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The Ugly Truth About "Taper"

|Includes: DIA, QQQ, SPY, SVXY, TNA, UPRO, UVXY, iPath S&P 500 VIX Short-Term Futures ETN (VXX), XIV

This is my maiden post and as you'll see I "ain't" a professional academic writer. However, I do have a boatload of personal experience trading at the professional level. Sometimes I get frustrated when the overall street "message" is so off base. So I decided, for altruistic reasons, I may as well set the record straight.

So here is the ugly truth about "Taper". At this point it is entirely meaningless whether it happens or not. Either way the stock market AND bonds are headed lower.

Why? Simple. The real reason bonds are selling off is because, aside from Pimco, nobody wants them.

The world is well aware that the US isn't a Triple "A" borrower anymore. The reasons are too numerous to detail and too obvious to need to do so. That said, the US isn't deserving of Triple "A" borrowing rates anymore. For a time, however, a "flight to quality" narrative coupled with the Fed buying program was enough to keep bonds from adjusting to their real deserving prices.

The problem is that the "flight to quality" story is ended and the only story left is the Fed. Tapering means the end of that story too. This is why we had pandemonium at the mere suggestion of Tapering.

This is also why the Fed did everything they could over the days following that massive sell off to placate the market and convince everyone that they may not taper, or even if they did, it will be just a spot at a time and can stop at any time.

On cue, the knucklehead crowd (a.k.a. the unsophisticated investors) came in and ran the stock market up because they figured this means rates will stay low and all is good.

However, the bond market isn't that stupid. Aside from a tiny blip it has continued to sell off hard. Here is the reason why: If the Fed tapers, even a little, prices will adjust quickly to the "real" rates, as explained, because there will be no more reason to buy bonds at current prices. However, if the Fed decides NOT to taper, it will suggest fear of the economy and/or fear of losing the bond market. That message is just as bad - maybe worse! If the market senses that the Fed is actually worried about the economy and/or bond prices investors will be very spooked and will definitely want out of bonds at these prices. And if $85B of buying per month hasn't been enough to keep the bond market steady wait to see what happens when more sellers get going. It won't even come close.

The Fed is desperately trying to figure out how to get out of their market manipulation while allowing rates to adjust in an orderly fashion. The problem is there is no way to do it. The Fed isn't in control of the bond market at this point. Rates are set to adjust. Period. People want to be paid for the perceived risk of being a lender to the US. That risk isn't 2-3%. It's probably closer to 5%.

How do I know that this is the case? Easy. Look at when bond prices topped out AND look at when net cash inflows to bonds topped out. Hint: They both occurred at around the same time and it WASN'T when talk of "Taper" started.

So put simply, taper or not, bonds are going lower/rates are going higher from here. This will slam the anemic growth in the US economy, which will most definitely require a downward adjustment in stock prices. The only difference is, if Taper occurs, bonds and stocks will sink right away. If it doesn't, you may get short covering/manipulation/unsophisticated buying to prop up the market for a week or so and then it sinks.

The only question is how low does it go? This I cannot answer since we are really in uncharted territory. Plus it will be greatly affected by how the Fed responds to the market sell off. Plus I don't know how much leverage has really been taken out of the system over the past 5 years.

How am I positioned to take advantage of the upcoming selloff. I have recently gotten short TNA, UPRO and XIV. I will either make good money or crazy money.

As an aside, if I were the Fed, I'd stop tying to manage this mess and simply step away. I'd announce a full end to QE3 in September. Let the markets sell off for a few days in a panic. Let the rates re-adjust. At least, at that point you'll have given the sense to the world that you trust your economy and that you may actually start acting like big boys instead of scared kids. Then maybe in a few months, after considerable pain, the world will come back at fair rates. Otherwise you may lose everyone's respect and it can take years to earn that back.

Disclosure: I am short XIV, TNA, UPRO.