Federal Reserve: Shrinking The Balance Will Have Consequences

When Alan Greenspan took over the Federal Reserve in 1987, its balance sheet was at about $200 billion. A few years ago, it reached $4.5 trillion. Shrinking it will have consequences.

Related trading instruments: 

• SPDR S&P 500 Index ETF (SPY)
• SPDR Dow Jones Industrial Average ETF (DIA)
• iShares Russell 2000 Index ETF (IWM)
• Nasdaq 100 Index ETF (QQQ)

Inflation: The Danger To Bondholders

How comfortable are bondholders going be when inflation is above 2 percent when they're barely earning 2 percent on their bonds now? 

I mean you're not even getting 3 percent on a 10-year Treasury right now, you're getting around 2.95.

Well, if inflation is above, let's say inflation is two and a half, well you're getting two and a half percent inflation if your yield is only 2.95 you're not even getting 50 basis points. But of course after taxes you're losing money because the Treasury bond yield is not tax-free. The federal government still taxes you on the money you earn on Treasuries, so after taxes if you're getting a two point nine five percent coupon if there's two and a half percent inflation you are losing money.

Federal Reserve: Willingness To Tolerate Higher Inflation

I want to talk about what happened with the Federal Reserve this week because I think that is the most significant news of the week. In fact, I think it's the Federal Reserve's statement on Wednesday and the comments from today that's the real reason we had the 300 plus point rally in the Dow Jones Industrials Average today that's why we had the 400 plus point turnaround in the Dow on Thursday. I think it's all about the Fed and its willingness to tolerate higher inflation.

Are Rising Rates Bullish For The US Dollar?

I know people say that rising interest rates are good for the US Dollar. That's rising short-term interest rates which in theory are good for the dollar not rising long-term interest rates.

Gold & Gold Stocks

Gold continues to pullback. Remember we got above 1350 briefly and we couldn't break out and now here we are going back down to 1300 but one thing that looks good to me are the gold stocks.

US Dollar Strength: The Current Drivers

The strength of the US Dollar I think again is being driven by the rise in bond yields. The yield on the 10-year US Treasuries is back up to 2.97 percent, still below three percent but I don't think it will remain below three percent for long.