To Taper Or Not To Taper...Is That the Only Question?

Tomorrow at 2pm the Fed issue's it's minutes for the July meeting and we are assured there will be some serious MOPE and economic psych-ops as the Fed will likely try to signal that Wall Street needs to break it's liquidly habit-when it tapers or I like to call taper- operation QEDerma-patch.  Ok, maybe that's a stinker.

We are already seeing the reverberations of the mere threat of tapering in Asian markets as 20 of the biggest emerging market currencies took a significant hit and most notably the Indian Rupee hit successive record lows.  So how does a crashing Indian Rupee effect us?

A precipitous fall in the value of the rupee will create a sell off in Indian assets which will likely find a home in perceived safer havens like the US Dollar and possibly US equities.  Remember India is one of 5 of the BRICS countries and with China already experiencing slower growth,  India exports have taken a nose dive and emerging markets could find themselves in a mess creating a bigger global financial pickle.

But Will He Really Do It?

Well, we sure as heck have an idea what he'll say based off his previous taper tantrums.  He'll remark on the astounding recovery in the markets since the inception of QE with the stock market up 20% since January despite a slow recovery.   As usual, the report will contain some discussion of the list of economic factors that will play into their September decision including whether or not there has been any improvement in labor markets.  Watch out for the release of the the initial US jobless claims on Thursday.  

Despite whatever rhetoric is contained in those reports, Bernanke knows what you know.  If he really tapers, he'll throw the US and global economy into a tail spin.   The mere mention of taper has interest rates rising and the actual act of tapering will be bad.  Really bad!    And what does the Fed do to get us out of a recession?  It adds more liquidity to the market.   A vicious circle.  Little ole me realizes that and so does the Bernanke.   Does he have any other options??

Ok, here is where the whole taper/not taper scenario gets a little messy.  I'd suggest the issue is not as black and white as some are suggesting.  And folks, please realize this is all speculation for I can't read into the future but I think there is some information that you might want to consider.  The comment forum below is the place you provide your own speculations or politely raise counter arguments to mine. I'm open to suggestions

Story line 1.  The Fed Mopes us to death and finds reasons in September to keep the QE going. 

Story line 2.  He tapers back the QE as promised and throws the economy into a deep recession.  

Story line 3.    HINT  What has Santa been talking about all summer? 

Consider another factor in this whole taper mess,  and that is the mandate which  the Fed receives from the BIS.  And you thought the Fed was accountable to no one?    Briefly, The Swiss bank of International Settlement is a consortium of Central Banks that issues "guidance" and that's putting it mildly to all Central Banks.  It is the Central Bank of Central banks that is it's own sovereign entity and is accountable to nobody. NOBODY.  Do they have any say in the matter of QE?  You betcha!

Here is a June article by Investment weekly discussing the warning BIS issued to the Fed that a spike in the bond yields could trigger a global financial crisis.

http://www.investmentweek.co.uk/investment-week/news/2276792/warning-of-new-financial-crisis-as-bond-yields-spike

Here are some pertinent quotes from the article to consider.

  • "It warned losses could range from 15% to 35% of GDP in the UK, France, Italy and Japan and even greater damage in a number of other countries."
  • "Such a big upward move can happen relatively fast," BIS said, referencing the 1994 crash.
  • "However, BIS said authorities must still proceed with monetary tightening regardless of these bond worries, warning QE and zero interest rates are already doing more harm than good, according to the Telegraph. The warning from BIS comes after the US
  • "Federal Reserve set off the most dramatic spike in US borrowing costs for over a decade by hinting at an early exit from quantitative easing"

Allow me to summarize. QE is not working.  It's a failure. The economy has NOT recovered.  We have given you a mandate to stimulate employment and stabilize prices. It hasn't worked.  Continued QE could result in dire consequences.  Stopping QE could result in dire consequences with a rise in bonds.   Get your economy back in gear and start tapering QE and deal with rise in bond rates.

If you want to read the original document issued by the Bank of International Settlement back in June issuing the Fed its mandate, here you go.

http://www.bis.org/publ/arpdf/ar2013e1.pdf

Allow me to once again highlight a couple more points.   I highly recommend you read these carefully. 

 "Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy"

"Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilization role, allowing others to do the hard but essential work of adjustment.

"Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks."

"How can central banks encourage those responsible for structural adjustment to implement reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back
from their expansionary policies? And in pulling back, how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions."

So what exactly is the BIS saying Green Lantern?  The fed will really taper?  Well.  Yes, No and Maybe. The fed will have to save face and tell the markets that it is still looking to taper.  That's the near term plan as they continue to buy just a little more time.  But the masters, masters' are growing impatient.

But time for what Lantern?  If you read carefully, thee buzz words were "stabilization" and "adjustments"   So if money stimulus alone cannot "stabilize" or make the proper "adjustments"  What will?  If you said bail-ins, you guessed right.   As I mentioned in my last post,  "the bail-in model is based on an agreement between the Bank of International Settlement (there they are again) and endorsed at a 2011 G 20 summit."

The same people who wrote the bail-in model, are telling the Fed, it ain't working and it's time to stabilize and do it sooner rather than later.

Ok one other thought for your consideration?    The Basil III regulatory framework (BIS Yet Again),  banks must maintain assets as a buffer against a liquidity crisis.  Without QE, the banks will not have adequate buffers.  Hence the BIS warning of a dire crisis and telling the FED.  Go Fix It!!    I can only think of two ways of doing that.   Continue QE against their masters wish and keep pretending there is a recovery.  Or start bailing in.   

Ok folks, remember, this is just little ole me thinking out loud.   What do I know?  I'm just a guy in a Green suit patrolling the Universe for common ordinary thugs!

87 Comments

Marblesonac's picture

First

First

Now to read the post!

treefrog's picture

twoth!

tooth?

Kcap's picture

Things getting super interesting now....

Thats all I have to say as much unfolds over the coming weeks.

If you're not out, your in.  If you're in, you're done.

Kcap

El Gordo's picture

Whaddid he say?

They write these rules for themselves to improve the public perception of their business model then routinely go about offering themselves exemptions (or deferrals) to compliance for those same rules.  And the beat goes on.

tyberious's picture

Food for thought!

Ok, so the Fed tapers on MBS buying but UST not a chance, cant happen, wont happen, will not happen!

Green Lantern's picture

I neglected to mention a 4th

I neglected to mention a 4th option that the Fed has. 

It would be an alternative to a "sterilized" QE.  

I don't think they will go in that direction, but I'd be remiss if I didn't mention.    I'll let you guys have a go at it. 

¤'s picture

"To Taper Or Not To Taper...Sounds Like A Set-up To Me"

  Thanks GL!

I think they'll taper and reallocate funds from the MBS purchases into the bond purchases a bit more and as much as necessary

I also think (as I've said many times previously) that when the taper brings havoc to the market place (and it will) that it'll open up the door for more emergency spending measures out of necessity.

The market tanking due to the taper is part of the set-up for more UST monetization afterwards and the eventual and gradual implementation of capital controls in The States.

I do think that this mentioning of tapering has served the cause of making QE and the existing stimulus relevant again. QE seemed to have lost it's punch and the effect was minimal.

If they threaten to take the punch bowl away (and actually do it a little bit) then the impact on the market if they don't will be significant...and here's the best part for them...it won't take a penny more to reinvigorate the market once they speak the  free words of ..."we're not going to taper"  or  the words..."We are going to resume or add onto QE etc." are spoken.

The impact of either will make existing QE seems relevant again and it'll carry the market higher for awhile. How long is the question.

My guess is they minimally taper and tank or disrupt the markets just enough in order to resurrect some other form or just additional stimulus....and then capital controls of some sort down the road.

That's my story and I'm sticking to it.

Byzantium's picture

Bail-ins

I don't really get the 'bail-in' logic; it will impoverish all bank account holders, meaning all active participants in the official economy, therefore utterly destroying that economy. Nobody will then have money. Maybe crashing the economy is the plan, but I am not thinking that this is their intention.

Bail-ins are an economic suicide pill on a national level.

Green Lantern's picture

DPH,  I like a man that has a

DPH, 

I like a man that has a viewpoint and can support it!!  And also not afraid to give an answer that it is not the popular response.   Right or wrong.  You da man!

Green Lantern's picture

@Byzantium

The bail-in model does not have to be just for consumer bank accounts.  The bail-in model has a few more complications. 

http://blogs.reuters.com/financial-regulatory-forum/2013/06/12/basel-paper-offers-new-look-at-bail-in-models-for-ailing-institutions/

ps. hey, I hope you had a great vacation!

Byzantium's picture

QE

I'm of that school of thought that refuses to take any official data seriously. 

People analyse how much QE has happened and when, and the trajectory and the implications of tapering. But the Fed/Treasury can print as much money as it likes, without needing to announce it. Any TBTF bank that teeters and thereby threatens the system, will be saved with ease, it is just a Ctrl P operation.

It won't create immediate inflation (if at all) in a shrinking economic landscape, and when merely replacing existing money 'destroyed' by a default process.

We have no idea how much they have printed so far. The BIS is playing its own game; God knows who they are and what they really represent.

Something is definitely up with these WH meetings, and thieves are falling out. It looks like the whole world economy is about to crash, and the winners will be those that cope with that crash the best. 

pbreed's picture

End Game...

For awhile now I've thought that when the Fed held the majority of the Federal Debt, the debt functionally ceases to exist. They just send the interest payments back to the treasury and buy all rolled over debt.  This is 100% functionally identical to having the Fed just forgive all of the Debt, while giving the Fed the added power to hold it over the U.S. government to get whatever concessions the banks owning the FED want...

This will work until the world gives up on the dollar as a means of international trade...

Green Lantern's picture

If you read "The Creature

If you read "The Creature From Jekyll Island"  and enjoyed it.  You might want to consider this one.

there is reason nobody knows who they are and what they do and it barely gets mentioned.   Maybe it's time we start talking about them?   

Tower of Basel is the first investigative history of the world’s most secretive global financial institution. Based on extensive archival research in Switzerland, Britain, and the United States, and in-depth interviews with key decision-makers—including Paul Volcker, the former chairman of the US Federal Reserve; Sir Mervyn King, governor of the Bank of England; and former senior Bank for International Settlements managers and officials—Tower of Basel tells the inside story of the Bank for International Settlements (BIS): the central bankers’ own bank.

Created by the governors of the Bank of England and the Reichsbank in 1930, and protected by an international treaty, the BIS and its assets are legally beyond the reach of any government or jurisdiction. The bank is untouchable. Swiss authorities have no jurisdiction over the bank or its premises. The BIS has just 140 customers but made tax-free profits of $1.17 billion in 2011–2012.

Since its creation, the bank has been at the heart of global events but has often gone unnoticed. Under Thomas McKittrick, the bank’s American president from 1940–1946, the BIS was open for business throughout the Second World War. The BIS accepted looted Nazi gold, conducted foreign exchange deals for the Reichsbank, and was used by both the Allies and the Axis powers as a secret contact point to keep the channels of international finance open.

After 1945 the BIS—still behind the scenes—for decades provided the necessary technical and administrative support for the trans-European currency project, from the first attempts to harmonize exchange rates in the late 1940s to the launch of the Euro in 2002. It now stands at the center of efforts to build a new global financial and regulatory architecture, once again proving that it has the power to shape the financial rules of our world. Yet despite its pivotal role in the financial and political history of the last century and during the economic current crisis, the BIS has remained largely unknown—until now

Libero's picture

QE 3 and interest rates go up

and gold goes down, not exactly what we expected right?  So why would we think that a "taper" message will tank everything down?  Predictions are useless.  I've been waiting for years for the "money supply" growth to cause inflation, -like waiting for Godot.

I would think the Fed will continue to do what it does best, straddle the fence, the market will hear what it wants to hear and life will go on much the same way it has since 2009... Slow growth and lower standard of living for us in the industrialized West while the rest of the world catches up, which will put demand on materials.

Precious metals will explode only if people of wealth decide that they can make money this way as opposed to stocks and bonds.

litterbox's picture

lets see what rolls out

                       PAPER OR TAPER

litterbox's picture

paper or taper

Photo-5-Sorry-Dung-Beetles.jpg

Turd Ferguson's picture

Great stuff, GL!

MODERATOR

It's going to be an interesting end to the week, that's for sure...

¤'s picture

GL

Thanks for bringing that book up. yes

I saw the book (Tower of Basel) referenced on a news channel about 6 weeks ago and I wanted to look up the title online and I forgot the title of the book the next day and it was bugging me.

Now it's not.

And while we're at it...

tower_of_babel_painting_close.jpg

The Tower of Babel  ~ Abel Grimmer ca. 1600

Monedas's picture

Very Polite !

Thanks for not taking any .... weird, gratuitous slams at the US .... like, kids are goats .... not children .... BTW .... where is Gold Dog (worth his weight in gold and possesses more than his weight in gold) .... where is Klinky (bluegrass, blueblooded patriot) .... where is I Run Barter Town (wise business man)  .... where is Grigeo (Supreme Court material) .... we can't keep quality people like that around here .... you little cult of personality darlings of the blog .... stop running off good people .... I send out a casting call .... come home all yee quality posters .... don't let the heritage poster clique run you off .... Monedas will defend you .... especially Gold Dog .... he was a prince of a feller .... we are diminished by their absence !        Monedas      1929     Comedy Jihad I Will Wrap You In My Barbecue Apron And Protect You World Tour    devil

Down Range's picture

How about

the new $100 bills come out in October?

The old ones will only have a 2 for 1 value for 30 days. After that they are worthless.

Would piss off a LOT of BAD people and put a BIG dent in the deficit!

PS Anyone been thrown off Zero for dropping a F bomb, disparaging the president or leaving quotes for the NSA?

Dawg

Turd Ferguson's picture

This is interesting...

MODERATOR

The only flaw is that Chris writes it from the perspective that QE is actually about "economic growth". OK, maybe as a secondary or tertiary effect but not as a primary goal. As we all know, THE PRIMARY GOAL OF QE is to support the bond market, keeping rates low which allows The Great Ponzi to continue a while longer.

http://www.peakprosperity.com/blog/82623/why-we-all-lose-if-fed-wins

redwood's picture

smack down

I sense a smack down this evening.  Anybody else think so?

Guess we'll know by morning.

litterbox's picture

could those meetings be on this subject

DayStar's picture

Harvey's Up!

  • Harvey:  Basically dealer inventory was unchanged.  The GLD reported a big gain in inventory tonight of 1.8 tonnes with a reading of 914.12 tonnes of gold. No doubt all of the physical gold is gone out of London which will explain the negative GOFO rates. We had no change in silver inventory at the SLV. The reading of the SLV inventory tonight is 338.409 million oz. Today, we have recorded the 32nd consecutive trading day for negative GOFO. 
  • Mark O’Byrne: Liquidated ETF gold holdings are being shipped from the U.K to Switzerland for refining into smaller one kilogramme gold bars. U.K. gold exports to Switzerland exploded to a whopping 240 tonnes in May this year alone and a very large 797 tonnes in the first six months of 2013.
  • GoldCore: Gold ETF sales were 681.4 tonnes for all of this year so far through August 19, data compiled by Bloomberg show, and these sales have been greatly surpassed by physical coin and bar demand in China and India alone.
  • Dylan Grice: Negative real returns to cash, the inflation in various equity and credit markets, and investors’ “reaching for yield” suggest money’s transition from usable to unusable is already underway, 
  • Bill Holter ponders as to why the special meeting at the White House with every major banker, the SEC, the CFTC etc present.  We now have 32 consecutive trading sessions of negative GOFO rates. Is this the reason for the meeting? Or is the meeting due to interest rate swaps bursting on the 10 yr and 30 year bond for our major bank underwriters?  I deep down believe that control has been lost in the Treasury market, and this has set off the nuclear derivatives time bomb that we all knew existed but never wanted face.
  • John Embry: I firmly believe the reason the President has called this meeting today is because if interest rates in the U.S. continue to rise, it could really unleash something disastrous. When you have a vastly over-levered economy, higher interest rates suck money out of the system, and you have to remember that the system is already struggling. So we may well be looking at something catastrophic unfolding right now.
  • Sherilee Lakmidas and Ed Stoddard: Anglo American Platinum (Amplats) said it planned almost 7,000 job cuts at its South African operations including thousands of compulsory lay-offs.
  • Debbie Carson: Germany says Bitcoin is legal tender and we are going to tax it. All this and more on...

The Harvey Report!

http://www.tfmetalsreport.com/comment/342626#comment-342626

DayStar

Bohemian's picture

@Down Range

"The old ones will only have a 2 for 1 value for 30 days. After that they are worthless."

There would be some serious problems with foreign CBs, holding mostly our $100 bills in their reserves. I don't think we can do that, just like that. I was thinking about another possibility:

They can replace those old $100 bills in foreign CBs reserves with the new ones, 1:1. All the other old $100 bills in circulation, worldwide, they could replace with the new $100 bills in that ratio 2:1, or a different one?

s1lverbullet's picture

QE

Hey guys, since the FED is printing 85 billion per month and then it was forced to buy up around 60 billion in treasuries from foreign sellers this month, wasn't the real number of dollars printed closer to 145 billion?

This shit is going to get crazy one day if the foreign selling picks up. 

DeaconBenjamin's picture

Adam LeBor, author of “Tower of Basel - The Shadowy History of

Jim welcomes journalist Adam LeBor, author of “Tower of Basel”, a very unauthorized history of the Bank for International Settlements (BIS) in Basel, Switzerland. For many decades it has stood at the center of a global network of money, power and covert global influence. LeBor and others call it the most important bank the world. The BIS predates both the IMF and the World Bank, yet very few have heard of it or knows what it does. The BIS helped finance the Nazi war machine before, and during, WWII. It also hosted much of the planning and technical preparation for the Euro. LeBor believes without the BIS, the Euro would likely not exist. The bank is also immensely profitable, making over a billion dollars tax-free in 2012, from a very small number of important customers. The BIS continues to host the world’s most powerful central bankers every year in Basel.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2013/08/06/adam-lebor/tower-of-basel

Kerbouchard's picture

Kunstler ;-)

Nowhere to Run, Nowhere to Hide

     The Federal Reserve answers only to God, but Ben Bernanke’s must not have known that his boss was such a prankster. All of a sudden here is the interest rate of 10-year Treasury paper rising like an angry carbuncle on Ben’s pale tuchus just when he thought he could sit back and watch the mud wrestling contest between Larry Summers and Janet Yellen.

     Poor Ben, sedulous student of the Great Depression, who didn’t notice that the country had changed from a nation of farmers and factory workers to a nation of pole dancers and waiters, now awaits his sublime moment of Hooverization. Like poor President Hoover, he gets to hang around the pilot house half a year after he runs the garbage barge of US finance aground on the shoals of wishful thinking and accounting fraud.

More: http://kunstler.com/clusterfuck-nation/nowhere-to-run-nowhere-to-hide/

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