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The Hilsenrath "Tapering" Article Is Out
Yesterday, the rumor turned out to be a joke. Today, there was no rumor, but as we warned four hours ago, it was only a matter of time. Less than four hours later, the time has come, and Jon Hilsenrath's "Fed Maps Exit from Stimulus", conveniently appearing after the close, has just been released.
From Hilsy, and one of his final attempts to remain relevant, pointing out what everyone already knew:
Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Don't expect an imminent announcement.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.
The whisper sellside consensus is that it will be the September FOMC meeting, just after the Jackson Hole meeting at which Bernanke will be absent, that the first details of the flow "slowdown" will be revealed. But there is certainly no consensus.
The Fed's strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.
Officials are focusing on clarifying the strategy so markets don't overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.
That the market will obviously "overreact" is a given: for reasons why, read this. As for the rest of the WSJ piece, it is fluff.
Regarding bets when the unwind begins, a look at the change in the VIX forward curves gives us some idea:
If correct, put the date September 17-18 in your calendars.
* * *
For those who missed it earlier, here again is the preview of the market's "Taper" Tantrum:
From Scotiabank, on why a "tapering" may be imminent, if only for purely optical and "transitory" reasons:
The bullets below list reasons why the Fed would want to “leak” hints of a tapering now.
- On Monday morning of this week, the RBNZ (New Zealand) and BoK (Korea) intervened in the currency market to try to dull the strength of their currencies. Soon afterward, Sweden and Chile announced they might have to intervene as well. Poland cuts rates to weaken the Zloty.
- These actions and comments show that the external ramifications of QE will no longer be tolerated passively. These moves represent a tacit protest against QE. It could be argued that if QE policies do not subside soon, other governments are now willing to retaliate with counter-measures (currency wars, “a race to the bottom”, protectionism).
- When FOMC members discuss the “costs” of their policies, they are partially referring to the potential for asset bubbles and distortions to price discovery. The Fed has had its foot on the accelerator so long that easing off should provide information from how markets react.
- In the past 10 days, the yield on the Barclays High Yield Index has collapsed from 5.37% to 4.97%. A 4-handle on Junk bonds is truly remarkable. High Grade spreads have also been tightening materially.
- Credit Default Swap (CDS) premiums have been declining rapidly and plummeted the past two weeks to all-time low levels. Certainly, marginal buyers have continued to be chased into the market from fears of missing the up-trade and promises of the Fed “put” protecting the downside, but the collapse in CDS premiums represent bear capitulation and the futile results of hedging risk.
- Equities are higher by almost 15% YTD (46% on an annualized basis). The FOMC wants asset inflation (the Pigou Effect), but trading has become decidedly one way. The S&P 500 has rallied 13 out of the last 14 days. There was increasing talk of equities “melting up” and finally stated publicly by Stan Druckenmiller.
- NYSE Margin Debt has matched the highest levels in history (July 2007).
- Tobin’s Q ratio is the best predictor of market corrections (of 20%+). James Tobin won a noble prize for it. He hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. The ratio is approaching levels similar to 1907, 1929, 1937, 1969, 2001/2, and 2008.
- The Fed has been accused of ‘enabling’ fiscal stalemate. There is an article in the WSJ today about how improving Federal finances lessens the urgency for Republicans and Democrats to negotiate. Stable and rising asset market prices have the same effect. As negotiations begin, providing a warning shot that the Fed cannot do the heavy lifting forever, may be a wise move.
- After all, the debt ceiling limit gets hit next week on May 18th, at which point the Treasury will have to invoke extraordinary measures to prevent default (something they can do until September).
- Congressional and market criticism has been increasing.
- The Treasury will probably be cutting issuance in Q3 due to an improving position. This effectively means if the Fed continues to buy at the current pace, it would be buying an even greater percentage of visible supply.
- It is possible that Bernanke made a suggestion about ‘tapering’ in his Chicago speech today, when he used the words “reaching for yield”. The dollar and the bond market are just beginning to notice and react. The other markets will likely soon follow.
Fed tapering would catch the market off-sides. At some level, FOMC members must realize they have created a moral hazard dilemma and conditions of over-promising what they can deliver. Tapering would symbolically put a dent in market sentiment and the implicit ‘put’. The many investors that have been drifting into riskier assets in a scramble for yield would begin to prudently re-focus on the downside risks to these assets.
It is possible a steep decline in financial assets would ensue with the lowest part of the capital structure being hurt the most. The Fed has chased investors all in the same direction; into risk-seeking securities. Few care about “right-tail” events, but should investors decide to pare risk in reaction to a hint of ‘tapering’, the overshoot to the downside may surprise many. The combination of too many sellers, too few buyers, and dreadful (and declining) liquidity means a down-side overshoot is highly likely. It would provide the Fed with their answer as to whether they have been creating market bubbles.
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Probably just a cover -up for another cover-up.....
They act like they're so clever with all their cryptic messages
When people finally will accept that Fed acts on orders and are absolutely not independent, things become easier to see.
something big needs to happen to make Benghazi go away..
They just might impeach that Obama /sarcasm/
Benghazi ain't going away. It came back too many times already.
My interpretation is that the military complex is mad at obama. It started with Bob Woodward and since that point, it never stopped.
My take: Obama has given up. I have subscribed to his twitter feed and all it comes up is guns and obamacare. Useless arguments, particularly guns.
Obama is slowly becoming irrelevant.
If he is becoming irrelevant than will anyone listen if he tries to issue that order?
IRRELEVANT meaning that he is incapable of making policy because only few people are following him now. Even his own party has abandoned him in key issues to him, like guns, which in my view is an idiotic issue, because america cannot exist without guns.
Bush became irrelevant, but it was his duty to sign executive orders.
All he's doing right now is ...playing golf. So does Boehner. Both are making it clear that they have not much power on making policy.
My personal opinion is Obamacare is going to be the final nail
It's going to effect so many people and the young are not going for it which will make the whole thing implode. They need the young, healthy people to balance everything. The 95$ penalty to not participate is the linchpin.
They are going to feast on Obama...
Obamacare will be dead soon. It's the most idotic idea I've ever seen. It's like car insurance. People are forced to pay insurance to private corporations.
Obamacare forces people to pay insurance to pharma lobby.
Spot on ekm, who was it that pointed out the political alignment of White House, big banks and big pharma vs. military industrial complex and big oil? I think that sums it up, and I think Military/big oil wins out. Obama impeached? Entirely possible...
It was me.
At the very end Big oil and military wins, all the time.
Re: "People are forced to pay insurance to private corporations."
People are forced to pay interest to the private Federal Reserve corporation for the use of money only Congress is Constitutionally authorized to coin.
If Benghazi issue disappears, it'd mean that obama would have accepted to do sth else in return for the very powerful people behind pushing this or....go rogue.
Going rogue is not obama's strength
Bernanke always reminds me
of the guy in the lawn chair with the helium balloons,
who does not dare to even slow down, much less come back to earth ....
http://www.snopes.com/travel/airline/walters.asp
The us equity market will melt up 200 mon. on this phoney/baloney article. It is a plant, false (fed) flag, ruse, scam, lie.............et al.
It has become down and dirty in the the ol usa. You can believe nothing your eyes tell you. Believe no one/nothing.
Most of all, go short nothing.
Where is Sirhan Sirhan when he is most needed?
Yes, fbi, i know you are watching.
"The us equity market will melt up 200 mon. on this phoney/baloney article."
I wouldn't be surprised to see the DJ down 200 at the open to take out all the stops, then up 200 by the close.
Poppycock until proven otherwise.
The only exit strategy they have is to make you think that they have a exit strategy.
They will probaly just do away with the fixed amount of monthly purchases and start mixing it up.
One month they give the impression they are winding down, just to ramp it the next month.
Don't judge them by what they say, judge them by what they do.
The sequester is in fact a taper in as much as it is a slight reduction in the rate of increased spending. In fact it is the only move in the right direction during the last 4 plus years.
"Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations."
What is unpredictable about market expectations? On each QE the market jumped up. When each QE ended, the market slumped.
The market loves financial fraud. It is financial truth that the market does not love. A managed market is a manipulated market. A manipulated market is a fraudulent market. The truth always eventually comes out and the market manipulates back against the fraud.
A strategy. Greenspan mapped out a strategy of a housing bubble to replace a .com bubble. That strategy blew up. QE bubble is a strategy to replace a housing bubble. 100% of bubbles burst and deflate. Bubbles are bassed on financial fraud. Financial fraud can't be hidden forever.
Does this mean I should plant more broccoli this weekend or plan on moving before they're ready for harvest (90-110 days)?
So many questions, I probably will just drink myself stupid, starting earlier than usual.
Alain Charnier: Our American friends are becoming overcautious.
Pierre Nicoli, Hit Man: What about our timetable?
Alain Charnier: We MUST follow it.
Pierre Nicoli, Hit Man: But will they?
Alain Charnier: I don't know. Boca's scared. He sees policemen in his soup.
Pierre Nicoli, Hit Man: He's not wrong.
Alain Charnier: The one who followed me on the subway, he's our biggest problem.
Pierre Nicoli, Hit Man: Let me handle him.
Alain Charnier: There'll be others.
Pierre Nicoli, Hit Man: So what? By Friday we'll be gone.
the Hil can go to Hell
I'd be very very nervous if I was long stocks this weekend. I can almost hear that "hissing " sound
According to Bank of America Merrill Lynch:
http://fs1.hidemyass.com/download/h8Cqx/1s3nkvl62fipb7krsefh0bajr1
Easy Fed policy: too much of a good thing
The costs of easy Fed policy
Fed policy is aimed at stimulating economic activity, which involves incentivizing households, businesses and investors to take more risk. Investors have obliged, resulting in low rates, tight credit and mortgage spreads, and new all-time highs for major stock indices. But some worry the Fed is causing a dangerous search for yield that could lead to new asset bubbles and financial instability. Our assessment is that Fed policy has not led to an increase in systemic risk.
Risk-taking is good; systemic risk is bad
This piece provides a guide for monitoring financial stability and the linkages between asset markets, financial institutions and the real economy. We believe the ultimate question is whether the Fed’s policies have increased systemic risk.
This depends on the following, which we address in the note:
- Do market valuations appear overstretched and are there signs of asset
bubbles forming?
- Is there an increase in leverage in the market or an overreliance on short term funding? Would systemically important institutions be at risk of failure?
- How are the beneficiaries of easy credit using the proceeds? Are they using debt to fund risky investments, buy homes they can't afford or go on a consumption spree? Or is issuance going toward improving their balance sheets and lowering their vulnerably to the eventual rise in interest rates?
Risk transfer underway, but systemic concerns muted
We argue that Fed policies have encouraged a transfer of risk from borrowers (indebted households and corporations) to creditors (investors) who are willing to accept lower risk premiums. Increased real money participation in credit markets mitigates the systemic implications of this risk transfer. Corporate and household balance sheets are healthier, thanks in part to easy Fed policy, but signs of increased appetite for leverage in the corporate sector bear close monitoring.
Fed to stay the course
Our survey of financial conditions and systemic risk supports our base case that the Fed will maintain its asset purchase program at the current pace of $85bn/month through March 2014, followed by a 6-8 month tapering period.
QE will limit the upside in yields
The potential for a sizable rise in yields will be limited if the Fed maintains QE well into next year as we expect. We forecast a gradual rise in 10y rates by year-end.
So let me get this straight....The Fed gives market sensitive, market moving, non-public information to one journalist and that is somehow ok?
The information they are "leaking" has a material impact on almost all securities and should be released in a timely manner and to the general public via a press release. To do it in this manner seems in violation of the Securities Act in disclosing non-public information.
Its time a member of the press question Chairman Bernanke at one of these post FOMC press conferences on why a privileged few, in this case ONE, gets this information before the rest of us.
Either stop the leak game or give us all the information at the same time.
This is shameful to say the least
Interesting... Scotiabank has made a list over all the reasons why the fed would do what is healthy for the economy... when we all know they always pick the opposite