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Fed Shocker: No Taper

  • Written by Syndicated Publisher No Comments Comments
    September 19, 2013

    The Federal Reserve today (9/18/13) surprised the world, and me, too, by not reducing the amount of bond purchases from the current $85 billion per month to something less.  The guesses and expectations were for between $10 billion and $15 billion less per month, to bring the number down to “only” $70 to $75 billion per month.

    But the actual reduction was $0, leaving the purchases at $85 billion per month.

    The financial markets reacted instantly.

    Of course, the dollar got hit right away – and for a pretty good amount, given that it’s the world’s major reserve currency – losing more than 0.75% in the blink of an eye:

    Gaining far more than the dollar lost was pretty much everything else.  Stocks went up hard; bonds, gold, oil you name it.

    Starting with the bond market, the ten-year U.S. Treasury yield fell by more than ten full basis points, or one tenth of a percent, which is really remarkable for such a large and liquid market:

    What this tells us is that lots and lots of market participants had been selling Treasury notes in anticipation of a $10 billion cut in the Fed current quantitative easing (QE) program.  I guess we can further infer that $10 billion/month buys you about ten basis points, which I suppose is a good deal – as long as you are printing money out of thin air.

    Next, the oil market took off as well, although it had been rising steadily all day for some other sets of reasons, but the non-taper announcement tossed another buck onto the price:

    Finally, gold really punished the shorts today, and on massive volume, too, popping more than 2% instantly on the news.

    In summary, the U.S. financial markets just exploded on the idea that the Fed was not going to reduce its asset “purchases” (in quotes because purchases are usually made with money that was earned).  Of course, none of these movements reflect anything more or less than the idea that there will be ever more money flooding into the system, which will cause things, but especially financial assets, to go higher in price in the future.

    The ultra-rich are going to be thrilled with the Fed, and they should really send the Fed a nice gift this year perhaps the deluxe fruit basketduring the holidays.

    Combined net worth of America’s richest rises

    Sep 17, 2013

    NEW YORK (AP) — Life is good for America’s super wealthy.

    Forbes on Monday released its annual list of the top 400 richest Americans. While most of the top names and rankings didn’t change from a year ago, the majority of the elite club’s members saw their fortunes grow over the past year, helped by strong stock and real estate markets.

    “Basically, the mega rich are mega richer,” said Forbes Senior Editor Kerry Dolan.

    Dolan noted that list’s minimum net income increased to a pre-financial crisis level of $1.3 billion, up from $1.1 billion in 2012, with 61 American billionaires not making the cut. “In some ways, it’s harder to get on the list than it ever has been,” she said.

    (Source)

    Fed Speak

    In its release, the Fed noted concerns about both rising mortgage rates and the lack of additional excess in fiscal policy from D.C. as being drags on growth.

    They also said this, indicating that they are adopting a ‘wait and see’ approach:

    Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.

    However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

    (Source)

    More evidence?

    In the past month we’ve seen articles like these:

    If you had told me a decade ago that we could have both headlines like these and an $85-billion-per-month, thin-air money printing program by the Fed, I would not have believed you.  At least not without a plummeting dollar and gold over $5,000 per ounce.

    But we have neither, and the entire investing world is celebrating not only the Fed’s largess with wild abandon, but also the efforts of all the other OECD central banks.

    If one takes the Fed’s words at face value, then one knows that it is not going to do anything until in its judgment, the labor market hits some appropriate threshold, and inflation gets back to a level that it feels gives itself, and the big banks, more breathing room.

    In the Fed’s own words:

    The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

    In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. 

    To this, the Fed also essentially promised that interest rates (meaning the Fed Funds rate) would remain near zero until 2015, removing even the option of slight interest-rate tightening for another year.

    Taken together, the Fed essentially said, nobody seems to mind that we’re printing up enough money each month to bail out southern Europe, our best friends (the 400 richest people on the Forbes list) are applauding us, and the financial markets are giddy, so why stop now?

    Boxed In

    As I have long argued, the Fed is boxed in and almost certainly will continue to print as much and for as long as necessary. Along the way, everybody knows that the financial markets are becoming more dependent on continued Fed stimulus and that tapering, let alone actual unwinding, becomes an ever harder and more remote possibility.

    Further, we all have to try to make sense of the growing gap between the Fed’s actions and the reported economic statistics.  After all, $85 billion a month is an emergency amount.  And so we have to ask, where’s the emergency?

    It’s not in housing, or auto sales, or the headline GDP number.  Nor is it in bank earnings or growth in wealth for the already wealthy.

    The simple truth, as I see it, is that the Fed now knows that as soon as it takes the punchbowl away, all of the apparent wealth evaporates and the market crumbles.  Here we might note that if several years of truly historic money printing has not yet provided enough self-sustaining recovery, why exactly is it that the Fed thinks more of the same will do the trick?

    Something just does not add up in this story.  What is it that they are not telling us?

    Well, one thing that really does not fit in this story is that oil over $100 per barrel.  As far as I am concerned, there will be no such thing as a resumption in the type of growth the Fed wishes to see before it willingly begins tapering (end eventually unwinding), because of the price of oil and debt levels that are still far too high.

    Which means the Fed will keep on printing money until something happens.  More bluntly, I think the Fed will keep printing until some form of market accident happens that forces it to behave differently.

    When that happens, the Fed will be following, not leading. And many will be cruelly punished for believing that the Fed had some magical ability to re-write economic laws.

    Conclusion

    By failing to taper, the Fed has all but admitted that it is quite worried about something that it is not publicly disclosing.  But it’s not that hard to read between the lines.  The Fed, along with everybody else, knows that the markets are elevated mainly because of the QE money-printing, and it is desperately afraid to find out just how much elevation it is supporting.  The best guess is a lot.

    For now, the whole world seems content to just go along with the story and buy up everything that isn’t nailed down, which is just another way of saying don’t fight the Fed.

    To my way of thinking, this is just inflation, pure and simple, and the Fed has engineered another huge bubble, this one bigger than all the others put together.  It is now our job to figure out when and why this one, too, shall burst.

    Again, I consider all of this to be perfectly reckless behavior. We have to be open to the possibility that rather than being a paragon of competence, the Fed is actually staffed with ordinary humans who have no better idea of where this is all headed than anyone else.

    With history as our guide, we’re pretty confident saying that this ends badly, and given that this is the largest bubble by far, we might even guess that it ends really badly.

    But we can never know the when of such matters, and so we continue to prioritize building resilience at the personal, financial, and community levels.

    Images: Flickr (licence attribution)

    About the Author  

    Executive summary: Father of three young children; author; obsessive financial observer; trained as a scientist; experienced in business; has made profound changes in his lifestyle because of what he sees coming.

    First of all, I am not an economist. I am trained as a scientist, having completed both a PhD and a post-doctoral program at Duke University, where I specialized in neurotoxicology. I tell you this because my extensive training as a scientist informs and guides how I think. I gather data, I develop hypotheses, and I continually seek to accept or reject my hypotheses based on the evidence at hand. I let the data tell me the story.

    It is also important for you to know that I entered the profession of science with the intention of teaching at the college level. I love teaching, and I especially enjoy the challenge of explaining difficult or complicated subjects to people with limited or no background in those subjects. Over the years I’ve gotten pretty good at it.

    Once I figured out that most of the (so-called) better colleges place “effective teacher” pretty much near the bottom of their list of characteristics that factor into tenure review, I switched gears, obtained an MBA from Cornell (in Finance), and spent the next ten years working my way through positions in both corporate finance and strategic consulting. From these experiences I gather my comfort with numbers and finance.

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