The Bernanke sell off, some sanity returns?

Yesterday was one of those strange market days. The big speech of the day came from Fed Chairman Ben Bernanke and at first the US markets rose as it all seemed quite tame with little sign that the Fed induced intervention was likely to stop. The market has been living off this form of money steroids for some time and like a drug, once on them it is difficult to withdraw. So, at the first hint that the Fed may be winding down its activities the market got a bad case of withdrawal symptoms and things seemed like the old volatile times before the most recent bull run. Down they went.

Talking of bull runs, the Japanese market has been going great guns since the start of the new year, but yesterday gave it an excuse to sell off with traders banking profits on the back of some not so well received news from China and Bernanke's speech. Around 7% or 1000 points in a day, which after the most recent run doesn't look too bad accept that it is almost approaching crash territory, without anyone saying the word crash. Banking profits sounds better and at least it doesn't feel like a crash, at least until we see what follows.

Futures suggest another down day today in the US and the UK looks to have its first minus 100+ start to the day for some time. The fact is that this was needed to remove some of the froth that has been building in the market for some time. It's healthy that markets do occasionally fall during a bull run. Whether the psychology behind the bull run has been damaged only time will tell. Sooner or later equity markets have to stand on their own two feet without the assistance of Central Banks pumping money their way. We need to wait to see if and when this dip is bought or if this is the start of something else more challenging for markets.

Update;

FTSE100 currently off around 135 points.

ADVFN market report states the obvious which markets seem to have been ignoring for some time.

However, when faced with questions from politicians, the Fed chief did hint that a tapering of QE measures could happen “in the next few meetings” if the Fed sees a sustained improvement in the economy.

Simon Smith, the Chief Economist at FxPro said this morning: "The message is markets have to remind themselves that in many ways they are living on borrowed time and the Fed is doing their level best to prepare them for the fact that they cannot continue to buy $85bn of assets a month for ever. We could well be headed for a much more volatile summer."

Bernanke's comments saw the FTSE 100 lose as much as 1.7% in early morning trade, following similar falls for benchmarks on Wall Street overnight. Meanwhile in Asia, markets suffered much steeper losses overnight - with Japan's Nikkei diving a whopping 7.3% - as traders reacted to remarks from the Fed Chairman as well as some gloomy economic data from China.

Turning Japanese? More like Japanese turning American?

Or at least trying to?

Some might be familiar with an old rock, pop song from the 1980's called Turning Japanese, a choice of words that increasingly has been used in economic circles to describe what may become of the Western economic experience if we are not careful. That experience is one of low growth, lower asset price valuations and little inflation bordering on deflation with dreaded doses of deleaveraging.

Essentially the Japanese experience since the heady days of asset bubbles being almost everywhere, 39000 on the Nikkei and property valuations that would have taken several lifetimes of mortgage repayments to justify them being just two, has been one of economic struggle. It's not as if Japan has been a total economic basket case, it's just that they have struggled to find that one thing so loved by Western financiers and Governments - inflation.

Don't let the politicians in the West kid you that inflation is a nasty thing that should be fought against at all cost, because for most of them it is what they actually want, or at least a little bit of inflation  The last UK politician to promise a fight against inflation was Margaret Thatcher and the cost was several million unemployed, not that the millions out of work should all be put down to her economic policies, but in order to fight the price inflation that was running wild across the UK economy, drastic measures were undertaken. It is unlikely that politicians today would ever take such measures when "printing" money is so simple.

The one thing that has been missing from the economic fallout of the financial crisis of 2008 onwards has been the hyperinflation that many were so convinced was inevitable following the "money printing" of Central Banks as the answer to the crisis. It hasn't happened, probably because that money printing has been kept out of the grubby hands of the masses, there have been no helicopter drops for them (for those not familiar with this, do a search on Ben Bernanke, Helicopter), it has largely been parked in the vaults of the financial elite.