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Fed Action Looks Increasingly Futile

NEW YORK ( TheStreet) -- The Federal Open Market Committee decision to modify the original QE3 plan not only gives the Fed much-needed flexibility managing the widely feared exit scenario but also provides stronger support in case things get worse.

But the market reaction Wednesday was even more significant. There was a brief risk-on rally, with Treasuries ( iShares Barclay's 20+ Yrs Treasury Bond (TLT) ETF) down, and stocks ( SPDR S&P 500 (SPY) ETF) and gold ( SPDR Gold Trust (GLD) ETF -- which in its inflation-protection hat is a risk-on asset in the current context) up, that lasted for an hour.

Then the market seemed to have forgotten about the Fed and went back to the corner, sulking in the gloom of the earlier ADP (ADP) miss.

Two things are very clear:
  • 1. The excitement over the prospect of a (finally) strong and sustained recovery of the U.S. economy earlier in the year is gone. It's another case of green shoots that have sprouted and quickly died every spring since 2010.
  • 2. The excitement over Fed quantitative easing is gone. Nobody's worried about inflation anymore. And this is not a vote of confidence in the Fed, otherwise stocks would go up and Treasuries down. Rather, it is a clear vote of no confidence in the Fed in the sense that the market believes the Fed can do little to help the economy.

But at least housing is good, right? Yes, except that it's due to Japanese buying of Ginnie Mae bonds; Chinese investors buying houses with legitimate reasons (diversification) or less-than-legitimate ones (moving ill-gotten money away from the anticorruption campaign waged by the new leadership in Beijing); and European diversification caused by the scare of the Cyprus deposit bail-in.

The surge since January has been so sudden and strong, it'd be a real stretch of logic and imagination to explain it any other way. This is not sustainable, real demand.

Everything in the financial world since shortly after QE3 has everything to do with either Japan, China or Europe and nothing to do with the almighty Fed. The Japanese liquidity tsunami caused the surge in Japan and Southeast Asian stocks, eurozone peripheral bonds, and U.S. bonds and stocks.

The fact that China's slowing down is becoming an accepted reality, and indeed even intended or at least a well-expected consequence by Beijing, caused a prolonged drop in industrial commodities. Even tiny Cyprus kicked up a tempest in the global teapot. Yet here we are, the Fed goes QE3++, and all we get is a lousy one-hour pop in the stock market.

Fed Chairman Ben Bernanke famously criticized the old Bank of Japan for its timidity when he was still enjoying the freedom from consequences in academia. Then he famously admitted sympathy after a few years on the job. Soon it may be time for him to apologize to Masaaki Shirakawa, the former head of the Bank of Japan, and retract his gushing endorsement of Haruhiko Kuroda, the new head.

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