This page has been archived and commenting is disabled.
Which Door Will Yellen Chose?
Two theories to explain the year-to-date global dumpathon. The first is that it's all local issues - no single macro story explains the depth of the sell off. Some examples (and why they are individually no big deal):
+ Turkey is facing big domestic political/economic problems – it’s no surprise that some of the ‘air’ is coming out of the currency, bonds and equities that were so recently loved. All in, Turkey is now cheap – one should buy this dip.
+ South Africa is facing labor issues. This explains the drop in the Rand. This is not a ‘contagion’ story. It’s an isolated case.
+ Brazil is temporarily suffering from some weakness in other EM markets. But Brazil is a ‘special’ case – this is the land of the future.
+ Argentina’s deval is a good thing. Every time that Argentina has hit a wall over the past 30 years they have gone through this, and came out strong. Buying this dip will be a moneymaker.
+ Japan is going to ‘Whip Deflation’ in 2014. The coming 40% increase in the national sales tax is not going to be a speed bump at all. The (still) cheap currency that has been engineered is about to trigger an export boom. Japan has the ‘Platinum Coin’ option, and it will use it to eliminate the debt problem.
+ Europe is really in ‘recovery mode’ this time. All the evidence you need to confirm this is that Spanish ten-year bonds were sold the other day (in size - E13b) at a dirt cheap 3.75%. The offering was 3Xs oversubscribed.
+ The ‘worst case’ in Puerto Rico will never be seen. Treasury Secretary Jack Lew will ape Mario Draghi and pledge that PR will not default. There’s big money to be made in PR bonds.
+ China’s latest ‘blip’ in funding costs is going to go away as of Feb. 1 (New Year). The fact that there will be a default of a Wealth Management product in a few days is well known - it's already in Friday's market print. China Inc. will not allow defaults to spread. And what’s all the complaining about? GDP of 7.5% is in the cards.
+ The US is going to have the best year of GDP growth in years. The higher corporate top line/earnings that will follow this economic spurt will keep multiples expanding. Janet Yellen has confirmed that she’s going to keep the short end at zero for years to come, so the Fed’s put is alive and well. Buy this dip!
+ The US picture is bright because of all those new holes that are being pounded into the ground from Colorado to Pennsylvania. For the first time in decades crude is a short. $75 WTI is in our future. As this evolves, there will be no meaningful consequence to Saudi Arabia, Iran, Iraq, Indonesia and it will not hurt Mexico a bit.
The “spin” on the foregoing issues have the same theme. They are isolated issues that are (for the most part) not really interconnected. Yes, those issues are causing some markets to adjust, but there is no case to be made for a single source of the global puke-out. And anyway, there is a positive side to all of this.
But there is another take on this story. All of the issues that are emerging have one common thread – It’s the Fed’s Taper that is behind all the uproar.
Is this possible? Can a relatively small adjustment in the supply and demand equation for the US bond market be responsible for the rout? I think the answer is “Yes”.
The real question is what does Janet Yellen think is behind the global sell off. I’m as certain that I can be that Ms. Yellen is itching for an excuse to extend (expand) QE. QE is, after all, her ‘baby’.
Next weeks’ Fed meeting is supposed to bring us another notch down in the QE monthly purchases – at least that is what the WSJ’s Jon Hilsenrath told us a few days ago (link). Given what has happened since then, the possibility of a Fed ‘surprise’ is now a distinct possibility. Yellen could fall back on the ‘data dependent’ theme, and opt for a pause in the Taper. This translates to a continuation of QE at the rate of $75B a month for a bit longer.
What might be the consequences if Yellen does a U-turn on the Taper? The hoped for result would be a rapid turnaround for the EM markets, and with that, the US market would quickly revert to green. Happy days would be here again. There are enough people who believe in the magic of QE that a suspension of the Taper might be sufficient to turn the global capital markets back to stability (Yellen is on top of the list). But that outcome is by no means assured – a delay in the Taper could backfire. The difference between QE of $75B a month versus $65B is meaningless. The markets are not that dumb - it will just take a few days for markets to reach this conclusion.
We have only two scenarios:
1) Yellen opts for a continuation of the Taper and we have an immediate blowout in the EM economies/markets or,
2) She delays the Taper and holds QE at $75B for "a few more months". The next leg down in markets would start in less than a week as reality/disappointment set in.
Both of these outcomes have a bad ending. Either way, the concept of the "Fed Put" is about to be tested. Seat belts should definitely be worn (tightly) next week.
»
- advertisements -
There is leverage and there is de-leverage. De-leverage accelerates at the margins. The further from the center, and the seemingly less important, the faster the movement.
Emerging Markets are seemingly unimportant, and they are leveraged. Leveraged demand from an artificially reflated market economy -> USA.
There's too much capacity in the system. Since the world is now simply financialized by fiat, there's simply too much leverage.
I think that they let more air out of the balloon. It will be disturbing if Yellen caves at the first ripples. And dangerous, since as Mr. Krasting points out, the markets will sniff out the farce within a week or so. And then what?
The FED will print. They could use any method of transfer since they are above the law and audits are not possible. There is no reason for them to do otherwise.
BTFD
What's happening in Japan with Ultra QE? Doesn't seem to be going very well.
Wrong question.
It's all irrelevant anyway, the micro-taper has no bigger real effects.
This other article shined light on the much more important viewpoints:
http://www.zerohedge.com/news/2014-01-24/american-bandstand-and-glimpse-...
"There are enough people who believe in the magic of QE that a suspension of the Taper might be sufficient to turn the global capital markets back to stability".
The global capital markets have not been stable since well before 2008. The fraud that existed before 2008, still exists today, hidden behind a facade that allows banks to lie about the value of assets. Stability is pretense, not truth.
A stable market does not need financial frauds such as ZIRP/QE.
Agreed. 2008 was just another bubble bursting in an economy that now does nothing but blow and burst bubbles. I've said before, I don't think we have had real economic growth since the late 90s. Low rates and too much accommodation led to a massive tech stock bubble, and when it burst, they just kept doing more of the same. All growth we have ha has just been more debt, which isn't real and can't be sustained.
wall street doesn't like the idea of the fed playing whackamole with the stock meltup. they want the money delivered on time every month, same way same place. greenspan spend most of his tenure making this market a stairway to heaven, smoothing out the bumps in the business cycle and allowing companies to project farther into the future, and thereby leverage their earnings. things got a bit hinky in 08 and so the fed threw a lot of gasoline on the fire, now they have a gas can in one hand and a fire extinguisher in the other? they're putting downers in the punch bowl. Yellen would be smart to find something and stick to it, and not play that game, and short of that she will probably use traditional fed tools, pomo and repo in the abscence of QE. so yeah no QE this month, bring on the POMO (the public thinks gee she is really involved, and wall street says, well as long as the money gets here we dont care. best answer to a irrelevant question)
here on planet earth we know that 2014 ends in an even # i hope this is not to complicated but that means this an election year that means qe goes up before november jesus you people are stupid
Lump all the factors showing that the economies of the world are crap due to banker hegemony and the money printing of their toady Central Bankers and parasitic crony capitalists and it is clear why the FED withdrawing $10 Billion/month of QE has the tapeworms and ticks of the Ponzi scheme selling.
The game will continue until real people eliminate the malfeasant blood suckers in their respective countries.
No rule-of-law, no fiduciary duty, and politicians bought by bankers, middle-men, and money-changers.
Is it any wonder the labor force participation rate is at historic lows?
Is it any wonder the economies of the World are sucking air?
This is not rocket science.
Hang the fuckers!
"But there is another take on this story. All of the issues that are emerging have one common thread – It’s the Fed’s Taper that is behind all the uproar."
The up-roar was ZIRP/QE. Global Financial Fraud pushed the market up where it did not belong in the first place. The taper is not at any fault for the Friday dump. Can't have a dump, without the pump.
Taper did not create the bubble.
ZIRP and the carry trade inflated the stock marets and EM currency bonds that pay high rates, for 5 years.
Taper destroys the source of low rate borrowing, and so destroys the carry trade, and so destroys emerging markets.
The last few weeks prove:
1. Taper is ON.
2. EMs will be destroyed.
3. FED is in a box so must taper (lost control of 10-yr rate), and this now causing 1 and 2 to occur.
and there is large leverage involved (10:1, 50;1?) because of the very thin margins. FED ZIRP inflated the bubble, Taper will pop the bubble.
Doesn't the Federal Government also have a huge amount of debt, that rolls over within the next five years and has to be refinanced at a higher interest rate?
Methinks, they will increasingly have a harder and harder time at keeping the rate down and this will be the final nail in the coffin in our faux economy. Good luck, with that debt ceiling hike, in these highly uncertain times!
What might be the consequences if Yellen does a U-turn on the Taper? - 1. The realization that the Cantral Banks will NEVER be able to stop the "stimulus" and will expand money until that point in time when either the treasuries markets completely break down, or the currencies lose so much value that the currency reform will be needed. 2. The realization that the Fed has no clue what it's doing, what the economy is doing, and the "In Ben & Janet We Trust" investing strategy may be short term money making, but longer term wealth destroying way to invest.
P.S. "The difference between QE of $75B a month versus $65B is meaningless" - Yes and No. It's only meaningless if at the following meeting the Fed "tapers" by $20B, covering for both months, and therefore printing just $10B more than they would otherwise. However, considering that the gradual $10B of additional taper every subsequent month was "the plan", delaying $10B taper will result in each subsequent month's QE being $10B greater than it would have been according to the original "plan." That means $60-70B more QE than Fed expected in December. If $10B taper is delayed be 2 months, the additional cumulative QE grows to $120-140B. Delay by 3 months means QE growth by additional $180-210B. Soon enough we'll start talking some real money...
"What might be the consequences if Yellen does a U-turn on the Taper? - 1. The realization that the Cantral Banks will NEVER be able to stop the "stimulus" "
That is a mantra. The mathematical fact is that what cannot continue, won't.
Your claim that "Central Banks will NEVER be able to stop the stimulus" proceeds from a false assumption - that the Fed cares about the stock market and employment levels. They do not. They only care about maintaining their control over the production of money in the world economy. Infinite QE will eventually (and probably sooner rather than later) cause the current, status-quo economic system to collapse. The risk of a Hugo Chavez-like figure to rise and execute the Central Bankers is one that the Central Bankers won't ignore. They will continue the taper because it offers the least risk to their position of power.
so they taper to a level where the market does not fill the gap. then what? rates go up and that can't happen unless the new twist is from stocks to bond(fear trade). that is what is being tested. at the expense of the last one in stock market, and i have no good feelings for that greater fool.
"Two theories to explain the year-to-date global dumpathon. The first is that it's all local issues - no single macro story explains the depth of the sell off."
Global Financial Fraud is the single macro story. The depth of the Global Financial Fraud has just not been explained to the public, yet. The bag holders are the last to know what is going on. The insiders have their dumpathon first, selling to the bag holders, while the market is going up.
The market has gone up parabolically, due to the macro story of Global Financial Fraud. What goes up parabolically...
Then the truth comes out.
Answer: The back door
i have quietly come in that back door in my youth. everyone was happy to see me.
(let you figure out what i brought)
Celente says more tapering at January FOMC and thereafter followed by an orgy of money printing mid year ..see KWN interview
IMHO anyone who believes that QE was only $ 85 Bn per month in 2013 and $75 Bn now is naive in the extreme. It must be multiples more in reality, to prevent the interest rate derivative machinery from imploding.
Celente's predictive track record is terrible.
I agree, in reality its trillions, ... the FED is always much more in secret.
Toss in also that OFF-BUDGET NSA/CIA are creating their own FIAT and buying hearts and minds all over the world.
*
Me thinks that the CHINSE banking crisis will too get paid off with FED secret money, for the simple matter that Chinese will not pay, goldman-sachs can't afford to lose customers in china, and the USA knows that so long as the FED can't print infinite FIAT in secret, and the entire world feeds at the 'pig trough' WHO SPEAKS UP? NOBODY
Same-Same as here in USA, so long as 70% of the people are on the US-TREAS DOLE, courtesy of FED-FIAT, who in HITLERS good name will SPEAK-UP? NOBODY
There was only one dissenter from the Taper policy (Rosengren) and even he's gone along with.
Turn on Taper (meaning restart QE) and I think you'll get a HUGE sell off in equities.
The committee has a consensus...it wasn't like Janet wasn't there when the Fed started their own "mid course correction."
There is no "one thing" that is causing all this mayhem in currency markets...there are a multitude of events all reported here and only here...in detail I might add...which have "conspired" to make the current reality so.
No one more than me would like to see 1920's style economic growth in the USA. For some it's been that "and then some."
I hear France is nice this time of year...
Excellent synopsis, as usual Bruce. It sounds like the can they have been kicking is just about used up, torn, worn and in shreds. We all know here that this "American recovery" is a mirage. Are truth and facts finally making a difference, or is this just another short correction that will propel us ever higher? We will know in the next few days as Bruce advises. I could not be more comfortable with my miners, physical gold and silver and 0 generic stocks. I sleep very well and know the ending. I just do not know which day it all comes together.
The can rolled off into the bushes and they can't find it.
QE tapering will continue at $10B a meeting.
The Fed will tolerate ~10% stock market sell-off and see it as a "needed correction." Despite their public statements, inside the Fed they are concerned about the stock market bubble and its sustainability.
Not only that, but the immediate result of a declining stock market in the face of QE is declining US Treasury yields. Which is more important: The S&P 500, or the interest paid on the national debt? Of course, this only has a limited timeframe before the effects wear off, but manipulation is the name of the game. If I were a central banker who didn't understand that the physical economy will eventually trump all and I wanted to keep the music playing, that's how I'd roll, while crossing my fingers that I didn't take out any TBTF along the way.
I agree, as one can easily make an argument that QE tapering is a stimulus and good for US economy.
Tapering => EM Sell-off => Funds Move Back to the US => Higher Demand for US Treasuries => Lower US Yields => US economic/housing stimulus and smaller US government payments on its gigantic debt.
Funds Move Back to the US =>
Higher Demand for US Treasuries
AND/OR
Higher Demand for US Stocks.
==> Either way, DOLLAR goes UP in relation to other currencies, yes?
tricky part for FED is maintaining an overall balance of capital between UST/Stocks that keeps them both in demand in relation to the Golden Wildcard, but much easier to tinker with when capital's on the home turf.
and that demand will be fulfilled with (drum roll) qe. back over at the hill, nothing changes, 600 billion mic, ect, ect, beam fwd to baby bommers moving to ss. hmmm, taper, think not.
got to keep the train on the tracks. 20 trillion by 2016. interest rates will be sub 2 on tens.
has to happen or bust, just math or the hill needs some serious sequesters, which again won't happen.
where is the breaking point?
only fools make those predictions...
Again, I disagree. The primary objective of the Fed is to maintain their status quo and that of their fellow international banks as being in complete control of the world economy. They don't give a shit about the common man, the stock market, or even national governments except as they are part of maintaining their status quo. What is the greatest risk to their continued control of the world economy - a contained delationary depression or a hyperinflation collapse? The answer is a hyperinflation collapse, which is why they will continue to taper and let interest rates rise.
interest rates will be sub 2 on tens.
yup, Japan is the template, and since they are the template, they will have to face the consequences before anyone else will.
extend & pretend : the game remains the same.
Let me follow up on that, assuming that the wheels don't come of before then:
=> TBTF meltdown => Bail-In => "After careful consideration, the private markets are not safe for retirement accounts, therefore, to help current and future retirees, we at the Consumer Financial Protection Bureau are mandating that a minimum percentage of all retirement accounts be in "safe" US Treasury Securities." => Print MOAR => DOLLAR GO BOOM!
I don't think that it'll make it that far before the BOOM! stage happens, but I see that as the maximum possible amount of manipulation that can occur before we're all screwed.
I disagree. Despite the happy talk from Obama et al and the financial media talking heads, I think the underlying structure of the world economy is far more fragile now than it was in 2007. When the next TBTF meltdown occurs, I think the wheels come off completely across a wide spectrum of economic activity (e.g. banks, employment, pensions, state budgets, retail, ...) Forcing people to invest what's left of their IRA's in government bonds will be the least of the Fed's/govt's worries. Printing more doesn't really help in that situation but instead will accelerate the flat spin. Look to Venezuela to see how futile government intervention and printing is under those conditions.
Bail-In : don't worry, that feature will be fully beta-tested elsewhere before it gets introduced in the US. probably like version 4.0 or something.
it's good to be King...until it isn't of course, but then by that time, everyone else is fucked too, so what difference does it make?
All this amounts to is Mr Yellen's first "crisis" test
The test is a manufactured one by the large trading banks
All the EM shit is related collateral noise
They did the same thing to Bernanke after he was annoited -- albeit, to a far larger degree, and [1] it got out of control, and [2] was used a smokescreen by certain parties to consolidate power and take out Bear, WaMu, Lehman, et al
Trial by fire -- watch the fat pig rise to the occassion and save the day
This time will be no different, just the level at which Mr Yellen whips out her fetid wart covered dick to put out the fire
Same song different dance
you are right. If they pull the shake and take now, the media can get away with not blaming Bernanke or Yellen. They will blame the transition
Meet the new boss...
How many sheeple have a grasp of large numbers and plain arithmetic to compare QE and just some of the central bank scams to actual earnings of the major companies of the whirld?
The CBs dwarf the real market and have done so for a very long time.
My savings of a lifetime and my business are literally nothing in comparison to the emissions of the FED. The innumerate slobs forget that a billion is a thousand thousand thousand. 80 billion per month is 80 thousand millions of dollars. Real profits in the private sector are an aside compared to those big numbers.
In fact, if you really want to piss yourself
You'll also take notice that they did the same thing to Greenspan
Greenie entered the Fed August 1987
And "they" collapsed the market it in Oct 1987 so that the Fed could ride to the rescue
Wash, rinse, repeat
"Two months after his confirmation Greenspan said immediately following the 1987 stock market crash that the Fed "affirmed today its readiness to serve as a source of liquidity to support the economic and financial system"
http://en.wikipedia.org/wiki/Alan_Greenspan
There are reasons why the Fed cannot ever stop printing, and there are reasons why it must stop printing. My personal opinion is that it will do everything that it can to stop, and when that fails, it will print with a vengeance.
Hey Bruce you very happy and ultra positive. your trades must be going pretty damn good.
cheers to ya!
Well said.
The Fed can run (taper QE) but they can't hide (stop QE).
The rest of the world is tapering their purchases of U.S. debt and that is the primary reason that The Fed can not terminate QE. The Fed either ensures that Uncle Sugar lives in the style it has become accustomed to or Uncle Sugar shuts The Fed down. All appearances to the contrary are, ultimately, illusory.
In the meantime, The Fed will hold out against reversing the taper until their backs are against the wall for the simple reason that once they stop, let alone reverse course, it's over. It will be absolutely clear that QE is on until there is a run on the currency. That in itself will hasten the inevitable currency debacle.
Well said.
The Fed can run (taper QE) but they can't hide (stop QE).
The rest of the world is tapering their purchases of U.S. debt and that is the primary reason that The Fed can not terminate QE. The Fed either ensures that Uncle Sugar lives in the style it has become accustomed to or Uncle Sugar shuts The Fed down. All appearances to the contrary are, ultimately, illusory.
In the meantime, The Fed will hold out against reversing the taper until their backs are against the wall for the simple reason that once they stop, let alone reverse course, it's over. It will be absolutely clear that QE is on until there is a run on the currency. That in itself will hasten the inevitable currency debacle.
You are under the presumption that there are no overriding ill effects of QE that will force the Fed's hand. Denninger has been writing about this very topic lately - that pension funds and insurance companies will go bankrupt if zero interest continues much longer. Their cash flow is being decimated. The purpose of the taper is to let interest rates rise to a point that the entire pension/insurance complex doesn't go bankrupt.
Choose. Sorry for being a nazi but it detracts from your article.
Millivanilli, what El V is saying is exactly correct. They know they are in danger of being trapped using QE to prop up the economy, so the Fed want to taper to zero, but just like EL V, I also think negative economic forces on the way down will force them to either stabilize at say 65 or 75b a month, or go back up to 85b. Look what's happened just at 10b a month less - the stock bubble has retraced some and with it confidence in the economy which will reduce hiring.
This all leads back to precipitously dropping EROEI of oil. The black stuff was a one time endowment of cheap abundant energy that is now getting more expensive to extract and harder to find new sources at the same time we demand growth. The only way to reconcile those two opposing directions is to heap on huge deficits and print like mad.
I dare the Fed to taper to zero QE. If they do the bottom falls out and if they continue to QE ad infinitum we eventually get hyperinflation. Either way we cannot escape dropping EROEI (energy return on energy invested) that is falling as evidenced by fracking, tar sands, deep offshore - heck the low hanging fruit that built this civilization is gone. Now we scramble around like wild mice trying in vain to keep seven billion people fed.
Sorry... my timepiece seems to be malfunctioning, can you tell me how soon the next hyperinflation is coming?
There's another solution besides QE. That is to take the fed away from the private corporation and make it a separate (and independent) government branch under treasury. That eliminates the economic drag caused by interest payed to the fed. In addition, currency has to be backed by something more tangible than the taxing authority of the government. Gold, silver, nickle and copper are appropriate or a basket of oil, corn, soybean and steel might be appropriate.
Economic stimulus should have been applied by sending checks to everyone. The poorest would have spent their check on necessites and stimulated the economy. The richest would have spent it on a night out on the town, and gained less in this way than with QE.
papa s
I disagree...
When a society saves in commodities it hurts the users of those commodities, prices rise and scarcity developes.
There is one single and universal item that has been selected for this purpose. It is one that has only minimal industrial use. It is universally held in the highest regard. It has a 5000 year track record. It is scarce and yet found all over the planet. Saving in it hurts no one. If the price in it rises it helps the holder without damaging the rest of society. It is gold of course.
When the derivative gold market dies (it is on its death bed now) gold will rise to correct the balance sheets of nations and the mistake of 'astonishment and scandal' (Rueff on the gold exchange standard) will finally be put right.
Save copper if you like, I'll be saving physical gold.
Yea, the Treasury is worse than the Fed, he must have connections in treasury places, a sad place to be today.