The spell of Nasdaq following Nikkei broken

In March 2000 a sorceress(Meg Whitney ? to become over 121 months governor of California?) casted a spell over the Nasdaq causing the dot.com bubble to burst after Nasdaq's mojo seemed to be sold on ebay: Nasdaq thou shall follow the path of the Nikkei with a leg of 121 months.

And thus it came to pass. Until the powerful magician Bernanke at the end of August on the Jackson Hole conference broke the spell. With enough hundreds of billions of dollars, maybe trillions it seems to happen: the market has its greed back. The correlation Nasdaq / Nikkei is broken. Howard Simons van Bianco Research saw it (see chart). He wants 2.8% higher prices to be definitive, but you can already see that is stockmarket no longer is following the Japan scenario.

N.B.1 Japan started with QE1 in March 2001.
N.B.2: When Bernake proves to be not such a good magician and the equity markets starts again to follow the Nasdaq / Nikkei scenario (=double dip arriving), the equity markets wil go down tremendously.

QE2 and the path of Arthus

The chart shows the economic growth of the US according to several models/ theories.

In the long run the US economy followed the path of the law of Okun: the growth was about equal to 3% plus two times the decline of the unemployment rate, so structurally 3%.
Since the credit crisis is the US economy more and more deviating from the 3% path of Okun.
The economy is growing according to the best path of Arthus, the guru of Natixis. He is more or less a supporther of the New Normal theory. The loss of growth according to the Okun path is permanent he says and you will see no convergence to the Okun path in the coming few years. That is because of deleveraging the consumption cannot faster than income (something that in the past happened after every recession and that caused higher growth than 3%.
Even with the best path of Arthus the Fed cann't live, that forbids their mandate (and triggers impeachmeant of bernanke over some time). If the US economy continues to follow the path of Arthus the unemployment rate will not decline (but stabilise)enough reason for Obama to fire Bernanke, but than he has to be quick because he cannot be reelected on the path of Arthus.

So the Fed had to do something else thean normal, somthing that makes it possible to get the moderate V Bernanke path. That is why the Fed has to print tons of money even while there is not much danger for a recession in the coming quarters. Those hundreds of billions must restore confidence by blowing up the stock market, easing financial conditions so business get more credit and mortgages are easier to get also.
Obama will start to mr. nice guy for the republicans (as also Clinton did) and extend the Bsh tax cuts for at least one, probably two years, making the moderateV Bernanke path now the most probable path

QE2 explained well by Bernanke

Banzai (zerohedge) sees quantitative easing QE2 as new disaster and hopes taht we will get a cover of Time that could be explained as a contrary indicator.
The resistence against QE2 is huge and there is a seemingly never ending wave of new stories that the world will perish and that we will end up in an inflationary hell.

Still the markets reacted favourable om the gospel of QE2 while almost nothing new news was added by the Fed.

Jim Bianco thinks that the clear and loud explanation of Bernanke in the Washington Post explains the favourable reaction of the markets:
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion".

So the Bernanke put is now really formalised.

I think the positive reaction of asia did help the markets also. Asia/ Latin America (!) cry wolf and want promises of the US that they will not continue with more QE2, but in their heart they know better. When they really want to export so much to the US they must carry the losses like a man on their dollar currency reserves.

Will QE2 become a kind of Titanic as more and more people believe? Defintively not when that QE2 is not becoming too big. $600 billion is almost nothing for the size of the US economy and will not lead to a measurable rise of the inflation.
The balance sheet of the Fed will then remain smaller than that of the ECB and that bigger balance sheet is not yet leading to hyperinflation in Europe. When QE2 will rsie above $1500-2000 billion, then I start to believe you will see somewhat higher inflation because of too much QE2. However, i think that $600 billion will be about enough to get the economy growing fast enough to get lower unemployment rates. So we are going more into the direction of Goldilocks than Weimar.