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FED’s taper, no-taper talks will push markets higher with nice dips in 2014

Anytime FED says it may probably taper if the economy shows some improvement, investors run for cover, panicking and selling everything they have.

A few days later the FED says that the economy hasn’t improved enough to taper and backs off.

 
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A pattern we see since Ben Bernanke mentioned tapering for the first time. When actually was it? I don’t even remember, as we are on this tapering Marry-Go-Round and I stopped counting the circles.

If you lived in the US recently (and not on Mars for example) you could see yourselves that the US economy isn’t really that brilliant as the government or FED wants us to believe.

It still is heavily supported be the QE stimulus and if we take it out, all recovery will collapse. Or will it sustain? The inflation is not that obvious as FED is quite successful hiding it (but just go to a grocery store to buy a gallon of milk and compare the price two years ago, if you still remember it).

 
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But trillions of dollars are sitting in banks reserves (while FED is paying the banks a hefty interest to keep the money in reserves, source: Motley Fool). Once this ends we will see inflation surface and maybe turn into a hyperinflation. If FED chairman or chairwoman finds courage to end the stimulus. And that is the problem. Will they be willing to end it?

Or just talking about it? Maybe all this talking is about to prepare investors for the real tapering. When they say it again and the market will not head down, that’s when we get hit by tapering. Maybe not. That’s a pure speculation.

 
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Apparently the economy isn’t ready for tapering – as investors are still worried and selling their positions. If they were not worried but satisfied and convinced about the US economy, there would be no sell off whenever data improve in such extend that FED would stop the stimulus.

So what can you do as a dividend investor?

I think a good approach in this market would be, as my friend blogger from Passive Income Pursuit is suggesting, – “pile cash reserves”. He sees the market overpriced and he keeps cash in reserves in anticipation of a major decline or correction which would return stock prices to a better valuation level.

The cash reserves gives you a great power when that happens. It will protect you against portfolio decline as well.

 
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That’s what I will be doing. My intent now is to start increasing my cash reserves. But my reason is a bit different. As I trade my taxable account using margin, I need to increase my reserves to protect myself against margin calls in case a major decline should occur.

Since FED will not probably taper as many expect, it will push the market higher in 2014. But the road higher will be bumpy with many declines. People will fear the tapering for some time before they realize it is actually good for us and not bad.

 
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And the dips on this road will create nice opportunities to buy more shares cheap. Or at least cheaper than what they cost today. And for this reason it is worth saving some cash and invest wisely and not everything all at once.

Sleeping inflation giant

Here is another point of view why I believe FED wants to preserve the existing situation as is and not to taper. Let me borrow a chart from Motley Fools showing bank reserve depository. In plain English, the chart below shows money supply held by all US banks in FED reserve depository:
 

Depository

 

And now explain to me what do you think will happen when those reserves will be thrown to the monetary market in the US economy once FED ends the stimulus?

 





8 responses to “FED’s taper, no-taper talks will push markets higher with nice dips in 2014”

  1. CI says:

    I’m terrible at predicting where the market is headed. I do know two things: #1 the stock market as a whole is overvalued based on historical statistics; #2 To increase my passive income stream I have to buy income producing securities (I will not reach my goals unless I buy).

    During past market run ups bonds were a viable alternative to equities. QE seems to have distorted everything and the alternatives to over priced stocks are probably even worse right now (from an income investor’s perspective anyway).

    I plan to continue buying dividend stocks, but also build cash reserves. Hopefully we’ll get a nice correction next year.

    • Martin says:

      I think the dividend paying stocks are probably the best alternative. I agree with you and do the same – building cash reserves and continue buying dividend paying stocks.

  2. MoneyAhoy says:

    I don’t think the FED will ever taper. They really have painted themselves into a corner.

    • Martin says:

      I totally agree with you. They are screwed. If they stop, the phony recovery will collapse, if they continue with QE, it will collapse too, but in much longer time and a lot noisier blast. We are doomed. I am trying to look for non-US stocks which will not be affected that much when this happens.

  3. Hi Martin,

    in Germany, the market (DAX) was fallen down 1,90% today!

    And Dow Jones 0,9% (and is going on…)

    I hope to see good buying prices in the next 2-4 weeks!

    Buy low, sell high or better:

    Buy low, sell never and collect dividends ;-)

    regards!

    D-S

    • Martin says:

      I think we will see some up and down trading now. After the good job data the markets may fall even more (can you see how crazy it is?) because of fear of tapering, which I personally do not believe will ever happen. So enjoy the sell off and nice price cherry picks.

  4. FFdividend says:

    looks like buying opportunity if that happens.

    • Martin says:

      I hope so. I can already see a few stocks in my watch list dropping into a zone where I am willing to buy. But I will wait a bit longer to see. Thanks for stopping by!

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