Bernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature.
One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs.
After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this.
In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up.
And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be.
Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared:
The Fed cannot exit. It will claim that it can, but market reactions to any real exit will be disastrous. We’ve passed the point of no return. Bernanke’s best home is to retire before the music stops.
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