Why the midday rally? It started with German business confidence up, which created a bounce in European markets. That followed through to our markets, but it picked up at 7:00 a.m. ET when St. Louis Fed President James Bullard said on CNBC the Fed will stay easy for a long time. Bullard is a voting member of the FOMC and is considered a moderate.
Leaked reports that Ben Bernanke has been playing down concerns that QE has spawned asset bubbles is also helping markets.
Bernanke will speak before lawmakers Tuesday and Wednesday of next week. My take: this will likely be the main event for stocks. Bernanke will likely follow up on the Bullard comments. Most traders I spoke with felt Bernanke will--subtly--indicate that QE will run into 2014.
They say that for good reason: how can you start tightening when the economy is still so weak? Growth will almost certainly be below trend in 2013 and could be substantially worse if sequestration occurs for even a short while.
I don't know if the Fed will stick to its target of 6.5 percent unemployment before they reduce purchases, but they will certainly require that the unemployment rate be on a downward slope.
A pickup in inflation beyond the Fed's long-term target of 2 to 2.5 percent would also certainly elicit a sharp debate about ending asset purchases.
But none of those conditions seem to exist. How much real employment growth is going to happen with sub-two percent GDP? And there is no sign of rampant inflation: there seems to be plenty of slack in the economy.
Don't think the whole trading community is going along with this scenario. One exasperated trader wrote to me as the market was melting up: "I have to say I'm a bit at a loss--acting like Washington will kick the can again and somehow that's bullish--no one seems to care if EU has no growth and a stand-up comic is about to take lead in Italian election- the 3rd or 4th most indebted nation on the planet ...."
Of course, there is a risk-cost analysis. The risk is you create asset bubbles and you create market dislocations when you unwind your positions. Bernanke will be questioned about this, and he will dance around it. Yes, there are risks, but we are watching asset valuations, and we don't think there is an asset bubble.