Lockhart Setting The Table For QE3?

One round of drinks gets you loose, two rounds of drinks gets you a little looser, and a third round of drinks is more than likely to leave you drunk, and with a hangover the next morning. So why is Federal Reserve Bank of Atlanta President Dennis Lockhart talking about a third round of quantitative easing? In quotes captured by Bloomberg, Lockhart said, “If additional actions are required, I can assure you the Federal Reserve is not out of bullets,” Lockhart said today in a speech in Florence, Alabama. “Expansion of the balance sheet or changes in the composition of the Fed's asset portfolio are available, in my view. These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory.” “I'm currently cautious about further monetary action,” Lockhart said in prepared remarks at the speech. “I still maintain that a resumption of growth is the most likely case. But if that assessment proves to be wrong, I believe we do have tools to address whatever circumstances arise.” "The events of the last several weeks are a reminder that circumstances can quickly arise that may call for additional monetary stimulus," Lockhart said. The Fed will do everything it can to fight deflation, as that, along with fostering maximum employment, are its two mandates. Ben Bernanke went so far as tell us that rates will be kept low until mid 2013 at least, because of how bad the current economic picture looks. The Federal Reserve is hellbent on fighting deflation, and over the past few weeks, we have seen serious asset price deflation over the past weeks, with stocks, and commodities dropping sharply. The Fed is not supposed to pay attention to asset price volatility, but it obviously does. Some even call paying attention to the S&P 500 the Fed's third mandate. The stock market gets drunk at the mere mention of further easing, and you can see the reaction today after Lockhart's comments. Gold is jumping, as are stocks. The playbook for how to play a third round of quantitative easing has been talked about extensively. Gold, ags, tech, hard assets, etc. Names like Potash POT, BHP Billiton BHP, Apple AAPL, Freeport McMoran Copper & Gold FCX all will benefit from a weaker U.S. dollar. Everyone knows the playbook, and there is no reason to think that the third round will be any different from the previous two rounds. After all, the very definition of insanity is doing the same thing repeatedly, and expecting different results. The theme to take away from today's speech? Bottom's up boys and girls. The next round is on the Fed. Again.