Taper Time! Who's Excited?

mikesswimn's picture
Rank: Neanderthal | 2,310

Three hours. That's when the FOMC statement and the updated economic and financial forecasts will come out, with Bernanke's press conference and Q&A following half an hour later. Most importantly, we'll learn about how the Federal Reserve will proceed with the slowing of its bond purchases - colloquially known as "Taper". How the Fed decides to move forward can have massive implications for the global economy. Such an important shift in monetary policy naturally carries with it the opinions of many journalists, among which The Economist has some interesting thoughts on how to deal with the coming unwinding of their most recent QE program.

The economy has improved enough to justify a small reduction in the pace of bond-buying--to, say, $75 billion a month. But it is not strong enough to withstand a sudden stop of such purchases, let alone a quicker return to raising short-term interest rates. The trouble is, that is exactly what the taper talk has led investors to expect. It is why long-term bond-yields have soared since May. And it is an impression the Fed must dispel on September 18th.

I have to wonder who, exactly, connects "taper" with "a sudden stop of such purchases", given that The Economist suggests that investors at large have, in fact, made such a connection. Nevertheless, The Economist does make some compelling points about how to proceed.

Investors interpreted the promise of tapering as evidence of a big shift in the Fed's priorities. That is partly because the taper talk was accompanied by a very public debate within the central bank about the downsides of bond-buying, particularly the risk of inflating bubbles in financial markets. And it is partly because the Fed provided an ambitious end point (ie, stopping bond purchases when the jobless rate reaches 7%) with little clarity about how it planned to get there, or how that goal weighed against other signs of weakness such as the uncomfortably low inflation rate.

This is a far more compelling point. The issue The Economist appears to have identified is the lack of clarity coming from the Fed. This naturally raises the question of how should the Fed better spell out its path forward.

First, it must leave no doubt that the priority is to support growth; that the pace of bond purchases is being reduced because the economy is ready for it; that the tapering will be cautious; and that if the recovery wanes the bond-buying will be stepped up again. Second, the Fed's promises about its future plans should eschew mechanistic reliance on one economic indicator. If America's jobless rate is falling but other measures of the economy's health are weak, the central bank should explain it will err on the side of keeping policy loose for longer.

Whether or not you agree with the Fed's actions, this seems to be fairly common sense advice. That being said, what was left out of The Economist's analysis is what the potential effects may be with a slowing of bond purchases on markets. Regarding the bond and equity markets, ZeroHedge has made an interesting observation:

According to the Fed, QE's aim was to drive down interest rates to unattractive levels by purchasing bonds in the market, thus encouraging participants to purchase riskier (and higher-yielding) securities. As Cornerstone's Ronnie Spence notes, this risk-seeking behavior in theory boosts asset prices (and increases the 'wealth effect'). However, when one examines what has actually happened under QE, only stock prices have followed the QE theory.

Their point is supported by supplying two graphs, one of the S&P and the other of 10 year US Treasury yields. The graph of the S&P shows exactly what you would expect, QE drives up equity prices:

However, what's interesting is the graph of the 10 year US Treasury yields:

Spence points out, that the drop in rates in response to QE likely results from the plunge in equity prices that has resulted when the Fed has looked to end their QE programs. Put another way, "Taper" is a false narrative for higher rates when in fact all the 'taper' risk is in stocks (and historically traders haven't priced it in until the money actually stops flowing).

What do you monkeys think? How do you see the FOMC meeting unfolding? What markets will bear the brunt?

Comments (53)

Sep 18, 2013

Short everything. Easing is ova

Sep 18, 2013

Probably not bad advice.

Do you think Spence's observation of the 10 year rate going down absent QE (and up with it) is a coincidence?

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Sep 24, 2013

Not a coincidence. At the time, the market viewed QE as a signal to move to risk-on as the FED would be supporting market price levels. So Fed announcing QE would lead to a selloff in treasuries. Keep in mind that this was also 2010-2011 when risk on-risk off was the dominant macro trend and correlations between asset classes were much closer to -1 and 1 than historically observed. The effect of QE on rates is a little more complicated now.

Any of the more experienced guys, correct me if I'm wrong.

Sep 18, 2013

QE is the new thing, everyone is doing it.

If the glove don't fit, you must acquit!

Sep 18, 2013

Ready for the correction; yield curve increase will cause a plethora of problems both domestic/emerging. Does anybody else feel China's credit binge/current environment will have a substantial impact?

Sep 18, 2013

If tapering is slight, the markets will be neutral as a little tapering is probably priced in. If tapering is over $20bn, markets will tank. If there's no tapering announced... Dow 16k!

Best Response
Sep 18, 2013

You guys are giving the Fed way too much credit (and shorting everything is suicide). I don't know why you think the Fed will do the right thing when they've always done the easy thing. There will be no taper.

    • 2
Sep 18, 2013
Edmundo Braverman:

You guys are giving the Fed way too much credit (and shorting everything is suicide). I don't know why you think the Fed will do the right thing when they've always done the easy thing. There will be no taper.

On one hand I hope you're right, as any decent-sized action will kill everything. And that would suck.

On the other hand, I think even the few comments here show that it's quite obvious that everything we're seeing right now is fairly artificial. Without this huge amount of asset purchasing, the economy would be even worse. And this needs to end at some point. We can't have a subsidized economy. Doesn't work like that.

"When you stop striving for perfection, you might as well be dead."

Sep 18, 2013
Edmundo Braverman:

There will be no taper.

Nailed it.

Sep 18, 2013

I agree, shorting everything is crazy. If you want short exposure buy inverse ETFs, at least you'll be a little more diversified. Betting against Ben is almost as crazy as betting against Le Fly

Sep 18, 2013

I'm guessing that the most they'll taper is 2BB. In the short term I'd hold course. In the medium term, take advantage of every over reactive lemming on Wall Street.

In the long term, we're all dead.

Sep 18, 2013
UFOinsider:

In the long term, we're all dead.

Can I have your Gameboy if u die first?

Sep 18, 2013

I'm thinking USD call/ JPY put option, strike price @ 103, expiring 31 Oct 2013. It'll be interesting to see the effects of this meeting on EM currencies, especially for Japanese investors who hold trillions of JPY shorts against EM currencies. I'm equally interested to see the unwinding of certain political events in Japan (consumption tax hike announcement, TPP negotiations, possible corporate tax cuts) on the JPY.

Sep 18, 2013

be careful shorting...I expect, like most of market, a $10bn taper. As soon as that uncertainty is removed, I'd expect stocks to run higher (at least in the short term)

Sep 18, 2013

I really shit in my shoe last night. I had an order in to buy 100 GERN Dec $3 Calls for 0.15 each that didn't get filled, and now the goddam things are bidding 0.30. Taper Shmaper. That $1,500 profit would've paid my bar tab for a month.

Sep 18, 2013

We are so fucked... Good call Eddy.

Sep 18, 2013

No tapering via bloomberg

Sep 18, 2013

From the statement:

However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Good call, Eddy. Markets are very happy!

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Sep 18, 2013
mikesswimn:

From the statement:

However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Good call, Eddy. Markets are very happy!

Wow, was not expecting that. From all the strong language they had been using up till this point I was expecting some sort of action. Next step is though, how long will this last. If they have their model built around employment percentage, I honestly don't see this ever changing, not until the next presidential election, if then.

"When you stop striving for perfection, you might as well be dead."

Sep 18, 2013

Hmmm....Ben must be more concerned with missing his inflation targets than with asset bubbles.

Please don't quote Patrick Bateman.

Sep 18, 2013

You think Obama would pressure the Fed to tapper now instead of later. It will eventually have to happen and if it happens before the 2016 election or shortly after it will screw the Dem nominee. Take the hit during the last 3 years in office and leave a clean slate for Hillary or Biden.

Sep 18, 2013
TNA:

You think Obama would pressure the Fed to tapper now instead of later. It will eventually have to happen and if it happens before the 2016 election or shortly after it will screw the Dem nominee. Take the hit during the last 3 years in office and leave a clean slate for Hillary or Biden.

This shouldn't come as a surprise. Politicians are only concerned about their own legacies.

Sep 18, 2013
TNA:

You think Obama would pressure the Fed to tapper now instead of later. It will eventually have to happen and if it happens before the 2016 election or shortly after it will screw the Dem nominee. Take the hit during the last 3 years in office and leave a clean slate for Hillary or Biden.

You would, maybe. But in his mind, the option isn't when to taper, it's why do I have to taper? He doubtless has no problem with this Fed-subsidized economy that allows him to keep bragging about 2% growth or dropping the occasionally tenth of a percentage point in unemployment. Don't forget, there's idiots out there that actually think the economy is killing it right now. The democrats, I'm sure, think this is the way to go. If they had their choice, the Fed would just orchestrate the entire market.

"When you stop striving for perfection, you might as well be dead."

Sep 18, 2013

Biden/Hillary? We'd be fucked anyway! Why would Obama think that way... he wants to go out on "top" taking credit for a booming stock market. Even though he sucks.

Sep 18, 2013

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Sep 18, 2013

Yeah. I mean I never considered Obama to be a team player. If he was he would have let Hillary win in 2008, taken a senior cabinet position, gained experience and then won in 2016. Instead he took Hillary out in her prime, layered on Benghazi, let her rot for 8 years making her basically 1 year younger than the far outter bounds of elected Presidents, and basically fucked the economy for whoever is the poor bastard that runs in 2016.

I'm sorry, but you don't need to more than double the national debt in 8 years to effect a recovery (or whatever crap of a recovery you want to call this).

I truly want to hear the half assed plan the Fed has for unwinding all of this.

Sep 18, 2013
TNA:

Yeah. I mean I never considered Obama to be a team player. If he was he would have let Hillary win in 2008, taken a senior cabinet position, gained experience and then won in 2016. Instead he took Hillary out in her prime, layered on Benghazi, let her rot for 8 years making her basically 1 year younger than the far outter bounds of elected Presidents, and basically fucked the economy for whoever is the poor bastard that runs in 2016.

I'm sorry, but you don't need to more than double the national debt in 8 years to effect a recovery (or whatever crap of a recovery you want to call this).

I truly want to hear the half assed plan the Fed has for unwinding all of this.

On point, all of it. I mean I'm a libertarian but I'd almost rather of had her as a president. Obama doesn't have a clue about...anything. He's just embarrassing.

Half-assed may be too generous for whatever they've cooked up...unfortunately.

"When you stop striving for perfection, you might as well be dead."

Sep 18, 2013

So Long shorters!

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.

Sep 18, 2013

lolol bernanke

Sep 18, 2013

There's a "plan" for unwinding this? I though it was a "pump and pray" situation?

Sep 18, 2013

One could argue that they're undwinding a substantial bond debt position. What better way to then reduce the budget:GDP ratio than by inflating the currency supply that will be used as a basis to pay it back? I think a lot of people are right about the potential fallout of QE, they just have the wrong nation, it should be China.

...this is theoretical though, I'm way out of my depth with that stuff

Sep 18, 2013

That's the eventual outcome of printing money wantonly to finance spending deficits over the long term. Eventually you begin to inflate and it goes up and up until everything implodes. Inflation is a way to cheat lenders out of the purchasing power of the dollars they lend in the future. It is exactly a cheap way to pay back debts. One of the issues here is that we aren't even paying back other countries, we are straight up buying our own debt and just screwing ourselves. Okay sure, people will argue that we aren't literally buying our own debt or some balance sheet transfer crap, but let's be honest with ourselves here. And yes, I would be very mad if I were China.

I always think of it in the frame of what is the absolute worst possible case for the federal reserve. What can it not fight no matter how hard it tries. Deflation. That is literally the bane of the central banker's existence because once deflation begins it is a vicious spiral and anyone who is a 'debtor' is absolutely toast. Now anyone can see why that would be a problem because most of this country are debtors as well as the country at large. This is a significant issue as it would cause all kinds of problems with banks, personal balance sheets etc. On the other hand, inflation is something that theoretically the Fed can fight via raising interest rates etc. Frakly the problem that I see is that we are backing ourselves into a corner where even the best case scenario ends up being a problem because we are still running a deficit and once inflation starts as growth picks up our interest rate payments on debt go up and take out a larger portion of our discretionary spending which... well you know where i'm going with this.

I'm not sure how your comment turned into my response, but it did.

Sep 18, 2013
Addinator:

That's the eventual outcome of printing money wantonly to finance spending deficits over the long term. Eventually you begin to inflate and it goes up and up until everything implodes. Inflation is a way to cheat lenders out of the purchasing power of the dollars they lend in the future. It is exactly a cheap way to pay back debts. One of the issues here is that we aren't even paying back other countries, we are straight up buying our own debt and just screwing ourselves. Okay sure, people will argue that we aren't literally buying our own debt or some balance sheet transfer crap, but let's be honest with ourselves here. And yes, I would be very mad if I were China.

I always think of it in the frame of what is the absolute worst possible case for the federal reserve. What can it not fight no matter how hard it tries. Deflation. That is literally the bane of the central banker's existence because once deflation begins it is a vicious spiral and anyone who is a 'debtor' is absolutely toast. Now anyone can see why that would be a problem because most of this country are debtors as well as the country at large. This is a significant issue as it would cause all kinds of problems with banks, personal balance sheets etc. On the other hand, inflation is something that theoretically the Fed can fight via raising interest rates etc. Frakly the problem that I see is that we are backing ourselves into a corner where even the best case scenario ends up being a problem because we are still running a deficit and once inflation starts as growth picks up our interest rate payments on debt go up and take out a larger portion of our discretionary spending which... well you know where i'm going with this.

I'm not sure how your comment turned into my response, but it did.

+1 on all of this

"When you stop striving for perfection, you might as well be dead."

Sep 18, 2013
Addinator:

That's the eventual outcome of printing money wantonly to finance spending deficits over the long term. Eventually you begin to inflate and it goes up and up until everything implodes. Inflation is a way to cheat lenders out of the purchasing power of the dollars they lend in the future. It is exactly a cheap way to pay back debts. One of the issues here is that we aren't even paying back other countries, we are straight up buying our own debt and just screwing ourselves. Okay sure, people will argue that we aren't literally buying our own debt or some balance sheet transfer crap, but let's be honest with ourselves here. And yes, I would be very mad if I were China.

I always think of it in the frame of what is the absolute worst possible case for the federal reserve. What can it not fight no matter how hard it tries. Deflation. That is literally the bane of the central banker's existence because once deflation begins it is a vicious spiral and anyone who is a 'debtor' is absolutely toast. Now anyone can see why that would be a problem because most of this country are debtors as well as the country at large. This is a significant issue as it would cause all kinds of problems with banks, personal balance sheets etc. On the other hand, inflation is something that theoretically the Fed can fight via raising interest rates etc. Frakly the problem that I see is that we are backing ourselves into a corner where even the best case scenario ends up being a problem because we are still running a deficit and once inflation starts as growth picks up our interest rate payments on debt go up and take out a larger portion of our discretionary spending which... well you know where i'm going with this.

I'm not sure how your comment turned into my response, but it did.

You are correct.....if this was a long term program. But it's not. I'm just pointing out a one time opportunity to refinance a few thins. The whole QEwas a short term stopgap until business+consumer+investor confidence picked up, and while both individuals and instituions retooled. Savings are up, debt is down, and confidence is increasing. There are less opportunities in some areas because of new regulation, especially trading, but they were on their way out anyway. This just sped things up. The only loose end is to reduce the size of the federal budget, but that doesn't have to be done right now, it can wait a couple of years. This does not necessarily mean shrinking the gov'ts influence/size/effectiveness.....just the cost. If this president or the next ($50 says it's Christie) can move things in that direction then we're fine.

If this program were permanent, then yeah, we'd eventually be carting wheelbarrows full of worthless paper around like post WWI Germany. Duh. The people in the FED know this, they're smart, and it's partly why they eased in and are easing out, in order to minimize the shock. Honestly, for all the existensial angst over taper/noTaper, a 150 point move is anticlimatic. And why did the market even jump? People are optimistic about the economy still being weak? Stupid people. That 150 or whatever points is pure bubble, completely removed from fundamentals. I'm tied up in other investments, but I'd be looking for a 100+/- index ETF short play.

As for the Chinese, sure they're pissed. If they were smart about this though, they would use a reverse of this technique to solve their own problems. Think of it this way: China screwed themselves when they
1. pegged their currency to ours
2. ran a massive centrally coordinated development program
3. boosted their economy by then using the imbalanced currency ratio to fund their own economic devolopment
4. recently started dicking around with their own internal financials.

The way out, ironically, is theoretically simple. Just use the debts to cancel each other out and balance their own books. If you only think of finance merely in terms of accounting, yeah, they're fucked. If you think of finance as assigning values to what's relevant, then they can come out ahead big time. All they have to do is let the markets decide the values for everything, and then adjust their monetary system accordingly. Whether their political structure is ready to 'let go' is anyone's guess. Strangely, I think they even understand this, but being ruled by a military dictatorship seems to have reached it's logical conclusion.

Just to illustrate, look at the South Korea that runs on our logic VS the North Korea that runs on logic not dissimilar from China's. Pretty stark contrast, and clearly illustrated for the world to see. The only last ditch North Korea has left on their current trajectory is to start a war. Or they could just liberalize. Ultimately, they're going to have to take a good hard look at their own decisions and stop blaming the US for being stupid. China did this to themselves, and they can very quickly fix it. It's entirely in the hands of their gov't right now.

Sep 18, 2013

Interesting listening to Bernanke...give him an A- on his responses...the big elephant in the room, what happens if QE doesn't work, or even if with QE, we don't see any sustained growth in the economy or improvement in the labor market...do we just keep QE forever until the size of the Feds balance sheet is insanity?

i wouldnt short the market because i think we are a ways off before shit really hits the fan, but this experiment could go very very badly if things dont start improving fast (and even if they do, could get tricky if inflation starts to run up)

Sep 18, 2013

Gold's up by $55 (or around 5%).

'Hopes' everyone bought their tungsten detector.

Sep 18, 2013

I hope it burns when Bernanke pees.

Sep 18, 2013

This hyperfocus on the Fed is causing a lot of people to miss fundamentals. The end of QE would be GOOD for the economy, in my view. The Bank of England started tapering recently, and the British economy is now picking up steam due to loan growth from a widening of the yield curve. The sooner we end it, the better.

Metal. Music. Life. www.headofmetal.com

Sep 18, 2013
In The Flesh:

This hyperfocus on the Fed is causing a lot of people to miss fundamentals. The end of QE would be GOOD for the economy, in my view. The Bank of England started tapering recently, and the British economy is now picking up steam due to loan growth from a widening of the yield curve. The sooner we end it, the better.

Bingo. It's a stabilizing program, and a temporary one. The whole point was to buy time while companies retooled and debt to earning levels lowered....all without tanking the economy through deflation.

There was/is considerable angst over fears of a hyperinflationary death spiral, but widening the view a bit just reveals the program to be tough medicine to fend off a pretty bad disease. 85BB sounds like a lot of money but it's pocket change from a federal budget perspective. Plus, they're merely reassinging debt, they can reverse this process: rest assured, people will buy this stuff. In fact, investors have been paying, after deflation, a 'fee' of 2% for the ability to park their wealth in US debt during the larger global uncertainty. Extra cash can be printed, but it seems that a lot of people forget it can just as easily be shredded when the goal has been reached.

The other thing is that this policy didn't heal the general economy beyond the banking system proper. It kept the banking system from collpsing...that was the goal. The economy was understood to recover on its own given some stability. Companies have been retooling their operations, consumer debt is at all time lows, corporate savings are at stellar levels, and now it's just a function of people taking advantage of opportunities and letting go of their fear, little by little.

Sep 18, 2013

I was predicting taper about 2 months ago. Last night I was talking to my friend for an hour or 2 and finally decided that the economy was too mediocre for any substantial reduction in bond buying. And here we are...

Fundamentals, fundamentals, fundamentals. I've got friends who follow the technical signals over a cliff. It's still 90% fundamentals and 10% technicals.

Sep 18, 2013

Too easy.

Seriously.

It's like calling double-dribble on a retarded kid.

Sep 18, 2013

I'll tell you who's excited... my portfolio's Johnson.

Look at that thing's erection...

Sep 18, 2013
peinvestor2012:

I'll tell you who's excited... my portfolio's Johnson.

Look at that thing's erection...

+1 when I have bananas again, thanks for the laugh

Sep 19, 2013

Glad I could brighten your day!

Sep 18, 2013

Good call Eddie. In the conference, Bernanke did imply that the fed can't do everything...There's gonna be a day where the fed is going to come out with terrible news that will shock the financial world...unless the US gov't (mainly the legislative branch) does its fucking job.

Sep 18, 2013

If the glove don't fit, you must acquit!

Sep 18, 2013

Why would China care? Lower rates = higher bond prices = their investments are worth more.

Sep 19, 2013
DCDepository:

Why would China care? Lower rates = higher bond prices = their investments are worth more.

Good stuff here:
http://www.icis.com/blogs/asian-chemical-connectio...

http://www.reuters.com/article/2013/09/04/us-china...

If the glove don't fit, you must acquit!

Sep 19, 2013
WalMartShopper:
DCDepository:

Why would China care? Lower rates = higher bond prices = their investments are worth more.

Good stuff here:

http://www.icis.com/blogs/asian-chemical-connectio...

http://www.reuters.com/article/2013/09/04/us-china...

Yep, as the Reuters article points out, the emerging markets like QE because it brings in rent seeking foreign investment.

Sep 19, 2013

Cheaper dollar = lower value of dollar-denominated assets = they have lots of those.

Also hurts Chinese exports via higher Yuan/USD cross rate

Sep 19, 2013
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Sep 19, 2013