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OpEdNews Op Eds    H2'ed 6/30/13

The QE Conundrum: Why Stocks Rise on Bad News

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"Wall Street never thought it would be this bad.

"Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday.

"A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.

"The recent pain has spilled over into stock markets, pushing the Standard & Poor's 500-stock index down an additional 1.2 percent on Monday. But the real pressure has been felt in the bigger and more closely watched bond market.

"'The feeling you are getting out there is that people are selling first and asking questions later,' said Hans Humes, chief executive of the hedge fund Greylock Capital."

Sounds serious, doesn't it? Sounds like the world's biggest and most liquid market (USTs) could be facing some ferocious headwinds in the near future thanks to Uncle Ben's grandiose "pump-priming" experiment.

So how is Bernanke going to end QE? What's the so-called "exit strategy"?

No one really knows for sure, because nothing like this has ever been attempted before. We're in uncharted water. But, one thing is certain, the days of smooth sailing where stocks march in lockstep with the Fed's monthly injections are probably over. Investors no longer believe in the "Bernanke Put," that is, that the Fed will intervene to support stock prices. They know now that the Fed wants to scale back on its asset purchases and to wind down the program. That's going make traders antsy, which will lead to more volatility, more sell-offs, more capitulation.

So, there's no free lunch after all. Bernanke thought he could keep stocks levitating while the real economy languished in a long-term slump, but he was wrong. Volatility is baaack with a vengeance, and serious stock and bond wackage lies dead-ahead.

Eventually, the piper will be paid.

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Mike is a freelance writer living in Washington state.

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