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

87
Tue, Aug 20, 2013 - 7:04pm

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.

https://www.investmentweek.co.uk/investment-week/news/2276792/warning-of...

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.

https://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!

About the Author

Green Lantern

  87 Comments

Marblesonac
Aug 20, 2013 - 7:08pm

First

First

Now to read the post!

Kcap
Aug 20, 2013 - 7:17pm

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

treefrog
Aug 20, 2013 - 7:17pm

twoth!

tooth?

El Gordo
Aug 20, 2013 - 7:19pm

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
Aug 20, 2013 - 7:21pm

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
Aug 20, 2013 - 7:27pm

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.

Byzantium
Aug 20, 2013 - 7:32pm

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
Aug 20, 2013 - 7:34pm

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!

¤
Aug 20, 2013 - 7:36pm

"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.

Green Lantern
Aug 20, 2013 - 7:39pm

@Byzantium

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

https://blogs.reuters.com/financial-regulatory-forum/2013/06/12/basel-pa...

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

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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
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9/6 8:30 ET BLSBS

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8/26 8:30 ET Durable Goods
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8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

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