The financial markets are psychotic–manic depressives–with outlandish mood swings.  Usually the moods are determined by central bank utterances, particularly of the US Federal Reserve, and its Chairman, Ben Bernanke.  Sometimes the mood swings have no ascertainable cause.

The mood turned sour today, on the heels of only the prospect that maybe, just maybe, sometime in the not-too-distant future, the US Federal Reserve will start reducing the amount of new money it creates each month to buy mortgage and government bonds (really, one and the same thing these days).  All three US indexes–the DOW, the S & P and the Nasdaq–were down over 2%, added to yesterday’s plunge, which is when the inkling of reduced purchases came out.

Figure that tomorrow or the next day, Mr. Bernanke will step up to the microphone at some regularly scheduled appearance, and like Jesus on the Sea of Galilee, wave his hands and calm the turbulent waters.   And then mania will set in.  Markets will soar.  For a time.  Until the next depressive phase comes along. 

If Bernanke didn’t exist, the markets would have had to create him.  Of all the human attributes, perhaps the most durable is the human need to believe in a higher power–to believe that there is some wizard behind the curtain, guiding and directing human affairs, to whom appeals for mercy and grace can be directed.  Bernanke and the US Fed fills that role for now, with Shinzo Abe in Japan comprising a lesser deity. 

The problem with the financial markets these days is that everyone, but everyone, knows that the markets have long been divorced from economic fundamentals due to the central bank money printing mania of the last several years (decades, if the truth be known).   And so everyone is incessantly calculating when economic fundamentals and market performance might revert to some sort of reasonable correlation.  And everyone knows that the timing depends on the central bankers of the world, particularly the US Federal Reserve. 

So, expect more volatility.  Until either a crisis has erupted, which everyone knows will turn the printing presses to eleven (when all you’ve got is a hammer, everything looks like a nail), which will ironically act to smooth out and stabilize the markets (again, no matter what the underlying economic systems are doing).  Or, until it becomes clear that the nails are escaping the Fed’s hammer, and nothing is working anymore.  Then there won’t be volatility.  There will just be a long slide down to Financial Crisis, Part II.