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What Janet Yellen Didn't Say

In order for those excess reserves to enter the economy, interest rates are going to have to go up. At that point, banks may start taking the risk of loaning out the QE money. At that point, Yellen will find herself in a serious conundrum. Either she can allow that to happen and risk serious price inflation as $2.5 trillion in QE enters the system, or she can start to drain the excess by selling bonds, keeping inflation under control.

Either way, the bond market is headed for a serious shock. Rates have been trending higher since June 2012, regardless of QE, and there is an interest rate tipping point somewhere along the yield curve at which point huge amounts of excess reserves will start to enter the economy. Tapering, even if she tapers down to zero, cannot get rid of the extra liquidity that is already there.

If Yellen does nothing at that point and just lets the liquidity flood in, inflation will soar, pushing rates up. If she decides to drain the excess by selling bonds, rates go up. There is no way out. The only question is: When comes that tipping point?

With Obama and Putin declaring financial war on each other and the latter holding $132 billion in U.S. Treasuries, the answer may be soon.

But the real answer is, don't try to time it. Just get out of bonds.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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