It can be argued that the Federal Reserve is the most powerful institution on the face of the earth.  America is the center of world economy…especially as bond bears squeeze Europe and China slows with delinquent loans rising by nearly 333% since the end of 2011 all while their repressed population is starting to speak up.

The E-mini S&P 500 Index Future has had an average true range (ATR) of 13 points over the last 14 days; this is compared to nearly 25 points over the past year. Consequently, the volatility index is low too.  The CBOE’s VIX, a measure of implied volatility in the SPX, is down 40% year-to-date as a result of the small ranges that have slowly become a reality. While on the topic of options, the SPX currently has an implied one-sigma move of up or down $46 with 28 days to go in the October options. This is against, during this time last year, the October standard deviation was up or down about $99. This was however during the USA debt downgrade fiasco and debt ceiling, but the market came to the conclusion that America would still be a staple in the investment world, for rates actually proceeded to fall, proving the downgrade wrong in the short and medium term. The low ATR, VIX, and implied move in the SPX could all be a direct result of the Fed manipulating the market with their various programs not allowing for true capitalist price discovery to occur in the free market.

This contraction in volatility and price action has become a reality since the Federal Reserve started to communicate their intentions to further stimulate the economy via additional quantitative easing. More specifically, The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment; while keeping an eye on inflation, and while still undergoing operation twist…swapping out shorter term maturities for longer term (increasing the duration of the portfolio). “The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.” To the contrary the implied inflation rate is currently (as measured by the 10 year less the 10 year TIPS) 2.50%.  Perhaps the committee does not look at market prices, for they believe that they are the market.

The Fed in general has come into question. The dual mandate has been dropped by other developed areas and countries including Canada, the European Central Bank, the Bank of England, and the Bundesbank. This should all be questioned for the “wealth effect” has caused a fool’s rally, real income to fall, and confidence in policy makers to fall. The only way to fight the inflationary “Bernanke Put” is to buy gold and silver calls.

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mark@keeneonthemarket.com

Data courtesy of Thinkorswim