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Taper Talk is Back - It's Not Going Away This Time

Bruce Krasting's picture




 

 

The capital market for new issues and refinancing of corporate debt has been on a tear the past few months - I think that ended yesterday. That's because the dreaded Taper Talk has resurfaced. The Fed minutes yesterday rekindled Fear of Taper.

The Taper On/Taper Off story has been with us for six months now. It started in May with the release of the Fed minutes and the first "whisper' of the Taper. The talk of the Taper reached a zenith in late September as the debt markets were convinced that Bernanke would start the Taper in October. It was a big surprise to players when Good Ole Ben chose to delay the October start and push it to sometime in the future; and now it's back.

 

novembertaper

 

An interesting consequence of Taper Talk is how it affects the Corporate new issue bond calendar. The following chart shows how talk of taper killed the ReFi market in June/July/October, and it also shows how the window for new issues opened right after Big Ben delayed the taper for a few months. Up until yesterday the corporate finance types and bond dealers on Wall Street were having a daily party. As of today, they will be back to struggling to push deals out the door.

 

reuters

 

My read of this is that the debt market does not work well unless there is the perception of QE -4 ever. The capital markets freeze up whenever the threat of a disruption of the $85B of grease the Fed provides every month arises. When the capital markets are working well, the deal flow is there, and this is good for the economy. When there is Taper Talk the refinancing gears get gummed up, and it acts like a drag on the economy.

There is no doubt in my mind that Yellen is going to push off the Taper for as long as she can. But even the Great Dove can't push the Taper off for too long. I think that Yellen will be forced to initiate a Taper by March. That suggests that there is a four month window before the actual event, but I don't think the Taper Talk is going to subside as it did in October/November. The Talk of the Taper will be with us (and the closing of the refinancing window) for months. As a result we are going to see a pause in the up move in equities and a closing of the bond window. This will translate into an economic drag. Whatever your forecast of 4th Q and 1st Q growth were on Tuesday, you should mark them down a bit today.

QE is the lubricant of the system. But when it is ended (or threatened to end) it causes pain. We've had five years of grease, now we are going to have to pay a price. My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months. The Taper sign is now on, it will remain on until the talk is turned into action. When the Taper Talk sign is on, beware. The sign is now brightly lit.

 

tapersign

 

 

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Thu, 11/21/2013 - 14:58 | 4178346 Ying-Yang
Ying-Yang's picture

Good answer.....

Thu, 11/21/2013 - 14:50 | 4178297 g speed
g speed's picture

the Fed can destroy reserves by letting debt be paid off--the zeros just disapear-- It can hold long term bills it bought at low rates till they retire. It can hold MDS till they are paid or write off debt and destroy zeros --but that only works with zeros they control. The Fed has much to lose if the dollar becomes unsound. To many zeros in dollars that are uncontrolled threatens the Fed--the Fed will taper and end QE--its a matter of survival.

Thu, 11/21/2013 - 12:46 | 4177619 Hedgetard55
Hedgetard55's picture

The money DID enter the economy, when the Fed.gov spent it, the debt waas bought by the PDs frontrunning the FED. Look at the big picture, the end result is no different from the FED monetizing Treasuries directly, EXCEPT they are paying a vig to the PDs.

Thu, 11/21/2013 - 13:23 | 4177850 awgee
awgee's picture

And even if you agree with John Williams shadowstats, and I do, the Fed and the federal government has been successful at hiding the truth and continuing QE.  What is there to stop them?

Thu, 11/21/2013 - 13:56 | 4178050 LawsofPhysics
LawsofPhysics's picture

"What is there to stop them?"  -  Energy that is available for consumption.  Without calories to burn you can't do shit.

Thu, 11/21/2013 - 13:51 | 4178021 moneybots
moneybots's picture

"the Fed and the federal government has been successful at hiding the truth and continuing QE.  What is there to stop them?"

 

mathematatics.  1+1 ALWAYS = 2.

Thu, 11/21/2013 - 14:03 | 4178074 No Euros please...
No Euros please we're British's picture

Well, 1+1 CAN = 10.

Thu, 11/21/2013 - 14:14 | 4178131 Variance Doc
Variance Doc's picture

Good luck with that.

You can avoid reality, but you cannot avoid the consequences of avioding reality.

Thu, 11/21/2013 - 13:15 | 4177797 awgee
awgee's picture

A year or two ago, I would have agreed with you and projected same.  Some did enter the economy through treasury bond selling.  Then why is there not higher inflation?  From what I can tell, the Fed has managed to transfer real wealth to the banks and to the government, while taking away real wealth from the citizenry.  Are there any consequences?  So far, inflation has not been a consequence, other that asset inflation.  If that is the only consequnce, why in the world would the Fed discontinue QE? 

Thu, 11/21/2013 - 14:24 | 4178174 Ned Zeppelin
Ned Zeppelin's picture

You are missing the fact that repressed interest rates have transferred huge sums -trillions - from Mom and Pop to savers to adroit, cunning, algorithm powered Wall Street scum: QE "inflates" the wallets of the .01%. It serves no other purpose. 

Thu, 11/21/2013 - 14:10 | 4178112 Variance Doc
Variance Doc's picture

It's a PROCESS, not an EVENT you moron.  Shit in Nature does not necessarily conform to your time scale.

"So far, inflation has not been a consequence..."  You are either willfully blind or incredible stupid.  There is inflation everywhere, both outright and/or stealth (e.g. dog food that was 33 lbs for $64 last year is now 28lbs for $64).  Now, an idiot like you see that the price has not changed, thus no inflation.  Wrong!  The purchasing power has decreased, which is the essence of inflation.

Thu, 11/21/2013 - 13:49 | 4178014 moneybots
moneybots's picture

"From what I can tell, the Fed has managed to transfer real wealth to the banks and to the government, while taking away real wealth from the citizenry.  Are there any consequences?"

Of coarse.  The real wealth of the citizenry is declining, as a consequence.

Thu, 11/21/2013 - 13:14 | 4177784 Getting Old Sucks
Getting Old Sucks's picture

You are correct but I think the poster was referring to MBS purchases.

Thu, 11/21/2013 - 13:19 | 4177827 awgee
awgee's picture

I was referring specifically to MBS purchases, because the question is more obvious, but a modified version of the question pertains to treasury purchases.  Why can't the Fed continue with it's QE policy?  If the answer is that it will result in hyperinflation, it can be pointed out that $2 trillion later has not produced hyper-inflation.  And even if you are convinced that shadowstats is more accurate, it still has not been much of a consequence.

Thu, 11/21/2013 - 11:50 | 4177374 the grateful un...
the grateful unemployed's picture

watch gold go lower, theres your clue. the price of gold is tied to economic growth, [?], economic growth is driven by government spending and governent is shrinking. whenever the war machine ends, the economy tanks, and we are due to end Afghantistan, with nothing new for the war lords on the horizon, like the end of Vietnam, dust off the mid 70s playbook. (interest rates could rocket when the pressure on that market is relieved) and gold dipped only to hit some amazing highs.) and there is so much overcapacity in everything the global economy could live off overruns in production for a decade. Obama looks like Jimmy Carter, Rand Paul looks like Reagan. buy gold bitchez!!!  lock in those 10% CDs... flip houses flip house flip houses.

Thu, 11/21/2013 - 14:33 | 4178219 LawsofPhysics
LawsofPhysics's picture

What was the debt in the 70's again?  What was the trade balance in the 70's?

This is not the 70's, high interest rates will force a hard default.

Good luck with that.

Thu, 11/21/2013 - 15:00 | 4178359 the grateful un...
the grateful unemployed's picture

the vietnam war took young men out of the real economy and put them into government service, when they were no longer needed the private economy was in no shape to hire them. (it always happens that way, post W2 had the same problems) in 2003 the DOW was under 7000 when Bush started Iraq. (the Cold War ended in 87 leaving a gap in military spending, filled partly by Iraq1) Now Iraq2 and Afghanistan are winding down, government spending contracts, and no private sector jobs. we are even more energy dependent on foreign sources than we were then (arab embargo) and no confidence in the currency. we're already flipping houses, as the bubble in housing prices has returned. its all familiar including the players.

Thu, 11/21/2013 - 13:39 | 4177950 Vooter
Vooter's picture

"economic growth is driven by government spending"

Oh, really? I hate to break it to you, but any economy whose growth is driven by government spending is a BROKEN economy...

Thu, 11/21/2013 - 11:40 | 4177316 Hohum
Hohum's picture

Bruce,

You didn't say WHY the Fed has to taper by March 2014.  What will force Yellen's hand?

Thu, 11/21/2013 - 12:05 | 4177441 the grateful un...
the grateful unemployed's picture

governemnt spending is the justification for QE, slow that and you have to slow QE [the government took over the economy in 2008, and when they can grow the economy they can expand QE - QE is when banks turn in bad paper for good and make more malinvestments, which they return to the fed for good paper, rinse and repeat] when the government shrinks the economy shrinks QE must shrink. it seems like a perpertual motion machine, but its not. obama has done his best to expand the need for government services, ACA, which is just a front for Medicaid and Medicare systems (they should hand out whiskey and cigarettes, if we all lived healthy lives there would be no need, but we force people with no need - the young - to buy into it anyway) and some of us aint buying the phony healthcare scam, the phony war on terror, phony gun control laws, immigration cops, and all other manifestations of the protection racket.

Thu, 11/21/2013 - 11:47 | 4177358 Vooter
Vooter's picture

Because in the end, Bruce thinks that these are actually decent, rational people who are just "doing their best" in a bad situation. Isn't that right, Bruce?

Thu, 11/21/2013 - 11:35 | 4177290 Vooter
Vooter's picture

"The reason is that there is next to no basis to believe that QE can be continued beyond a few more months."

LOLOLOLOLOLOL...you dumbass. They will fly this economy into the ground before they do anything remotely sensible or courageous like tapering. These people are disgusting, drooling animals who should be rounded up and GASSED.

Thu, 11/21/2013 - 11:34 | 4177281 DeadFred
DeadFred's picture

Good job on snapping a photo of the Danger Taper Ahead sign Bruce, there aren't a lot of those around. It's always a highpoint of the day to see your name at the top of the page. I have to wonder what changed from last week that made the taper reappear. They could have put out any version of FOMC minutes they wanted to but they put out one that they knew would spook things.

Thu, 11/21/2013 - 11:27 | 4177255 MyBrothersKeeper
MyBrothersKeeper's picture

Liklihood of taper anytime soon can be summed up in 2 words: election year

At best they may try and taper treasuries a little, only to have it have a bigger impact than they expect and a new QE program will be introduced.  Wake me up when September...I mean November 2014, ends.

Thu, 11/21/2013 - 11:27 | 4177254 skipjack
skipjack's picture

"We've had five years of grease, now we are going to have to pay a price. My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months. "

 

Denninger is always saying this too, that the Fed will be "forced" to taper.

 

Why ? What the hell is going to force the banksters to do anything ? I wish someone would explain this, because there's nothing on this Earth I can see that will cause the Fed to stop.

Thu, 11/21/2013 - 12:26 | 4177526 ChaosEquilibrium
ChaosEquilibrium's picture

Intrinsic REAL GROWTH!!!

 

The FED is "hoping"---behaviorial economics is on the other side of "HOPE"!

 

FED is coralling collateral........the 'real grease' and in a system where collateral debt CANNOT or WILL not manifest itself intrinsically and/or naturally----------IT IS FATAL!

 

The FED does not care about inflation, unemployment, middle class........The FED is fighting for the survival of The FED and 'The system'.........but the FED CANNOT BE the entity BLAMED for the COLLAPSE.....it means the  ABSOLUTE END to Western 'free-market Capitalism and U.S Hegemony'!!!!

 

GAME OVER!!!!  DO YOU WANT TO PLAY AGAIN?

Thu, 11/21/2013 - 12:23 | 4177513 asteroids
asteroids's picture

QE and zero rates are death for pension funds. Somewhere, somebody big will implode. It could cause a chain reaction. As an example look at what's happened to Detroit.

Thu, 11/21/2013 - 15:08 | 4178414 Thisson
Thisson's picture

There can be no Taper.  Because the Fed wants to keep rates down, it must continually buy bonds and cannot stop voluntarily.  The only thing that can stop it is if the business community revolts.

Thu, 11/21/2013 - 13:42 | 4177975 Almost Solvent
Almost Solvent's picture

QE and zero rates are death for pension funds.

Insurance/Surety companies too!!

Thu, 11/21/2013 - 11:26 | 4177250 fonzannoon
fonzannoon's picture

The fed will never, EVER, stop purchases of treasuries. Maybe other stuff like mortgage debt could be cut. But the plan is to own the entire treasury market. That is all

Thu, 11/21/2013 - 15:09 | 4178418 Thisson
Thisson's picture

I agree with you, except I object to the word "plan."  The Fed has painted itself into a corner from which there is no escape.

Thu, 11/21/2013 - 11:23 | 4177232 CheapBastard
CheapBastard's picture

Many sectors are in serious deflation with prices plunging (retail, for one). Tapering will surely aggravate that.

Thu, 11/21/2013 - 11:00 | 4177142 new game
new game's picture

wet finger, stick in air, see velocity of wind and what direction-good article, bruce-thanks..

Thu, 11/21/2013 - 10:55 | 4177117 OneTinSoldier66
OneTinSoldier66's picture

It takes Two to (believe in)Taper

 

I do not believe that The Fed will EVER Taper. I could be wrong, but I do not believe it for one single moment until such time that they actually do it, instead of just jawboning about it.

 

To Taper would mean the start of facing reality, and it seems to me that most do not want to leave the illusion of The Matrix.

Thu, 11/21/2013 - 14:48 | 4178289 buyingsterling
buyingsterling's picture

If they truly intend to taper, they need to taper the taper: cut QE by 2%/month until it zeroes out in about four years. And announce it about four months ahead of the start of tapering. That would give the markets some firmer footing (and send the 10 year to 5% - let's get it over with, already).

Thu, 11/21/2013 - 10:52 | 4177095 Captain Willard
Captain Willard's picture

Bruce - great analysis of the trends in the bond market.

But you state that Yellen will be "forced" to taper. My question is: Forced by what? With respect, you have begged the question.

 

 

Thu, 11/21/2013 - 11:29 | 4177261 awgee
awgee's picture

And there are these two statements:

"My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months."

Huh?  Why not?  How about the Fed has been easing for a few years and the reasons it started have not dissappeared?  I could just as easily say, there is next to no basis to believe that QE can NOT be continued beyond a few more months.  Did the writer give any reasons to think that the Fed could not continue?  I'll read again, but I did not see any.

Thu, 11/21/2013 - 11:34 | 4177279 BigJim
BigJim's picture

Once the Fed owns a sufficiently large portion of the debt, they can taper, because a sufficient percentage of the higher interest payments will just go straight back to the Treasury in a beautiful circle-jerk... minus the mandatory 6% cut for the Fed's hard working owners, of course.

Thu, 11/21/2013 - 11:36 | 4177298 Vooter
Vooter's picture

So, in other words, it'll work like...magic. LOL...NEXT!

Thu, 11/21/2013 - 14:12 | 4178124 BigJim
BigJim's picture

 So, in other words, it'll work like...magic. LOL...NEXT!

Much of the inflationary effect of the Fed's low interest rates and buying assets has already occurred - that money is in the system now, though much of it is economically dormant in the form of Fed reserves. If velocity picks up, so will inflation. They can raise rates to dampen this if they've sucked enough government debt out of the system (via QE) that higher debt repayments don't bankrupt the US in the short-medium term.

Our beloved monetary leaders have two main concerns - the continuation of the petrodollar (ie, OPEC keeps demanding USD for payment) and thus the remainder of the world using it as the reserve currency; and the US government continuing to run interference so they can keep on keepin' on.

They'll probably lose control of the gold market at some stage, but that needn't bring the ponzi down... for a while.

Thu, 11/21/2013 - 20:13 | 4179401 Flakmeister
Flakmeister's picture

You seem to have a bit of mastery of the jargon, and are able to parrot some talking points but you really don't have a fucking clue about a lot of stuff...

Now you offer this chestnut:

the continuation of the petrodollar (ie, OPEC keeps demanding USD for payment)

No, dipshit, its OPEC keeps accepting USD....

You never did get back to me about how you inflate the value gold vis a vis commodities, short of telling everybody what the new price is at gunpoint...

Thu, 11/21/2013 - 20:36 | 4179467 BigJim
BigJim's picture

Hey, look, it's liar Flak! Watch her squirm and avoid the question with laughable evasions here:

    http://www.zerohedge.com/news/2013-11-16/nobel-winner-dares-go-there-no-...

And, no, *sigh*, OPEC doesn't 'accept' USD, it's the only currency most of them will... 'accept' - ergo, they demand payment in USD. Once they only just 'accept' it - ie, they will take other currencies - that's it for the petrodollar. Or did you miss the point of what I was saying... as usual?

You're not too good at this logic stuff, are you? Do you work for .gov (or immediately downstream from them) by any chance, girlfriend?

Thu, 11/21/2013 - 23:12 | 4179915 Flakmeister
Flakmeister's picture

Whats your take on Kowtan and Way?

Thu, 11/21/2013 - 23:40 | 4180006 BigJim
BigJim's picture

I don't have a take on it. Should I?

Thu, 11/21/2013 - 23:52 | 4180048 Flakmeister
Flakmeister's picture

.

Fri, 11/22/2013 - 00:05 | 4180032 Flakmeister
Flakmeister's picture

I suggest you figure out what it is first....

BTW, still waiting to explain how you convince people the gold oil ratio should 1 oz = ~900-1000 barrels....

Please enlighten us with you deep understanding of the issue....

Fri, 11/22/2013 - 00:30 | 4180125 BigJim
BigJim's picture

As to your previous usual attempts at misdirection, I'm guessing you've messed up - again, as usual - and are actually referring to Cowtan and Way.

To answer you question... it's a game-changer! I'm going to stop consuming any energy not from renewable resources and move away from the coast so I don't drown in the great tidal wave that will be arriving any day now from the melting arctic! I'm going to boycott any goods made in countries that are not rubbing sticks together to generate their electricity! How about you? Are you going to save the world with me too? Let's hold hands and sing the 'CO2 is pollution' song to 1st graders... they just might be ignorant enough to believe it.

Fri, 11/22/2013 - 00:35 | 4180176 Flakmeister
Flakmeister's picture

So you are capable of finding something on the internet with a search facility given incomplete information...

I was getting worried you couldn't..

You still have not figured out how to debate without blatant strawmen though...

Fri, 11/22/2013 - 08:54 | 4180714 BigJim
BigJim's picture

We're discussing monetary systems, you bring up AGW, and somehow I'm the strawmanner? How does that work?

 So you are capable of finding something on the internet with a search facility given incomplete information...

LOL, nice try, but you messed up. As anyone can make a typo, though, I'm not going to belabor your mistake... though I think it's worth highlighting as yet another example of your intellectual dishonesty.

Fri, 11/22/2013 - 09:10 | 4180732 Flakmeister
Flakmeister's picture

Whats the matter, can't you multitask?

I only wanted your opinion on the pause being laid to rest...

And you do owe me an answer explaining the magic trick with gold you propose...

PS Look up the definition of a strawman man and get back to us...

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