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Old August 1st, 2013, 11:28 AM   #1
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If Bernanke Does Not Taper Soon, The Bond Market Will Force Him

Since yesterdays highly anticipated FOMC meeting the major stock indexes are soaring. As you all know, the Federal Reserve said that they will continue their current $85 billion a month QE-3 program. The current QE-3 program is where the central bank buys $45 billion in mortgage backed securities (MBS) and another $40 billion in U.S. Treasuries every month. The Federal Reserve also has the fed funds rate at zero to a quarter percent, it has been at that level since December 2008.

So what will cause the Federal Reserve to taper the current QE-3 program? Obviously, the central bank tells us that there is very little inflation in the economy so there is really no danger to having the QE-3 program in place. History has told us that prolonged stimulus has resulted in high inflation or some type of bubble. In 2001, the former Federal Reserve chairman Alan Greenspan lowered the fed funds rate to 1.0 percent and that lead the stock market to new all time highs. Unfortunately, it also lead to the largest housing and credit bubble in seventy years. Could there be another bubble being created at this time, or is this time different? After all, almost every central bank is following the lead of the Federal Reserve when it comes to easy money policies. The Bank of England, Bank of Japan, and many other central banks are all creating money out of thin air so perhaps this time it is different.

Recently, yields on the 10-year U.S. Treasury Note have climbed sharply higher. Today, the yield on the 10-year U.S. Treasury Note is around 2.67 percent. While this is still a very low yield it should be noted that it has spiked higher by more than 1.25 percent since bottoming in July 2012. The yield chart of the 10-year U.S. Treasury note is signaling a move to 3.0 percent in the near term, so it would be prudent to expect bond prices to continue to fall. Yields are moving higher despite the Federal Reserve buying $40 billion a month in U.S. Treasuries. Is the bond market trying to tell us something? There is an old saying on Wall Street that the bond market is smarter than the stock market. You see, the people that run the bond market have much more capital than the people that buy stocks. Remember the old saying, follow the money.

If the bond market is moving higher it is telling us that the Federal Reserve is going to need to taper their current QE-3 program very soon. If they do not taper soon then they are risking another bubble or perhaps massive inflation. The Federal Reserve's balance sheet is now around the $4 trillion level, so perhaps that is the next bubble to burst. Either way, everyone should keep an eye on the bond market as it always tells us what is really happening before it does.

Nicholas Santiago

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Old August 1st, 2013, 11:56 AM   #2
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Sigh... Inflation has NEVER harmed the US economy. W're not printing out millions of $1k bills and dumping them into circulation. The inflation we have is natural background inflation and is offset by the ever falling price of manufactured goods. The real threat is that something stops this natural inflation allowing prices to fall unchecked. This is what caused the Great Recession a few years back (the banks collapsed drying up credit and deflating the USD). This chicken little ranting is why the EU is in such bad economic shape right now. They fell for it and made things worse, only export heavy countries like Germany kept their heads above water as they had sufficient income from trade to keep money in circulation.
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Old August 1st, 2013, 01:47 PM   #3
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inflation

no prices fell. we are under inflation now and have been since way b4 2008.
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Old August 1st, 2013, 01:48 PM   #4
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Quote:
Originally Posted by Salty View Post
no prices fell. we are under inflation now and have been since way b4 2008.
the interest is figured in w/ the cost. A 50 thousand dollar home costs 150. What do you call that???
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