Feds dilemma: Stock Market Bubble vs. Fight Deflation

THE WALL OF WORRY THAT BULL MARKET LIKES TO CLIMB ON IS AKIN TO THE SLOPE OF HOPE THAT BEAR MARKETS DESCEND ON.

Any news is a good news for the stock market of today;

• Past Friday, Japanese media came out with the news that Larry Summers had been picked by President Obama as the next Fed chief - markets opened high and continued rally for rest of the day. 
• Later in the week, Summers dropped out of the race, market rallied insanely again. 
• Majority of economists believe that Fed will start to taper from this meeting (though I disagree), again the market has kept its upward swing. 
• Debt ceiling issue is coming up real fast and no solution has been implemented yet, market is still rallying. 

I believe, the price point for all major indices indicate that market believes, FED will not taper. Hence, regardless of whatever the news, as long as $85 is being pumped into the market, people will keep investing and stocks will keep going up. Free money from the fed ends up in the stock market in hopes of making more free money so rich keep getting richer and poor keep getting poorer... Anyway, this cycle is making banks' balance sheet larger and larger - making them larger and larger to fail, creating larger and larger problem for us in the future. 

However, GOLD is acting very strangely. If the Fed was to keep the QE3 intact, should increase inflation which in turn should support GOLD prices since GOLD is the ideal hedge against USD.

At the same time, the way USD has been rising with speculation of tapering, any type of monetary tightening hawkish policies will shoot up the USD, which will in-turn be really bad for the over all economy, here at home or globally. 

So, FED has a pretty huge decision in its hands - 

On one hand, it can keep its low interest rates and keep pumping money into the market in hopes of increasing inflation, keeping unemployment low and assisting housing recovery - the whole point of QE policies for past 5+ years. But, risk creating a larger stock market bubble. 

On the other hand, it can start tapering this week and risk the USD being deflated and send the stock market in the downward spiral path with effect being trickled down to emerging markets. Just the talk about tapering crashed the emerging market's, one can imagine what the action will do. 

We will find out within next 24 hours... 

I think, FED will keep its QE3 untouched at-least till the next Fed Chair is elected. That would be an ideal time for this since market will already be on its edge and will be open and fast adjusting to the change. 

Disclaimer: I am expecting market volatility and GOLD's upswing and currently hold calls in GLD and VXX.