Let's be serious, we all know that the global economy is STILL not able to stand independently without the massive monetary support by the Fed. However, we also know that the major risk of the quantitative easing (QE) program is the stock market bubble. Thus, a reasonable investor would assume that the Fed is also aware that a stock market bubble could be a disaster for the broader economy once it eventually pops. The Fed in fact indicated that it would reduce the stimulus - or gradually taper - in May, but our understanding was not because the economy is improving, but to restrain the rising stock market.
Thus, the major thesis for the bearish view on the stock market was the expectation that the Fed would not allow the stock market bubble to rise, given all the risks when the bubble pops.
However, the possibility of the Fed taper immediately caused a near financial panic in the emerging markets. Also, the mortgage rates significantly increased in the U.S., following the rise in U.S. T-bonds yields, threatening the housing market recovery. The reaction from the financial markets supports the thesis that the global economy is still addicted to the QE. Yet, most expected that the Fed will have to start tapering now to prevent even bigger crisis down the road as the stock market bubble bursts.
The big surprise, the Fed last week decided not to taper - the economy is still not ready for the taper. We knew that, but what about the rising stock market bubble? Apparently, the Fed is NOT willing to restrain the stock market, perhaps reasoning that the risk of rising interest rates now is more important that the bursting stock market bubble in the future - and that is a major game changer.
Implications for investors
Since the Fed is apparently not willing to restrain the rising stock market, investors should buy stocks (SPY) (QQQ) (DIA) now with the 12-24 horizon, which is likely to be the final stage of the current bull market. Gold (GLD) is also a screaming buy here, as the uncertainties have only increase.
What are the risks? The economic data is unlikely to be strong enough to warrant the taper any time soon. However, the risk is that the Fed could suddenly change the mood again. I don't think this will happen, the Fed appears to be a horrible "poker player." We all now know the cards in the Fed's hand, and everything else is a "bluff."
Additional disclosure: Long gold futures