This past week brought the world’s central bankers, finance ministers and other titans of Wall Street together for a few days of meetings supposedly concentrated on out-of-the-box scenarios, sort of a TOPOFF-like exercise for the world’s monetary authorities. The seminal event of the conference was a speech by Fed chairman Ben Bernanke. Sponsored each year since 1978 by the Federal Reserve Bank of Kansas City, the original intent of the Jackson Hole meeting has long been eclipsed by its use as a policy podium. In fact, last year’s meeting was used by Fed Chairman Ben Bernanke as the setting for a speech in which he outlined the idea of a second round of quantitative easing (a.k.a. QE2). In the event, QE2 didn’t actually begin until November of 2010, although the markets went on a tear almost as soon as the microphones in Jackson Hole were turned off. Anticipating an unprecedented flood of liquidity into the optionbit markets (as well as a virtually riskless trade in Treasurys), everything headed north – stocks rose 18%, crude oil 22%, copper 31%, gold 15%, etc.

Fast forward 12 months, and there are many in the markets who believe Bernanke will hint at a renewed quantitative easing program this Friday. Despite a lot of commentary to the contrary, there are still some low-caliber weapons available to the Fed that would spur the economy, and in particular jobs, including focusing further debt monetization on the long end of the curve and thus forcing borrowing rates even further. This would serve to flatten the yield curve, but since elliott wave short-term rates are already at zero and staying there for the foreseeable future, there would be little price to pay on that end beyond an already-tattered credibility.

It can also assist in getting the mortgage mess finally behind us, which in light of continued lethargy in the housing markets is probably one of the most leveraged options still available to the Fed. Foreclosures continue to haunt large banks, which are still highly reluctant to lend, and corporate credit creation remains at multi-decade lows. Bernanke could do worse than to use the Jackson Hole opportunity to lay out some options for mortgage refinancings, resets and other direct lending initiatives. At the end of the day, getting the American real estate market off its back is probably the most visible thing the Fed could do. In a period of extreme uncertainty, some clarity of action in a sector that touches virtually all adult American taxpayers would pay second- and third-tier benefits.

Granted, Congressional Republicans have not signaled a great deal of willingness to go along with any further quantitative easing measures. But that does not mean they are categorically ruled out. Indeed, with the debt-ceiling issue now punted until the early fall, there may be more room to maneuver on this topic than initially meets the eye.

But there is also a good chance that Bernanke uses the podium at Jackson Hole to merely outline his options, instead of advocating for specific measures. This would be reminiscent of pre-crisis meetings in which the greatest financial minds on earth tried to think outside of the proverbial box about long-term, strategic problems facing global finance. Issues that would obviously qualify for such thought would be the European sovereign debt crisis, the impact of China on the global economy, education & poverty eradication, etc. This would be a mistake; although he would be forgiven for taking a wait-and-see approach, the markets will be highly disappointed with a passive tone on Friday.

Either way, we don’t think much really changes Friday morning. Proactive or not, investors will not be willing to part with safe-haven choices – at the moment, Treasurys, gold and Swiss Franc – until they have a better comfort level about the security of their principal. The age-old argument over stimulus versus austerity will not be solved this week; expect the markets to continue to sell risk and park assets where they are least threatened. This will mean equities, which are oversold and will bounce over the next few weeks, will face selling pressure as they rally.

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