The markets are entering a 'Fog of War' - Yields going upwards after the Feds QE2

As discussed in Contrarian play on the upcoming Permanent Open Market Operations (POMO) by the FED ala 600billion buy up of US Treasuries and Risk aversion coming back (update 2) - Ireland bailout looming I was correct on the contrarian view on the beginning of the Quantitative Easing 2 and the warning signs from April/May/June 2010 when yields on short term to long term bonds went upward and stocks were sold, despite the Feds constant monetization of US debt. Although incorrect in my counter view on QE2 was that gold would rally.

The general belief of the QE2 effect (on stocks and UST yields) from blogs, to various commentary was that QE2, in it's beginnings which occurred on 12th November 2010 would propel stocks into a hyper buy-up on the back of POMO operations and send yields downward. As we are now all aware what did occur after the 1st day of the Feds QE2, yields moved up, stocks were sold off. This is the fundamental dilemma that sometimes what we think should happen actually doesn't happen, much like Nicholas Taleb's Black Swan theory for the markets. Essentially what we are looking at is the markets reacting to inflation expectations with the very real chance of cyclical inflation returning and retuning hard, with nice doses of risk aversion from both Europe and China. The simple explanation of US yields (apart from the major jump on the 30yr UST) moving slightly upward, whilst the Fed attempted to crush yields on short term US debt, is why would you want to hold it US debt (short/mid term) as yield payments decrease: say China?

The other factor too, this reminds me of the fantastic documentary The Fog Of War, is that you can run statically models, charts and try and calculate a percentage of what is needed to get the desired effect. The problem of course is the unpredictable and psychology of emotion and changing environments that if you cannot adapt to, you are lost. This happened in the Vietnam War, when the US government utilized advisors, the Fog of War discusses this re Robert McNamara (the former US Secretary of Defense). McNamara and others thought they could calculate an outcome for the Vietnam conflict; of course they failed and hence the term the Fog of War. So it's the adaption that is missed on unpredictability

What we may be entering now within the markets is a sort of Fog of War and unclear patten emerging that is occurring from geopolitical/and or political tensions. If Brazil's Guido Mantegasaid that we are now in a 'currency war', then conflict (defined by the term 'war') in the markets could extend into other aspects, such as trade protectionism and so on. Mix this with a descending 'fog' and expectations or statistical modeling to try and figure out the cause and effects will be rendered useless.