Mo-Force is On Board the Deflation Wagon – Time for Mr. Bernanke to Cut Interest Rates

On August 2, 2008, we wrote an article titled “Jim Cramer on Ben Bernanke – Fair in August 2007 and Unfair in August 2008 – (—fair-in-august-2007-and-unfair-in-august-2008.aspx)

In that article, we coined the term Mo-Force to describe the hordes of huge, momentum-driven, performance-oriented investors (Macro Hedge funds and Quant Funds) that have dominated global markets for the past few years. These investors, often using the same models, can move enormous amounts of money into and out of global markets.  When they go in, they create waves of buying, catapulting markets and asset classes to dizzying heights and when they get out, they leave destruction in their wake.

In that article, we described how Mo-Force was totally opposed to the decisions of Federal Reserve Chairman Bernanke to cut interest rates in September 2007 and in March 2008. We demonstrated using charts, how every time Bernanke cut rates, Mo-Force actions created upward explosions in Oil Prices, in Metal and Commodity Prices, in Emerging Market Stocks and a sell off in the US dollar.
Remember how Oil Prices exploded upwards to near $150/barrel after Mr. Bernanke cut rates and bailed out Bear Stearns.

That was because Mo-Force was obsessed with inflation arising from GLG2 (Global Growth & Global Liquidity). We noticed,  that in July 2008, Mo-Force was getting off the GLG2 bandwagon. Our expectation was that Mo-Force would get on the deflation bandwagon sooner or later.

So we wrote in that article,
If and when Mo-Force starts chanting the deflation mantra, then Bernanke will have the force behind him to cut interest rates again.

This week, it became totally clear that Mo-Force is chanting the deflation mantra loudly and stridently. In fact, the din of this chant is reverberating around the world. Look at the action in global markets. The US Dollar is flying high and Commodities are literally collapsing. The widely used commodity index, the CRB collapsed 9.9% this week alone – its worst showing in at least 50 years.  Copper fell by 5.8% to a 19-month low, Platinum hit a 32-month low and Aluminum hit a 2-year low. Brazilian and Mexican currencies fell to their lows of the year and so did the equity markets around the world. This is the sort of destruction that Mo-Force leaves behind when it exits its favorite positions in size.

If Inflation is Fire, Deflation is Ice. In an icy environment, businesses and investors tend to hide deep in their proverbial caves to hibernate. In these conditions, the best performing asset class in the world is US Treasuries.

The steady fall in US Treasury Yields is the force Chairman Bernanke needed behind him to cut interest rates quickly and decisively. Now that the force is behind Bernanke, he must cut interest rates. He has NO EXC– USE to not do so. We do not have the Cramer megaphone but our message to Mr. Bernanke is the same.

Chairman Bernanke, cut fast and cut deep!

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