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I started investing when I was 18. The first major investments that I made were large cap oil stocks in the year 2000. In 2007 I sold my investments, and than re-entered the market in Feburary of 09. Currently I am investing in precious metals and Energy. I believe were in for a major change in... More
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Wall Street for Main Street
  • Bernanke's Bluff 0 comments
    Jul 1, 2013 12:10 AM | about stocks: GLD, SLV, DBO

    Hi everyone, I want to introduce myself, being that I am new to the Seeking Alpha community. My name is John Manfreda and I am one of the owners for Wall Street for Main Street. I have been investing in the markets since 2003. This article will be a short synopsis of the current market environment and how I see it.

    In May, at a Testimony to the US Congress Joint Economic Committee, Ben Bernanke first hinted at a plan to taper quantitative easing this year. The following month on June 19th, at the June FOMC meeting, Bernanke outlined his exit strategy from QE3 and QE4. Bernanke claims in late 2013, the Fed will reduce its accommodative policy, and in mid-2014 the Fed will stop easing as long as economic data warrants it. Of course he never said it would stop, he just claimed that if economic data warrants it.

    First off, if Bernanke is really resigning why does any of his talk even matter! I think it's sort of funny that Bernanke talked about policy in 2014, when in fact we already know there will be a new Fed president in 2014. But most importantly, it isn't words out of Ben Bernanke mouth that I was looking at to see if they could even remotely taper, but the market's reaction.

    Since Bernanke has been talking about "tapering", the 10 year Treasury note has risen as high at 2.61%. The Dow dropped over 300 points in one day, and is currently down from its high of 15,318. If you ask me, free market forces are now calling Bernanke's bluff. I personally believe there is no possible way that the Fed would taper.

    The Fed can't taper for two reasons, one the US government would not be able to service their debt, and the bond market will collapse. Below is a chart of government debt based on future interest rates.

    (click to enlarge)

    Now you see why the US government wouldn't allow the Fed to taper, even if it wanted to. The chart above just showed historical debt at 2 percent interest rates, imagine traditional ones. Two, I believe that QE3 was just a backdoor bailout of the banks, and if interest rates rose, the credit derivatives and swaps on the banks' balance sheet would implode. Now the question is, if this is true, why is Bernanke talking about tapering.

    I believe that Bernanke decided to up the taper talk for a couple of reasons, one he was testing to see how the market would react. Secondly, I personally believe if Bernanke decided to come clean with the fact that they weren't tapering, and announced that we are going to increase "accommodative monetary policy", the price of Oil would have skyrocketed to over a $100 a barrel. We know what happened to the economy last time Oil went well above 100 dollars a barrel in 08. Lastly politics, Bernanke knows that excessive money printing is politically unpopular, so it is of my opinion that Bernanke will talk about tapering for political reasons, as long as the market would let him get away with it.

    That is how I see the markets right now, I hope you enjoyed my little market synopsis, and follow me and read future articles of mine. Well enough about me, comment below and let me know what you're seeing.

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