Previewing The Market's "Taper" Tantrum

Tyler Durden's picture

The reason for yesterday's late day swoon was a humorous tweet, which subsequently became a full-blown serious rumor, that the WSJ's Hilsenrath would leak the first hint that the Fed is contemplating preannouncing the "tapering" of its $85 billion in monthly purchases. Naturally, this did not happen as we explained. And yet, judging by the market's response there is substantial concern that the Fed may do just that. To be sure, it is quite likely that in addition to just rumblings out of economists, which are always wrong and thus ignored, that one of the Fed's unofficial channels may hint at some tightening in the monthly flow (if certainly not halt, and absolutely not unwind). Which makes sense: all previous instances of non-open ended QE took place for up to 6-9 months before the Fed briefly let off the accelerator to see just how big the downward response is. The problem now, however, is that even the tiniest hint that the grossly overvalued "market", which has risen only thanks to multiple expansion for the past year, would lead to a massive overshoot not only to whatever an ex-Fed "fair value" may be, but overshoot wildly as the liquidation programs kick in across a Wall Street that is more liquidity starved today than it has been in a decade.

This is precisely what Scotiabank's Guy Haselmann thinks:

"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."

We certainly agree.

it is precisely just this illiquidity driven "deflationary" overshoot to the downside in a world which suddenly finds itself without a safety net, that will be just the thing that drags the Fed right back in, and forces Bernanke or Yellen (or heaven forbid, Geithner), to double down on the monthly amount of flow, launching the latest and greatest dollar-crushing, inflation stimulating reliquification tsunami.

Because if we have learned anything, it is that the equity market can no longer function without the Fed's "put" in place at every given moment.

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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
greased up deaf guy's picture

been waiting for the bubble to pop for three or four years now. not holding my breath in a managed economy.

IndicaTive's picture

It's only half-time. Need more cortisone and novocaine.

NotApplicable's picture

I had a noble prize once. Then I flushed it.

Element's picture

Stabeeleetee creates instabeeleetee

lizzy36's picture

Would a taper tantrum lead to a Tepper Tantrum?

knukles's picture

But but but... it worked so well for gold of late... more sellers than buyers and then can't find the stuff and now...
Where's Krugman when we need him?

Pure Evil's picture



Paging Pee Wee Krugman, paging Pee Wee Krugman.


madbraz's picture

We've had a correction - didn't you see that the market "crashed" 0.37% yesterday?

maskone909's picture

Cant fucking wait for the day this ends... Untill then...
Gold silver bitcoins guns ammo JGBD TMV PR0N and opiates
And shorting various fiat's accordingly

TeamDepends's picture

With you brother, the wait is absolutely killing us.  But we will never lose faith because that is exactly what they want.

knukles's picture

  Yes, exactly what they want.

Racer's picture

Also too few shorters to slow the slide too, they are equally as important but have been scared off too many times from standing in front of a racing steamroller at mach 2 speed!

Groundhog Day's picture

You mean ludicrous speed

ekm's picture

I have no doubt that the order has been given by the white house to full halt....without side effects.

This crude oil price for this long can no longer be tolerated.


Bernanke is trying to avoid the side effects along with a full and complete personal metal breakdown. He looks sick.

NotApplicable's picture

Puppets do not issue orders, regardless of the grandiose stage they appear on.

All any of them are trying to do is to manage expectations until an "external event" comes along to blame the collapse upon.

knukles's picture

Here's the deals

Bankers meet and get told to... smash gold and silver (cover)
Oil execs meet... get told to smash oil (cover)
Press gets meet... told to defend status quo  no rock-a-da-boat

Make like everything with everybody's zoooooo-kay!

Ben gets told... Print Print Print Print

Fuh Querada's picture

"Gas stamps" are in preparation, to be issued by JP Morgue.

ekm's picture

That would literally be the end of america.

RhoneGSM's picture

Repeat after me: There is no voluntary exit from ZIRP.

LawsofPhysics's picture

unless of course you mean an exit to NIRP...

85 billion per month in paper fucking promises, no asks about collateral or real assets or the interest charged to the taxpayer.  What's to stop these fuckers from making it 120 billion per month, or 300 billion per month?  Nothing, and the majority of the motherfucking sheep don't even get it, or have the math skills to comprehend it anyway.  Mark to fantasy rolls on...

NotApplicable's picture

Can a brotha get a "QE4EVAH" around here?

machineh's picture

Sistuh Janet gon' bring us QEFIVE, mothuh.

It's like forty-eleven trillion SNAP cards ... but you can only buy stocks with them.

Divine Wind's picture



Everyonez, Everyonez......

XRAYD's picture

Ben Bernanke warned against excessive risk-taking in financial markets on Friday as the dollar was driven up in the latest manifestation of a desperate global hunt for yield.

In a speech in Chicago, the US Federal Reserve chairman said he was watching for signs that banks were resorting to speculation because of low interest rates, highlighting the danger that easy monetary policy could inflate new bubbles in asset prices.



“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Mr Bernanke said.



Mr Bernanke said that the Fed is also working with individual banks to stress test what would happen after a change in interest rates. Another risk of a long period of low interest rates is that banks would suffer losses when rates go up.


i.e. We will rig the markets with the big banks and traders. Losses are only for the "muppets" we have herded into risk!

SheepDog-One's picture

When everyone and their cousin is all in and convinced markets certainly can't ever go down again, watch the hell out!

NotApplicable's picture

What markets? There's no tellin' how long they can make these fuckin' zombies dance.

Winston Churchill's picture

With the advent of 10 yr mongoliod  day traders, and the reemergence of houseflippers

advertising on local media, I feel kike I've time warped back to late 2006.

With no shorts to break any falls , this crash will be record(or system)breaker.

Thats the only dip I'm going to buy at my age.


Yen Cross's picture


   U.S. 10-Year    1.905    1.814    1.928    1.814    0.092    {5.02%}    19:30:19

TrustWho's picture

I believe everything the central banks have done is kick the can in this Greatest Depression. History may not repeat, but id does rhyme. Remember Smoot-Hawley Tarriff Act of 1930?

Every debtor country need to grow internal demand, reduce imports and increase exports to rebalance. If the Fed tapers, as they know they should, the dollar will stregthen, America's imports will rise and exports will fall. The world is out of balance and the hope of surplus nations, with surplus labot, pulling the debtor nations out of their financial mess is just a Pipe Dream.

We are just playing musical chairs now and everyone is hoping the music will never stop, but they know it will.

WhiteNight123129's picture




e.blair's picture



Fuh Querada's picture

Everyone is levered to buggery and back again (record margin debt). That should make for a great show when the downside starts.

Yen Cross's picture

     Set your trailing stops before you log off /Bitchez.

     I can't wait to see how Asia opens on Sunday after the JGB meltdown last night, and the WTF 5% move in T10's today. Where's all the cash going?

    Oh wait, it's that pop-off-joke 'Nikkei / Topix' experiment, or it's sitting in large mattresses with built in [bullion safes].

TrustWho's picture

The Fed entered the market at 3:39 pm today to stop a sell off!!!!!

TrustWho's picture

Congrats to all Longs as S&P set new record. Be sure to thank your Daddy...that is Daddy Bernanke!

JR's picture

Nadeem_Walayat, editor of Market Oracle, says one of the key emerging sector that he has been "focusing on during the past 18 months has been the property market, specifically UK property as illustrated by the approximate breakdown of my portfolio and where I expect it to be by year end:

UK Property 0% Jan 2012; 50% March 2013; 60% Dec 2013

Cash & Bonds 60% Jan 2012; 32% Marach 2013; 18% Dec 2013

Stocks 40% Jan 2012; 18% March 2013; 22% Dec 2013.

Here then is the advice for which many of his readers have been waiting:

Bank of England Celebrates 50 Months of Stealth Inflation Theft From Savers and Tax payers | Market Oracle

May 09, 2013 by Nadeem_Walayat

The Bank of England today kept interest on hold at 0.5% for the 50th month, as Britain's central bank continues to support its bankster brethren in the crime syndicate that calls itself Britain's banks who continue to literally get away with crimes without any real consequences as evidenced by the over 6 year old LIBOR scandal that the mainstream press and financial regulator only awoke to mid last year. As far as I am ware no one has gone to prison for this mega-fraud, instead the CEO's of Britain’s major banks have been retired on mega-pension handouts whilst all of the fines are at the end of the day being picked up by British tax payers.

For instance the hundreds in million in fines for the likes of RBS are only the tip of the iceberg for this near wholly tax payer owned bank will soon be hit for claims for tens of billions in damages that Britain’s tax payers WILL foot the bill for, because the consequences would be bankruptcy which is something that we have repeatedly witnessed that the Government nor the Bank of England will ever entertain.

Therefore in the name of continuing to save Britain's criminal banks the Bank of England continues to funnel tax payer cash into their coffers, not only to meet the existing scandals such as PPI mis-selling but the long string of ever escalating bank rescues that will follow such as LIBOR as tax payers continue to be literally bled dry as the Bank of England's brethren bank billions in bonuses on the basis of fictitious profits.

Britain’s Savers and Workers Continue to Pay the Price

Britain’s savers and workers continue to pay the price for over 5 years of artificially low interest rates as the Bank of England continues to print money to monetize government debt and drive down all interest rates in the economy the consequences for which is for persistently sub-inflation rates of interest that ensures that depositor cash over the coming decade will be stolen in MOST part as I warned several years ago and as iterated in the January 2010 Inflation Mega-trend Ebook (Free download), whilst the Bank of England continues to attempt to keep the general population sedated with the economic propaganda mantra of the always imminent risk of deflation something that was NEVER probable but just an excuse for the stealth theft of wealth by means of high real inflation which exists even on the governments own highly suspect official CPI measure of inflation that tends to under-report real inflation by approx 1.5% per annum.

Instead Britain’s savers and workers continue to be impacted by the consequences of the EXPOENTIAL inflation mega-trend as illustrated by the below graph that clearly demonstrates the deflation of the great recession of 2008-2009 that vested interest academic economists that populate the mainstream press continue to regurgitate amounts to nothing more than an inconsequential blip. …

The impact on savers of the inflation stealth theft is worsened by the 20%-40% additional theft by means of double taxation on savings interest, i.e., inflation erodes the value of your savings by currently about 4% then the government taxes you by 20% to 40% on the sub inflation interest rate you will be in receipt of which means that savers are guaranteed to lose near 2% of the value of savings per year that amounts to an estimated theft of 14% over the past 5 years. …

To protect oneself from the global inflation war against savings, savers need to increase risk i.e. if you invest in the stock market then you need to appreciate the fact that it will be far higher risk then leaving it in the bank even if you WILL lose at least 2% per annum in the bank.

Cyprus Shows that Ultimately Your Bank Deposits Will be Stolen

You think a Cyprus style theft cannot happen here ?

Think again, because when the chips are down and the Government has its back against the wall then it WILL happen and it would be far worse than that which took place in Cyprus for the fact that Britain is NOT in the Euro-zone, therefore our currency would plunge WHILST savings are frozen, whilst the government formulates a hair-cut xx%.

The net result would be that ALL Savers would lose, no one would be left standing as inflation would ensure that even if savers escaped the hair-cut they would only get back a fraction of the value of their money after the hair-cut which is why for several years I have been advocating an exodus out of bank deposits and into inflation proof assets such as stocks and since early 2012 property as illustrated by the January 2010 Inflation Mega-trend Ebook (FREE DOWNLOAD). ...

This further reinforces the fact that savers have to take some risk with their capital be it in the stock market or the housing market or commodities because as things stand you are guaranteed to lose at least 1/3rd of the real value of your bank deposits during this decade, with the ever prevalent risk that in a worst case scenario the Government WOULD Cyprus style outright steal ALL of your money in the bank.


If you want to take one message away from ALL that I have written over the years then take note of this - The Exponential Inflation Mega-trend Can ONLY TREND in ONE Direction which is to ACCELERATE - You need to consider this in how you view risk vs reward with respect to your wealth. In the long-run your wealth can only survive if it is indexed to Inflation which means being invested in assets that cannot be easily printed such as the housing market or are leveraged to inflation such as consistently increasing dividend stocks.

Meanwhile Britain's politicians are dancing around the issue of In or Out of Europe when the REAL FUNDAMENTAL ISSUE IS RAMPANT OUT OF CONTROL DEBT AND MONEY PRINTING AND ITS ACCELERATING INFLATION CONSQUENCES!

And yet...

Dewey Cheatum Howe's picture

Unless I am missing something, please explain why this wouldn't work. If enough people and entities bought Treasury Bonds wouldn't it force the FED to stop buying and taper off or shift QE elsewhere at that point? Basically you want to short the stock market do a concerted bond buying strategy and position accordingly in the market.

DavyRoySixPack's picture

Any selloff would just be contained by the FED buying up any panic selling. They have done it before.

Herdee's picture

But,you still have to face the national debt which has to be paid.Look at what Kyle Bass has to say once again.Most won't get it he says.The reason it's different this time is the size of the problem.Thedemographics have changed along with over-capacity of industry.There's not the tax base to support U.S. spending or Japanese spending.America is just the best looking of an ugly bunch which include the European countries.You cannot print and spend your way out of debt and keep rates at close to zero.If interest rates climb,the government cannot pay the debt because it does not have the tax base any longer.Endless war bills have eroded society.Just look around at the condition of American cities as proof.They're desperate and we're in a "blow-off" top in my opinion,meaning that Bernanke has to start to unwind.If he's going to create the next inflationary cycle in order to make the national debt look small to taxpayers once again,then Bernanke has to engineer the wash-out of bad debt worldwide.Maybe a lot of liquidity before the coming wash-out isn't such a bad idea.Question is,when's the cleaning-up operation going start to hit?And how many steps down will it be in order to clean it out for good?Some are saying a 20% correction to start will be the first step.

RaceToTheBottom's picture

"We need more lift, throw out some more Muppets!"

ThisIsBob's picture

Thing looks like a butt plug to me.