Taper Talk

Why does it seem like every single Fed meeting has become “the single most important FOMC meeting ever” in the media? And here we are again. The Fed begins a two day meeting tomorrow and it is widely expected that they will announce the first of many subsequent tapers at either this meeting or the one in November. The only surprise will be if they remove any kind of taper talk from their announcement or commentary. Although I do not agree with tapering at all here, consensus believes the Fed probably begins with a token taper of $10-$15 billion per month skewed towards treasury bonds. If they don’t, something else is at play in Bernanke’s mind.

As you would expect, the financial markets probably have a very negative response if the taper is more than $15 billion. If the taper is as expected, I think you will see moves in both directions until Bernanke’s press conference ends at 3pm and how he couches future tapers. If they surprise without a taper, I would expect a very positive immediate response that would run the stops in at the old highs.

Currently, the Fed is buying $85 billion a month in mortgage back securities and treasury bonds to keep interest rates, specifically mortgage rates, artificially low. That, in turn, helps the housing recovery which is so vitally important to the economy. Equally as important, the printing of $85 billion per month has resulted in dramatically higher stock prices because investors have been almost forced into other investments as bond yields plummeted, not to mention the additional torrent of liquidity in the system.

Should the Fed taper? Should they not taper? How much? When?

There is no right or wrong answer. Once the Fed Funds rate dropped to 0%, Bernanke & Company were forced to use other monetary tools. Printing money has similar results as lowering rates, so in this case, interest rates have effectively been below zero for some time. By beginning the process of ending QE, the Fed is returning rates to 0% for an eventual move to 0.50% and above much later this decade.

I completely understand those who believe the Fed’s hand is too heavy in the market. Forget about the thumb on the scale; Bernanke has his hand, wrist, elbow and arm on it. By that token, those people would rather let what’s left of the free market to rise and fall where it may. No arguments here.

On the other hand, we have an economy that is performing like almost every other post financial crisis period with sub par growth and stubbornly high unemployment. Since our elected clowns in Washington cannot get any fiscal policy passed, the Fed has become the juice of last resort. In effect, the Fed is plugging dykes and adding sandbags until the waters hopefully subside down the road which I continue to believe to be after the next recession.

We cannot have it both ways. I believe that tapering will drain liquidity and adversely impact the markets and economy over the intermediate-term. But long-term, we will be in excellent shape. The quicker we taper, the closer we come to recession and eventually get to the other side. But that comes with pain. Staying the course prolongs the markets’ and economy’s addiction to the crack of QE but prevents more serious short-term injury in hopes of an eventual fiscal solution from Washington.

Take your pick.

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The Fed, QE and Earnings Season

I had a great time with the folks at Yahoo! yesterday in New York in their brand spanking new studio.  We tape three fairly controversial segments and Matt Nesto knew exactly how to bait me just right!  Here is the first piece.

Enjoy!

http://finance.yahoo.com/blogs/breakout/move-bernanke-qe3-115057583.html#more-13067

In case you missed it, The House of Mirrors has officially taken the place of The Earnings & Fundamental Palace on Wall Street. I say this at a time when the aspirations and way forward for the U.S. stock market appear to be in direct conflict with what is normally perceived as being in the best interest of the country.

Worst unemployment print of the year, stocks rally.

Job creation craters, stocks rally.

Of course, even casual students of the market can see right through this bad-is-good charade and know the answer to this riddle lies right at the feet of Ben Bernanke, the Chairman of the Federal Reserve and key holder to the vault where so-called “QE3” is being stored.

“It is amazing but it seems that people are just going to invest when the Fed is going to stand behind and backstops them,” says Paul Schatz, President of Heritage Capital in the attached video.

But before you get too far ahead of yourself on the QE3 bus, you must realize that it’s going to take a whole lot more drama than a 4% dip to get Bernanke to deliver the goods. By my math, which is based on the prior three rounds of easing, the S&P 500 would have to erase all of the year’s gains, or drop 10 to 12% before the Fed can be expected to act.

Like most investors, Schatz is of the mind that it’s not a matter of ”if” but “when” it’s going to act, and has been calling for multiple QE’s since the first one was floated in 2008.

“We’re well on our way to a $5 trillion Fed balance sheet,” he says.

And it’s not just the Fed, Schatz says, Central banks from around the world are engaging in unprecedented easing programs, so much so that Schatz facetiously calls “ink” his best idea given the amount of it that will be used to print.

“The ECB is just starting. They’re going to go into the trillions and trillions in the next couple of years,” he says, describing the ensuing environment as a ”rent to own” market that will be full of volatility and opportunity.

“Four to eight percent pullbacks can and do occur at any time,” he says, calling them healthy, regular and something that should be bought, as long as the market has the QE-backing it so badly craves.

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