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Jonathan Yates
How Much Longer Can Bernanke Talk Up The Dow?

As detailed in another post on this site, it was needed for Federal Reserve Chairman Ben Bernanke to begin “talking up stocks” to bring the Dow Jones Industrial Average (NYSE: DIA) and the Standard & Poore’s 500 Index (NYSE: SPY) back to the recent highs.  As the chart below shows, this has happened:

It was not even a major speech by Bernanke that now has the market back to record levels.

As noted by one commentator, “Everyone, be sure to send a thank-you note to Mr. Bernanke. All he had to do was whisper how the Fed is still (probably) going to continue its QE efforts until, well, indefinitely, and the market soared. Since the market hangs on – and reacts to – his every word, all it took was a tiny bit of encouragement to fan the bullish flames. Never mind the fact that he hinted at the exact opposite idea in May, not to mention in February. Geez.”

All three indexes were up more than 1%, ending in record territory.  But the fundamental problem remains, as reviewed in the previous piece on this site. As noted by former Treasury Secretary George Shutlz in a Wall Street Journal article, the Federal Reserve does not an unlimited capacity to add trillions and trillions of assets to its balance sheet.

Common sense dictates that if the stock market rose and interest rates fell when the Federal Reserve was acquiring trillions in assets to its balance sheet, that the stock market will fall and interest rates will fall when the reverse happens.  In some form, that will take place.  When it does, it will take more than remarks by Bernanke to keep the Dow Jones Industrial Average and Standard & Poor’s 500 Index in record territory.

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