He loves me, he loves me not

All this week, the markets have acted like a little girl with a crush, pulling petals off a flower – “He loves me, he loves me not.”

The object of the market’s affections is Fed Chairman Ben Bernanke.  You’d think he possessed magical powers for the way the market made a fool of itself over him this week.  Come to think of it, perhaps the market does attribute magical powers to him.  Let’s review. 

On Tuesday, the Dow Industrials tanked 280 points, thanks in large part to the release of minutes from the Fed’s Open Market Committee meeting of August 7:

While the central bank noted the turmoil in the markets and said, "to the extent such a development could have an adverse effect on growth prospects, might require a policy response," it didn't discuss a cut in the benchmark federal funds rate that Wall Street has wanted.

He loves me not. 

Ah, but wait… On Wednesday, the Dow recovered all but about 35 points of the previous day’s loss, thanks in large part to the release of a letter written by Bernanke – I daresay, a love letter: 

The Fed is "closely monitoring" markets and is ready to "act as needed," Bernanke wrote in a letter to Sen. Charles Schumer (D-N.Y.) that was dated Monday and released Wednesday. 

He loves me.  Wednesday was the “Why-didn’t-you-say-so?” rally.

Ah, but love is a fickle thing.  And so the market see-sawed on Thursday, the Dow dropping about 50 points, traders hanging on every word of Big Ben, that hunka-hunka-burnin’ love… because all will be revealed today – yes, we’ll know for sure if his love is real! — when he meets with his fellow central bankers in Jackson Hole and delivers a speech.

Or maybe not.

Actually, the more I think about it, the market’s relationship to the Fed is not that of a love-struck first grader after all.  It’s that of a drug-dependent battered spouse, helplessly reliant on the abuser for regular “injections” of liquidity and fixes in the form of rate cuts.

Withdrawal is never a pretty thing.  And the longer it’s forestalled, the worse it becomes.

The Daily Reckoning