – I wish! – and just to disclaim upfront:  I was in the camp who thought Ben Bernanke would move to full QE right away, but facts is fact and this is my take:

·         From tactical point of view (as in relative to what he may need to do later) this is good news. He is stating his concern, he is not in panic (at least publically), and he talks about having more tools if needed. This means: I will do something if market drops – I think his level is 1050/1000 then he will be back in force stimulating

·         He gains some credibility by focusing on the US debt level and that it’s solution is fiscal plans. He is using classic economy theory that when in liquidity/debt trap the only real way to gain growth is through fiscal stimulus such as tax breaks, jobs incentives and other forms of reallocation of investments.

·         He also directly moves “the ball” over to the US Congress and their need to react to the debt situation. This is good for markets and probably the best news of this speech – it plays to the political theory that the best growth conditions are created through the inability of the political establishment to conduct any form of policy. Think about President Clinton – he came in with major political program but ended up doing: Nothing – and then as a byproduct came growth, fiscal SURPLUS and earnings. This is the good news.

·         The “negative news” is that most people had looked for specific targeted help to the mortgage sector through the FED buying more mortgage bonds. This would have helped the banks under pressure such as Bank of America and others by taking risk  of their books – this is now delayed at least temporarily.

The bar was set low for this speech but Bernanke told the market he is sitting still for now, and that fiscal policy needs to play a greater role. This is no different from the ECB which also feels European fiscal policy needs to play greater role if debt crisis shall be resolved. This is a small step for mankind – as we did not get more : Extend-and-pretend for now.

From market perspective I stick to my theory of a small up-move in risk before final 5^th leg down. Being long here of course is a risk – and I have with the help of Mr. Mads Koefoed constructed this “likely” scenario of S&P over the next three months to not be totally rudderless:

Source: Bloomberg LLP and Saxo Bank

This chart uses the recent low in the market in early August and then projects the future moves in S&P by using a 2008 analogy – this leads to the chart above indicating that we will move up into late September and then we will start towards new low in end December/Early January.

This is of course not a precise science, but only a reference tool.

Finally,

We are presently working on Q4 forecasts and I have two major changes:

1.       I will adjust our GDP forecast for the US up relative to consensus based on our leading indicators which shows massive improvement in consumer spending  (some of it due to much lower gasoline prices). This also play to my number one rule of economic projections – namely: Mean-reversion. We were negative on US growth all year and was right – now we are moving to opposite side- being more positive than the consensus (which is extremely) low.

2.       We will start focusing on how the US Dollar may stand in front of a major strength period which will be based on their increase in competitiveness.