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after june 30 i.e qe 2 what will happen to the asset markets and what are some likely options.

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posted on Apr, 20 2011 @ 07:29 PM
so stocks bonds commodity's all are very likely to be heavily influenced by what happens after qe 2 ends june.

this piece by john hussman *ONE of the VERY best* lays it out

with info you won't get else where.

Assets compete. If you create a huge volume of non-interest bearing money, somebody somewhere has to hold it. So long as close substitutes such as Treasury bills offer any competition at all, investors try to shift out of the non-interest bearing stuff into the interest-bearing stuff. Of course, in equilibrium, that sort of shift is impossible in aggregate since somebody still has to hold the money. So the result of the Fed's quantitative easing is that short-term interest rates have dropped to about zero. As long as that happens, people are OK holding the money, and you don't need to have inflationary consequences, but the sensitivity to small errors becomes magnified. Meanwhile, QE has also caused investors to seek out riskier assets, and the result has been an increase in stock prices, commodity prices and a variety of speculative securities. As prices rise, prospective future returns fall. The process stops at the point where all assets, on a maturity- and risk-adjusted basis, are priced to achieve probable returns near zero

yes ...when is that?

And so here we are.

oh boy

There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing. In this event, it's quite possible that we still would not observe much inflation, provided that interest rates are held down far enough. Unfortunately, the larger the monetary base, the lower the interest rate required for a non-inflationary outcome. T-bills are already at less than 4 basis points. In the event of even another $200 billion in quantitative easing, the liquidity preference curve suggests that Treasury bill yields would have to be held at literally a single basis point in order to avoid inflationary pressures.

there is also the possibility that the fed lets qe 2 to expire in then latest comment suggest allowing existing investments in MBS and other instruments ......the proceeds of which to be reinvested in treasurys at about 30/B a month comp. with the current 100B /month

option two by hussman

A second possibility is that we observe any sort of external pressure on short-term interest rates, independent of Fed policy. In that event, the Fed would have to rapidly contract its balance sheet in order to avoid an inflationary outcome. As noted above, even a quarter-percent increase in short-term interest rates would require a full-scale reversal of QE2. Alternatively, the Fed could leave the monetary base alone, and allow prices to restore the balance between base money and nominal GDP. In order to accommodate short-term interest rates of just 0.25% in steady-state, leaving the monetary base unchanged at present levels, a 40% increase in the CPI would be required. I doubt that we'll observe this outcome, but it provides some sense of what I mean when I talk about the Fed pushing monetary policy to its "unstable limits

and there is one more....but basically the fed is threading the needle as far as keeping the goldilocks economy going and that it won't continue much is interesting the possible paths but there is ever increasing odds with each month TSIATHTF in some fashion and that is why i'm back posting here. giddy up

the fed has up to now orchestrated a tremendous rally in assets ...cept housing.....and given the can a large kick down the road ........the fed is now DANCING on the edge of a KNIFE ...not much room to thread the needle ....

posted on Apr, 20 2011 @ 09:47 PM

Originally posted by cpdaman
the fed has up to now orchestrated a tremendous rally in assets ...cept housing.....and given the can a large kick down the road ........the fed is now DANCING on the edge of a KNIFE ...not much room to thread the needle ....

Yea the Fed has orchestrated a tremendous rally in assets called oil and throw in a war and we get the perfect storm.

The last time gas prices were this high, wall street went into economic chaos which we never recovered from (except stock prices and fat CEO bonuses). Another similar shock seems to be in the near future.

posted on Apr, 20 2011 @ 09:57 PM
Am I the only one who is going to have fun from this? Pretty soon we will be living on our own. We won't have to submit to our jobs, or worry about making mortgage payments. We can grow our own food, and learn how to entertain ourselves without American idol.

Also, I found it interesting that the Fed is feeding the fire even more by giving the citizens of the United States more money back than what was paid in taxes. I don't know if it was a devaluation of the dollar, or if it was them orchestrating the debt bubble, but either way, it seems they want it to crash.

Far too late to do anything,



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