Bernanke Implies More Market Pain Before QE3

By DoctoRx

Ben Bernanke spoke today before Congress; click HERE for his prepared remarks. The markets appear to have seized on the paragraph about potential further easing of monetary conditions. They appear to be ignoring that the text spends one paragraph on easing but two paragraphs on potential tightening. Earlier in the text, he reiterates the Fed’s viewpoint that economic activity is going to accelerate in the second half of this year.

I continue to take the “under” on economic performance for the rest of 2011. The following chart is a “quick and dirty” reason why. (From Oilnergy)

The markets may have a good deal of downside action before the Fed actually pulls the trigger on additional easing steps. “Dr. Copper” is flat today on the futures market. Faster-growing parts of the world such as China, India and Brazil are in financial tightening mode. Meanwhile the best the US and UK can do is impose negative interest rates on savers to recapitalize the big banks.

Another reason I continue to take the “under” on economic performance are the comments of Messrs. Geithner and Daley (Chief of Staff to the President) on the talk shows this weekend. Each talked specifically about economic pain ahead. Mr. Obama would rather they talk not about pain but about the prosperity that the months ahead will bring, to be followed by an even better 2012. That they spoke this way suggests to me that the White House does not like the economic tea leaves and that they too are “taking the under”.

Meanwhile, for whatever reasons, Treasurys continue in their long-term uptrend in price, having in my view passed an important technical test this winter by holding within their long-term trend lines and selling off only a bit today even as gold and silver rose.

Finally, gold has quietly gone to a record high for the Nth time. I continue to like the valuations of gold stocks relative to the price of gold bullion, and now I like their technicals as well (though they may be “overbought” on some short-term momentum indicators, which I confess to knowing nothing about and therefore I ignore them, probably to my detriment). While physical silver, which has bounced sharply since I recently cancelled my (successful) bear call on silver, should follow gold over the long-term (I am a long-term owner of silver), my view is that gold mining stocks have at least the same upside potential as silver bullion does but with the greater stability of gold over silver underpinning them. On the other hand, an increasing number of miners are paying dividends, whereas silver in significant quantities is bulky to store at home and costly to store in a vault. It just may be that the dismal action in gold mining shares across the spectrum from money-losing gold explorers to profitable, dividend-paying majors, has made gold investors so cautious that a continued uptrend in gold bullion prices could at some point in the not-too-distant future lead to a rip-roaring bull market in the shares.

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