falling-bearWhen QE1 ended there was a substantial stock market correction, and when QE2 ended there was a substantial stock market correction.  And if you will remember, the financial markets threw a massive hissy fit a few months ago when Federal Reserve Chairman Ben Bernanke suggested that the Fed may soon start tapering QE3.  Clearly Wall Street does not like it when their supply of monetary heroin is interrupted.  The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax.
So what is going to happen when the Fed starts pulling back the monetary crack and the bubble bursts?

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From the Economic Collapse Blog:

In fact, I just wrote an article that contained 37 statistics that prove that things just keep getting even worse for ordinary Americans.  But quantitative easing has been exceptionally good for Wall Street.  During QE1, the S&P 500 rose by about 300 points.  During QE2, the S&P 500 rose by about 200 points.  And during QE3, the S&P 500 has risen by about 400 points.  The S&P 500 is now in unprecedented territory, and stock prices have become completely and totally divorced from reality.  In essence, we are in the midst of the largest financial bubble this nation has ever seen.

A lot of people out there are claiming that the Federal Reserve will never end this round of quantitative easing.  They are suggesting that the Fed may hint at tapering from time to time, but that when push comes to shove they will just keep printing more money.

There is just one big problem with that theory.

The rest of the world is watching, and they are very troubled by quantitative easing.  Therefore the Fed must end it at some point because they desperately need the rest of the world to keep playing our game.

Our current economic prosperity greatly depends upon the rest of the planet using our dollars as the reserve currency of the world and lending trillions of dollars to us at ultra-low interest rates.  If the rest of the world decides to stop going along with the program, the system would come crashing down very rapidly.

That is why it was so alarming when China recently announced that they are going to quit stockpiling more U.S. dollars.  For a long time China has been warning us to quit recklessly printing money, and now China is starting to make moves that will make them more independent of us financially.

If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.

So the Fed knows that they are on borrowed time.  Faith in the U.S. financial system is declining very fast.

But the Fed also knows that ending QE3 is going to be very tricky for the financial markets.  The other times that the Fed has ended quantitative easing, it has turned out to be very painful for Wall Street.

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So this time, the Fed seems to be trying to do what it can to use the media to mentally prepare investors ahead of time.  For example, the following is what Jon Hilsenrath of the Wall Street Journal wrote just a few days ago

Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the idea that “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.

In case you missed the subtle messages contained in that paragraph, here is a rough translation…

“Don’t worry.  The Federal Reserve is your friend and they say that everything is going to be okay.  Investors believe what the Fed says and you should too.  Pay no attention to the man behind the curtain.  Tapering is not tightening, and when the Federal Reserve does decide to taper the financial markets are going to take it very calmly.”

The Fed (and their messengers) very much want to avoid a repeat of what has happened before.  As you can see from the chart posted below, every round of quantitative easing has driven the S&P 500 much higher.  And when each round has ended, there has been a substantial stock market correction.  The following chart was originally produced by DayOnBay.org

Chart By DayOnBay

And of course the chart above is incomplete.  As you can see below, the S&P 500 is now sitting at about 1,800…

S&P 500

So let’s recap.

From the time that QE1 was announced to the time that it ended, the S&P 500 rose from about 900 to about 1,200.

When QE1 ended, the S&P 500 fell back below 1,100.

In a panic, the Federal Reserve first hinted at QE2 and then finally formally announced it.  That round of QE drove the S&P 500 up to a bit above the 1,300 mark.

Once QE2 ended, there was another market correction.  The S&P 500 fell all the way down to 1,123 at one point.

In another panic, the Federal Reserve first announced “Operation Twist” and then later added QE3.  Since that time, the S&P 500 has been on an unprecedented tear.  At this point, the S&P is sitting at about 1,800.

And of course those massively inflated stock prices have absolutely no relation to what is going on in the U.S. economy as a whole.  In fact, the truth is that economic conditions for most of the country are steadily getting worse.  Just today we found out that for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier.  That is a hugely negative sign.  It means that the flow of goods is slowing down substantially.

So the Federal Reserve has created this massive financial bubble that is totally disconnected from reality.  The only way that the Federal Reserve can keep this bubble going is to keep printing lots more money, but they also know that they cannot do that indefinitely because the rest of the world is watching.

In essence, the Federal Reserve is caught between a rock and a hard place.

When the Fed does ultimately decide to taper (whether it be December, January, February, etc.), the consequences are likely to be quite dramatic for the financial markets.  The following is a brief excerpt from a recent article by Howard Kunstler

But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund?

The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.

What Kunstler is talking about is something that I have written about previously many times.  When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences for the U.S. economy.

Most notably, it would threaten to blow up the quadrillion dollar derivatives casino that Wall Street usually manages to keep so delicately balanced.

The truth is that we are going to have massive problems no matter what the Federal Reserve does now.

If the Federal Reserve keeps wildly printing money, our financial system will become a massive joke to the rest of the planet and other nations will stop using our dollars and will stop lending us money.

That would be absolutely disastrous.

If the Federal Reserve stops wildly printing money, the massive financial bubble that Wall Street is enjoying right now will burst and we could have a financial crisis even greater than what we experienced back in 2008.

That would also be absolutely disastrous.

So does anyone out there see an easy way out of this under the current system?  If you think that you have such a plan, please feel free to share it below…

 

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  1. China kept warning the FED about printing too much money but Uncle Ben wouldn’t listen.  Instead of running their mouth at Uncle Ben maybe they just should have stopped piling up worthless debt to begin with.  Idiots.  Stocks will fall as far as you can shake a stick at.  That’s my prediction. 

    • China didn’t warn us about anything; barring the massive transfer of physical wealth from West to East being planned years in advance, China’s “QE” in the form of M1, M2, M3, etc. makes QEInfinity look small. The ONLY difference between America and China is that our debt buys cheap goods and military might, whereas theirs buys gold and silver. The Yuan will end just like the almighty Dollar, in the most catastrophic of ways. A brief glimpse at China’s massive real estate bubble could tell any layman that much.

      The next financial era and the coming fiscal calamity is about globalists leveling the monetary playing field. Nothing more. All parties involved (at the top, at least) know EXACTLY what they’re doing.

      http://www.zerohedge.com/news/2013-11-25/chart-day-how-chinas-stunning-15-trillion-new-liquidity-blew-bernankes-qe-out-water

  2. They cant taper without crashing every gobal market. P/E for the Dow has reached comedic proportions thanks to QE. I cant see a soft landing anywhere in sight…crash and burn is only option. Love to see how they are gonna pull it off and not wreak global havoc !

  3. Within the next three months there will be a Currency Reset and the dollar will lose 30% so we will really be in debt and we will have to many notes out there. So there will be no crash for now, just a new leader because the dollar will be rejected. So get rid of them now.  Keep Stacking

    •  ” will be a Currency Reset and the dollar will lose 30%”    Against what?   Other paper currencies?    I really don’t think the Yen, Pound, and Euro are any better, in fact the Yen and Euro are the most over valued.
      Again, that doesn’t mean PM’s can’t move higher, but it’s been very difficult for gold to move higher if the dollar holds up or moves higher.

    • Marchas45 – thanks for getting zman into the act here. don’t think I can get thru the day without my daily dose of ‘LOL & fair and square’  financial markets. zman – it would most likely loose ‘it’ against PM’s! 

    • @Zman a devaluation means a loss of value against anything perceived as REAL!
      - A REAL ounce of Gold or Silver
      - A REAL bucket of wheat
      - A REAL Barrel of Oil
      - A REAL Hour of man labor (although this is the one that never moves as much as the others in a realized devaluation)
      So a devaluation in effect would mean that Illusive Inflation you so frequently remind us is not present. I know it is really hard in the modern text book programmed Western Psyche to understand the difference between holding a piece of paper saying you own something/value, and holding that actual something of value in your hand … but I think even the Zman can understand this concept … and even better, you WILL have to understand it real soon, so there will be a ‘realization event’, even in the land of the Zman reality shows its ugly face every now and then.
      Click your heels together Dorothy.
       
      …and yes, the Euro and Yuan are just as pathetic as the Fiat Dollar, except if the Chinese announce Gold Backing and the US open the doors of Ft Knox to show everyone the cob webs, and London runs out of Physical Bars, the Yuan will be the best of the toxic pile. All the factories and expertise have now migrated to China due to our ‘free market’ friends in Washington and their ties to the Bilgerberg-types that care not about US labor. Being Communists the Chinese build REAL shit like high speed rail with their QE as they know they need to feed the LABOR MARKET (That market that Washington does not seem to recognize anymore). But of course I am not supporting Communism as a fix to anything, but when compared to the so called ‘capitalism’ (which it is not) that Washington is supporting, the Chinese Labor market is being protected much better than in the US. It’s a sad day when a Communist system is making a mockery out of the last bastion of Western capitalist ingenuity.

  4. Reckon one might consider that The Fed says that they are tapering and not at all, to keep the can kicked down the road a little longer, then the Treasury in the mean time is setting up a Bail In scenario to drop on the public. Sure the Stock Market will fall to some degree, but if The Fed still feeds them money on the sly and still claims tapering is happening to make the sheeple feel better, who knows. What I do know for damned sure is that I don’t trust the government or the privately held Fed Reserve.

  5. Thanks for the article but I’ll quibble w/ over some points…

    1- “The rest of the world is watching, and they are very troubled by quantitative easing.  Therefore the Fed must end it at some point because they desperately need the rest of the world to keep buying our debt.”

    China and Japan, our two largest creditors and holders of $ reserves by far, are far weaker than we.  China is the one who has built a massive credit bubble building excess capacity of every sort (apartments, cities, factories, CRE, etc.) as if the US/ EU would be able to run massive deficits indefinitely.  Absent the Fed’s QE, absent the ECB’s bond buying scheme enabling China and Japan’s cheap exports, their indebted /credit bubbles implode…demand collapses and Chinese UE fires up and Japan’s debt bomb goes off. The only way Japan delays the day of reckoning is pushing rates ever lower (Yen ever weaker via buying ever more US debt)…they will likely be forced to buy significantly more US debt to debase their currency faster. Crazy, crazy stuff.

    2- “When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences”

    The Feds purchases push up the stock market while maintaining low yields (effectively walling of the Bond market while creating new “money” to be funneled only into stocks, RE, CRE where the Fed wants ‘em)…if the Fed reduces or stops it’s QE, the stock market crashes but the holders of equity sell and transfer to the bond market.  US domestic holdings of US Treasury debt has remained @ about $2.5 T since ’00…of all the $9 T in increased public debt, it’s all been taken up by the Fed and Foreigners.  This means pension funds, insurers, institutional folks are over-weighted to “risk” to get close to their 7% return assumptions in a 2.7% 10yr yield world.  If the Fed cuts it’s QE, what “should” happen is a stock collapse and bond buying spree and yields heading back for 2% or lower, dependent on how long the Fed maintains a QE reduction. Absent the Fed’s QE, there is no expansion in credit…no expansion in “growth” (albeit entirely simply debt)…and the stock market is awfully overpriced in that environment and a 2% or similar 10yr Treasury yield would be a big win compared to a return to 1200 or 666 S&P 500.
     

    • >>>If the Fed cuts it’s QE, what “should” happen is a stock collapse and bond buying spree and yields heading back for 2% or lower, dependent on how long the Fed maintains a QE reduction.
      I agree to a degree, but foreigners have just started shunting new Bond purchases and are starting to sell their hoards, so the upwards pressure on Bond Interest rates will be higher IMO than the influx of domestic buyers. Basically this means US pension funds and US nationals exiting stocks and buying bonds will be stuck holding useless Bonds instead of useless Stocks, interest rates are so low it’s almost a joke, which highlights the complete absurdity of the current QE Infinity paradigm … any taper will be a token taper, almost non existent … I would be exiting both Stocks and Bonds and buying physical PM’s, because the price is a steal at present, but I make up that 1% or lower of the population that can see the writing on the wall.
       
      Any announcement for curbing QE will definitely hit the stock market for sure, but there is no way QE can fully stop now because what is left of the US economy would be handed its ass on a platter … and if it keeps up QE it will be handed its ass on a platter, albeit a little later on.

    • You are dellusional like many other Americans if you really have the illusion that America is in a better position then China, China is stepping on your country my friend for years now, the west is flat broke way more so then the east, they hold the cards with your worthless treasury bonds if they decide to dump them you guys have a big problem on your hands.
      Also at least China has the national production to feed their people for free if they have to and for some reason the Yuan collapses sooner then the Dollar which I doubt because China will have the gold to back it up unlike the west who fractional reserve leased lol most of their gold a 100 times over, you Americans and we Europeans don’t have that luxury because guess what, we have outsourced all our real production and real labor to China, because it’s soooo much cheaper, I can’t wait to see you guys setup your brand new iphone factory in Kentucky with all the QE monies and start producing iphones at $5000 a piece all in sustaining costs management bonusses not included…

    • China is owning the United States on every level in every way shape or form except for quality goods and the raw military might maybe but you just wait and see when you can’t pay of your military anymore because the Dollar is worthless.
      Waging war is very expensive and let it be the case that America is flat broke and running on fumes, China is just getting started and their semi communist government has way more means to manipulate things internally then the USA or the west can afford without looking like some deranged facists to the rest of the world.
      If they had a Bradley Manning in China he’d not be in some military court but in a ditch between the rice fields somewhere.
      Regarding their QE they can produce goods so cheap they will just stop exporting it to you or sell it to you twice as high to be able to sell it to their own people twice as low, that is where the Easterners and Westerners mentality differ, westerners like to pay their own people less and leech on them first to be able to pay foreigners twice as much.
      China rather not pay anyone twice as much but if they absolutely have to the’d rather pay their own people twice as much then some dirt cheap foreigners.

  6. The Fed can control a lot of things.  They can control the 10yr rate even if they are the only buyer because they have unlimited funds.  They can inflate the the stock market through continued PPT buying because they have unlimited funds.  But, what they can’t control is what foreigners do with the dollars they hold.  
     
    When the dollar loses its status as the sole world reserve currency, the world will not need as many dollars to transact business.  Those foreign held dollars will be dumped on the FX market.  Result will be significantly higher prices at WalMart for all the consumer goods Americans use and with no competing industry here in the U.S., prices of consumers goods will soar.  That’s called cost-push inflation.    That’s what’s going to kill the economy.  And the Fed is helpless to stop it.

    • Totally correct. When the Chinese QE they feed their own Labor Market. When the US QE’s they give it to Big Banks, who give it to Big Multi-Nationals, who have moved all of their operations to Sth-East Asia, and the US Labor market is f*cked. General Motors point case. But then these USD’s are unleashed overseas, and flow straight back home on the forex as foreigners don’t see a point in buying US Treasuries anymore. It is a vicious cycle that will not stop until eventual real price inflation grinds the US to a halt just as you have so eloquently said.

  7. Not that much because 80 % of the stock market is held up an going up with backed government money laundard through the huge mega banks. It will go down as much as they want it to as will as up.The government holds all the cards now that controls the economy. If the economy was real the nuclear melt down in japan should of been the big hit in our stock market it didn’t even phase it. Even china couldn’t bring the usa economy down now if they cashed in all there treasury bills. The mega banks have so much money injected with them they could actually pay off the national debt.

    • Lol so much inflated digital monies America is rich it’s unreal, lit up those printing presses again yank, if China dropped all your worthless treasury bonds today you would be here crying your eyes out tonight that a loaf of bread is to expensive for you at wallmart.
      The “Mega Banks” are actually flat broke they are so overleveraged if the market farts the wrong way they will collapse, maybe bailed out with some more devaluated dollars or bailed in with your lifetime savings, it is a wonder you guys have yet to see a major bankrun.

  8. “The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax.”
     
    Somehow, I do not think that either the Fed or the Gov give a flaming damn about what the public supports… unless there is an election within the next month or so… and perhaps not a whole lot even then.  It’s not as if they have to ask our permission for any of this QE nonsense because they would be unlikely to get it.  No, I am afraid that both the Fed and the Gov are firmly rooted in the philosophy of “it is easier to get forgiveness than permission“.  Typically, they will try something to see if it works.  If it works, KUDOS for them.  If not, then lie… say that they HAD to do something and that it would have been a LOT worse had then not acted.  Proving that, of course, is impossible.  One cannot know the path not taken.
     
     

  9. I believe it will fall about 12% sometime next year. I also believe the Dow will reach or get damn close to 17,000 points before it crashes. I anticipate it will be a 2-3,000 point correction. Then afterwards the Dow is headed towards 35,000 points before the real crash.

  10. “If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.”
    Brother, I don’t know if you have not noticed but Europe, UK, Japan and many other nations are already doing this since 2008/2009, I am afraid that you lag behind a little because China has been silently making moves away from the dollar for years, only now that it is accelerating more people take notice of it.
    Europe is desperately printing money out of thin air just to keep up with you guys, they just don’t call it QE but you know what they say if it quacks like a duck…

  11. Almost every nation in the world is printing money like lunatics and pumping it in to bonds and equities to keep them artificially inflated, very soon this whole piramid scheme will come crashing down hard and fast.
    They have cut some many incomes of the middle classes in Europe with their austerity measuries just to keep the show running.
    125.000.000 Europeans are living below poverty and are to poor to buy food, boy you guys in AMerika are in for one rude awakening I can tell you that because it is worse in Europe than in the United STates you can taek that to the bank.
    Unofficial private debt calculations in Europe have us reach about 1000% of our GDP this is nu joke.
    Gasoline and food alone cost twice as much here as they are in American while the incomes here are about the same houses here are still about 200% overvalued it’s going to be a massacre of epic proportions you can take that to the bank, the first signs of hyper inflation you have already seen manifesting in stocks, stock prices rising unreasonably and unrealistically not in line with the economy in any way shape or form is a form of inflation also.

  12. This is the only reason we haven’t seen massive inflation in food prices yet because they pump all that stimulus in bonds and equities that is where inflation is at now, now wait untill this new fiat money seeps into the real economy into the hands of the consumer the inflation will blow your mind wide open.

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