June 20, 2013
U.S. financial markets are exhibiting the classic behavior patterns
of an addict. Just a hint that the Fed may start slowing down the flow
of the “juice” was all that it took to cause the financial markets to
throw an epic temper tantrum on Wednesday. In fact, one CNN article
stated that the markets “freaked out”
when Federal Reserve Chairman Ben Bernanke suggested that the Fed would
eventually start tapering the bond buying program if the economy
improves. And please note that Bernanke did not announce that the money
printing would actually slow down any time soon. He just said that it
may be “appropriate to moderate the pace of purchases later this year”
if the economy is looking good. For now, the Fed is going to continue
wildly printing money and injecting it into the financial markets. So
nothing has actually changed yet. But just the suggestion that this
round of quantitative easing would eventually end if the economy
improves was enough to severely rattle Wall Street on Wednesday. U.S.
financial markets have become completely and totally addicted to easy
money, and nobody is quite sure what is going to happen when the Fed
takes the “smack” away. When that day comes, will the largest bond bubble in the history of the world burst? Will interest rates rise dramatically? Will it throw the U.S. economy into another deep recession?
Judging by what happened on Wednesday, the end of Fed bond buying is
not going to go well. Just check out the carnage that we witnessed…
-The Dow dropped by 206 points on Wednesday.
-The yield on 10 year U.S. Treasuries shot up substantially, and it is now the highest that it has been since March 2012.
-On Wednesday we witnessed the largest percentage rise in the yield on 5 year U.S. Treasury bonds ever. It is now the highest that it has beenin nearly two years.
-It was announced that mortgage rates are the highest that they have been in more than a year.
-We also learned that the MBS mortgage refinance applications index has fallen by 38 percent over the past six weeks.
If the markets react like this when the Fed doesn’t even do anything, what are they going to do when the Fed actually starts cutting back the monetary injections?
Posted below is an excerpt from the statement that the Fed released on Wednesday.
Please note that the Fed is saying that the current quantitative easing
program is going to continue at the same pace for right now…