Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances
1. Don’t you wish
the Fed had begun its taper at the October 30 meeting? They had everything going for them on that day. The Government shutdown was over and interest rates had come down sharply with 5-year at 1.24% & 10-year at 2.48% just before their announcement. The Dow and S&P had closed at all-time highs the day before. So why didn’t they taper instead of just sounding hawkish?
This week’s economic data came in stronger than expected in both areas of our old Economy vs. Economy debate with upswings in manufacturing/ISM data and labor markets. Friday’s payroll rise of 204,000 with upward revisions in August & September would have made a tapering decision seem prescient. And the markets would have heaved a sigh of relief. Because just about everybody is fed up of this endless wait for tapering. So why didn’t the Fed taper on October 30 instead of merely sounding hawkish?
Because the Bernanke Fed has a problem, a core problem. They don’t have the guts to pull the trigger. They are also convinced that they can direct the markets with verbal messages from them and their whisperers. So they achieve just the opposite – stock markets have kept their rally while interest rates are up 23 bps at the longer end & 15 bps in the 5-year.
This has been the story since May 22, when Bernanke first began talking about a taper. They think they have to prepare the markets for an upcoming taper. They don’t seem to understand, not even after the utter debacle in the summer, that markets are likely to front run any possibility of a taper by spiking interest rates higher, especially when the economic data confirms strength in the economy.
This is why interest rates shot up on Friday with 5-year yield up 11bps and 10-yr, 30-yr yields up 14bps each. This was the second worst spike in yields in one day in 2013, the highest being payroll Friday, July 5, when 5-yr, 10-yr, 30-yr yields went up 18bps, 22bps & 20bps resp.
Friday’s spike definitely breaks the Fibonacci levels of 1.38% (5-yr) & 2.47% (10-yr) discussed by Rick Santelli last week. So now what?
- Will interest rates spike as they did in July & August with the 10-year yield touching 3%?
- And if they do, will the Fed have the courage to taper in the December meeting? Or will they again point to tightening “financial conditions” and refuse to taper on December 18?
The latter is the bet Larry McDonald of NewEdge seemed to make on Friday afternoon on CNBC Closing Bell when he said the market has a 100% track record in being wrong about its taper consensus. He pointed out that in early May, the market had priced in QE-infinity, in September 100% taper was priced in and in late October, the market had priced in no taper till mid-2014. In every case, the markets proved to be completely wrong. So he is inclined to fade the December taper possibility, he said.
2. Forward Guidance?
There was talk this week about forward guidance by the Fed about keeping rates low until the unemployment level goes to 5-handle rather than the 6.5% red line drawn earlier. This apparently is a sop to bond markets that is supposed to dull the sharp pain from a December taper, to sweeten the bitter taper pill as Roubini described it.
We are simple folk and we think simply. This baloney, in our opinion, is a rehash of “tapering is not tightening” and “the size of the Fed’s balance sheet is what matters and not the monthly purchase amounts” summer nonsense with which the Fed tried to verbally calm the markets. We know that failed miserably and so will this forward guidance nonsense, we think.
Why? The Fed has already told us that rates will be at current zero levels till 2015 at least. So forward guidance might extend that to 2017-2018, right? In contrast, the taper would happen on the date they announce it. The former is years away and the latter is right now. What will investors focus on? And who believes that 5-year yields will remain low if the economy actually gets into a higher trajectory of 3%? The markets will move the entire curve higher and drag the Fed higher with them. So forward guidance, forward schmeidance, we say.
These verbal sops merely tell us that this Fed is still frightened of what their taper would do to interest rates. This fear has essentially placed the Fed in a trap of their own making, a trap they won’t get out of by verbal sops.
Therefore, we reiterate our message to the Fed –
- Stop trying to verbally manipulate or even talk to the markets. Just use your best economic judgement to taper when & if you want. That would be the right thing to do. And the markets will do the right thing in return. And then we will all get out of this asinine “will they, won’t they” rigmarole.
We have the luxury of speaking so plainly to & about the Fed because we are not in their loop. Professional economists don’t have that luxury because so much of their output depends on hearing what the Fed is thinking. So getting cut off from the Fed-whisperer noise is a career risk.
3. Taper Talk
Let us be clear. We want the Fed to begin their taper in December. This is regardless of where interest rates are on December 17 or how strong or weak the economic data is between now & December 18.
Larry McDonald of NewEdge said on Friday, “I just think we won’t get a taper until May-June, or later in the year.” So he would be a buyer of bonds and of gold miners & GDX. Paul Richards of UBS said on Thursday that he would raise his probability of a December taper to 40% with a strong payroll report. So he would buy the Dollar and sell the Euro.
Nouriel Roubini, the man who was correct about September’s non-taper, said the following on Thursday on BTC Street Smart:
- “my forecast would be that they would start tapering in January instead of March, but I still hear right now noise that they might start as early as December … if they are going to be more aggressive with forward guidance ..so the baseline would be January but depending on data, they might argue that there has been enough of a cumulative improvement in the labor markets in September of last year to justify a beginning of taper and sweeten the bitter pill by changing their forward guidance in a much more aggressive way.. I would not exclude December but in general January is more likely“
We had made an appeal to Chairman Bernanke to begin the taper on July 30. How we wish he had done that? He probably wishes he had done so too
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4. Markets
Markets this year have been driven by two basic assumptions, in our opinion:
- Economy is getting stronger, slowly but surely and
- Fed will continue its QE until it stops & that stop is out in the future.
The force of these two assumptions has been getting stronger as we near year-end and approach that blissful state of performance-fee realization. This force has run over all technical charts and sentiment considerations. Will it continue to do so until year-end? That would be our bet.
But those who believe in trend-exhaustion might care to look Friday’s post-close tweet & chart below from Mark Newton:
- Mark Newton @MarkNewtonCMT – Weekly SPX w/channel from late 08-09 has completed 9-13-9 pattern into highs of trend channel this week – pic.twitter.com/z63meJqSWw
Note: These weekly Interesting Videoclips articles will not be published during the next three weeks due to travel. We wish all readers a Happy Thanksgiving.
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