The Fed's Bubble: How Long can It Last?

[Tuesday Afternoon]

By Bob Chandler - June 9, 2013 | Tickers: GAS, POR, SH, XLU | 0 Comments
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Federal Reserve is currently purchasing over $80 billion in bonds per month to keep interest rates at an all time low, this helps inflate other asset prices. The action, called Quantitative Easing, or QE, seems to be working; the stock market’s up about 18% and home prices 10% in the last year. But there is also evidence that these gains are the symptoms of a particularly dangerous bubble: one initiated and maintained by Fed policy.

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Bubbles are difficult to recognize. In his book The Alchemy of Finance, billionaire investor George Soros offers a great analysis of how to spot such a boom and bust condition.

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The linchpin for successful QE is maintaining control over long-term interest rates, namely 10-year and 30-year bond yields. The Fed has achieved control so far with radical purchases and a masterly public relations campaign. The problem occurs when these rates are no longer subdued. If, for whatever reason, there is a reasonable probability of a meaningful trend toward higher rates, doubts surrounding the effectiveness of QE and the Fed-put bias could initiate a rapid bust cycle.

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Recent events suggest that we are probably in a Fed-initiated bubble. The Fed's unprecedented bond buying is its underpinning and any doubts about QE’s effectiveness could trigger a sustained rise in interest rates, which will likely initiate a bubble pop. Investors might benefit from watching and planning for such an occurrence.

more at link:
http://beta.fool.com/grahamsway/2013/06/09/the-feds-bubble-how-long-can-it-last/36630/?source=eogyholnk0000001

[golfguru]

1. It will last until they run out of paper and ink

Fed can NOT STOP printing money! Same reason why Japan can not stop printing money. The national debts will bankrupt both if they stopped printing and interest rates rocketed up. If you think yearly budget deficits are high now, re-compute the deficits with Treasury having to pay 6% instead of 0.2% on short term debt, and 8% on long term Treasury bonds.

[Tuesday Afternoon]

2. Daddy lied to me. He told me there was NO money tree in the backyard.

There is too, a money tree!!

[golfguru]

3. What are you doing?

posting on Monday afternoon? I thought you are only allowed to post on Tuesday Afternoons?