We have been harping for weeks on the incongruity between a Fed that needs to keep down long term interest rates and a risking stock market that is inflationary and points to higher long term interest rates.  Today, with the S&P 500 within a hair of breaking June highs, Bernanke came out guns blazing with an oped in today’s WSJ (as detailed in our morning report) and testified before congress to talk down yields.  So far, the 30 year has had its greatest one day gain (with yields inversely heading down by the same margin) since the July 8 09 interim low in the S&P 500.  Make no mistake, Bernanke does not want new highs in yields and is willing to throw the stock market under the bus.  No doubt new equity longs will vigorously defend their positions and we can easily see new highs.  However, the battle is raging and we are not willing to jump onto the buy and hold bus until there is a clear victor.  Hopefully, this will emerge over the coming weeks.

However, as we have posited before, we could enter a situation where long term Treasuries and equities are manipulated in a tug of war in a vain attempt to maintain the status quo–two weeks equities are on a massive tear and bonds are down, the next two weeks reverse, etc.  The longer that goes on, the greater damage is ultimately done to the economy as investors are shaken out permanently from the markets.  As ZeroHedge would say, we would then have two SPARCs trading with themselves in a basement of the NYSE financed by FRNY funny money.  Another point on this last sentence–just because the New York FR Bank is pumping out dollars through permanent market operations (POMO) twice a week does not mean this is Bernanke’s doing.  New York is Wall Street and Bernanke is Washington.