What should be expected after the D-day?

It is Jun 30, the end of QE2 (Quantitative Easing #2), which is being called the D-day for the financial market. Why? Because this is the day when Benanake has officially announced that he will end the purchasing of the US government bonds. QE is a fancy name for money printing. This second QE (so called QE2) was purposed to buy $600 billion worth of treasury bonds to keep interest rates low and help spur lending and economic growth. Indeed, the long-term interest rate has been kept low, but artificially of course thanks to the QE2. We have already seen the impact of the Benanake asset bubble, i.e. everything has been inflated extensively except the US$ obviously.


So what will happen after the D-day? Actually no one really knows for sure. This is uncharted water, which is unprecedented. But we probably can make an educated and logical guessing. Up until now, about 70% US treasury bonds are bought up by the Fed QE2 money. The remaining part is largely absorbed by China and Japan. China is already too much scared about what is going on in the US and has raised their concerns repeatedly about the safety of their money tied to the treasury bonds. It would be lucky enough to expect them to keep the current level of buying, letting alone further increasing of their purchases of the US bonds. Japan is busy with dealing with their rebuilding, which requires a huge amount of money. They probably will sell, not buy more the US bonds. Looking around the world, EU is also heavily indebted and is unlikely to be able to pick up the bill. So who is going to fill the gap after the Fed stopping the purchases of the treasury bonds? This is the question asked by the Bond King, Bill Gross. If no one is going to fill the gap and the logic holds true, then we should expect a crash of the treasury bonds, which will cause a spike of the long-term interest rate. If this does occur, then a chain reactions will ensue: an appreciation of the US$ (although short-term), plummeting stocks and unfortunately also a correction of commodities including precious metals (potentially severe but fortunately also short-term). Of course, this won't happen overnight and likely will be seen over a few months. Actually it seems the market is behaving as such right now to anticipate this result to happen. We don't need to wait too long to see how it will evolve.

Personally I'm raising cash, shorting Euro (via EUO) and the overall market (via SDS), shorting treasury bonds (via TBT), and buying put options to hedge against my gold and silver (e.g. put for GLD and SLV as well as put for my mining stocks). In this unprecedentedly uncertain period of time, I want to be very cautious and be prepared to be able to jump in with enough cash in hand. Just to be clear that I'm not expecting to gain too much with such measures. I rather treat them as my insurance, in case the worst comes true. This market has been irrational for too long and the logic is often not applied; therefore I may be wrong but I just don't feel safe to stay with the herd.