We're Not In Kansas Anymore!

by: Stock Traders Daily

When Janet Yellen says she will stay the course she means that she will continue to cut the bond buying program so long as the economy is not falling apart. Job growth can be anemic, but so long as the economy remains fairly stable tapering will continue. The Federal Reserve is not looking for aggressive growth from our economy, in fact I believe they would rather see it quite tame, and so long as the economy does not crumble the Federal Reserve will continue to cut its bond buying program.

Staying the course is not what it was when Bernanke was in office. His course was to constantly infuse capital, and although Janet Yellen is from the same cloth as he was she has been given the chairmanship while the direction is on a completely different path. In many ways, the challenges facing her are far more serious than the challenges facing Ben Bernanke, even though he's survived a complete financial disaster during his tenure.

The problem is that the weakness that began in 2007 is not over. Growth has been fabricated by his actions, and unless the FOMC continues to fabricate, unless they continue to stimulate, the economy will eventually show is true colors again. By definition, the underlying economy is far weaker than the face of our current economy because of the $4 trillion dollars of stimulus infused into the system.

Soon, however, the stimulus will be cut enough so that the economy begins to revert back to its natural state. In order to do this the FOMC does not need to stop the bond buying program completely, they just need to do it enough to remove the net positive monthly stimulus instead. Every time the FOMC buys bonds in the open market the U.S. Treasury is selling them, offsetting the efforts of the FOMC, so the net real stimulus is the difference between the efforts of the FOMC and the U.S. Treasury.

The net real stimulus on a monthly basis during the first part of calendar 2013 was about $16B, but that increased closer to $35B per month as the year came to an end. When the net real stimulus balances to zero the economy will begin to revert back to its naturalized state, and then anything more than zero would be a drain on liquidity, and that is where it gets tough.

Janet Yellen's task is extremely difficult because she needs to taper the bond buying program in the face of an economy that is not naturally healthy. The Investment Rate, the longer-term macro economic analysis that has predicted every longer-term major market cycle in advance since 1900, including both the Great Depression and stagflation, tells us that the third major down period in us history began in 2007 and it does not end until 2023. The natural state of our economy given this analysis is one that is exactly like the Great Depression.

Bernanke prevented depression by stimulating the economy, that was affective, but fabricated growth can only continue so long as net positive stimulus continues. According to the schedule of the FOMC the net positive stimulus will come to an end soon, and the combined efforts of the Federal Reserve and the U.S. Treasury will actually become a net drain on liquidity thereafter.

Given the findings of the Investment Rate, this will confound the already naturally weak environment that exists and make the risks increase substantially accordingly. We are not in Kansas anymore!

Although the Market can experience a trading rally from the lows this year thus far, longer term investors should sell the rally and traders should prepare for exceptional shorts later in the year. On my radar as possible short candidates when the time is right is Netflix (NFLX), Amazon (AMZN), and Twitter (TWTR), just to name a few.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.

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