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Is A Fed 'Taper' Positive For Treasuries?
Submitted by Mark J. Grant, author of Out of the Box,
There is no plan, no scheme that the Fed can concoct for exiting their support for the U.S. economy that will not negatively affect both the bond and equity markets and have a positive effect on the Dollar. The markets have relied upon the manna from Heaven to rise and virtually nothing else. The American economy cannot justify either the absolute levels of yield or the compression that has taken place or the lofty levels of our stock markets. All of this has had a single driver which is the Fed.
There does come a point in time, however, when a 4 trillion dollar balance sheet and the flip side of the coin, the decline in the wealth of the investor, the consumer, starts to impact the market as paltry returns eventually lead to declines in capital for goods and services. The Fed has spent four years providing gifts for those that borrow and for the banks while penalizing those who save and invest. What one group gained the other lost.
Now the Fed faces the dilemma of its own making; how to gradually exit their current strategy without setting the financial markets on their rear ends. This is a situation that I have contemplated for some time and I have been asked about it by some of the most senior people in our industry. So this morning I will share with you and the Fed some of my thoughts.
First would be to exit your support of the various agencies first. They are now doing fine. Profits will be down but not out and a gradual withdrawal is called for as an initial step in the process. The definition of “gradual” will be the key but I think this is the logical first step.
For the Treasury markets a different plan can be utilized in the first instance. Use the same amount of money that you are using now but buy the bonds directly from the Treasury and not in the open markets. This will have the effect of lowering the borrowing amounts for America, having smaller auctions, and so the demand will not need to be so sizeable to sustain them. Then as the Dollar strengthens and as both European and Asian investors move out of their troubled economies and into Treasuries for safety there will be increased demand from overseas.
Yields will probably still rise and the compression in fixed income will reverse but not as dramatically as feared by some. A tremendous amount of corporate and mortgage financing has taken place during the last four years so that the amount of new issuance will also decline which will also help in this process. It can also be announced that some portion of the Fed’s balance sheet will be allowed to just run off which will also decrease the pressures on the markets. The Fed bombed its way into the markets but the way out must be slow and carefully considered.
The Fed should also concentrate on its primary objective which is the financial well being of America. Another area where the Fed should cut back on in the first instance is supplying capital to the European banks. The ECB and the EU will have to pick up the slack and stand on their own feet without so much dependence on the Fed. In my opinion the Fed has been overly generous to foreign institutions and this should stop. The ECB needs to learn to take care of its own mess and not rely upon the Fed to help them.
The Fed’s tapering off of their European support will also be a positive for Treasuries and American credits as spreads will begin to widen between the two groups. America will be seen, once again, as the safer haven causing some European money to flow into the American markets. External demand will have been increased by employing this part of my strategy.
“Tapering off over time” should be the mantra. Baby steps should be the pace. The continuing strife in Europe will also help the United States as investors are forced to deal with more problems in Cyprus, Greece, Portugal, Spain, Italy and Slovenia. The difficulties in Europe will be positives for America as a result of relative safety and value.
This is the course I would set and honest words backed up by policies that match those words will go a long way to preventing serious market erosion. The beginning will not be easy but the path can be contained if it is maneuvered properly. Market corrections will take place but giant upheavals can be avoided by a studious and honest approach. The Fed can also learn a lesson from Mr. Draghi and make forceful pronouncements that “it will do whatever is necessary” to maintain orderly conditions and then demonstrate this tactic if needed.
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short answer, no.
Grant is smoking a bad batch of mushrooms again. Honest communication from the Fed, concentrate on the financial well being of America, chase after unicorns. Hallucinating
Whar sarc tag? Whar?
Fed taper ?
Are you joking ?
There is no taper, it's one big FUCKING LIE.
The truth is that JPM & the Comex are bleeding gold.
What better way to stem the gold outflow than to concoct a story of tapering QE.
They CAN NEVER end QE, period, end of story.
The Fed will taper when the U.S. Government starts tapering off its spending spree and not before. That's not too likely.
Here's your "Strong Dollar Policy," bitchez:
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"Once you're into this family, there's no getting out." - Tony Soprano
Its called "outside the box" He is trying to make you think. The consensus about the taper story is going to cost you jackasses some money if you don't keep an open mind.
Perhaps an attempted Fed exit is good for t-bonds. If you can't conjecture that possibility you are a cement head.
It would be interesting to hear Hoisington's perspective.
As Krugman would say to dear Grant.
“It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.”
One recent article I read suggests they must taper or stop QE due to the BRICS dumping the dollar for regional transactions. The dollars flowing back to the states due to the BRICS would more than make up for the current QE policies.
Any input?
It still won't work, they have went to far past the Rubicon and they have to take this nasty tasting financial medicine that is coming.
yes IMHO...
Anybody thinks the yield junkies are not foaming at the mouth, better think again..
Bill Gross thinks rates may never rise. He's hoping to sell to YOU real soon now.
Gross is exactly right. Rates will never rise on UST debt.
The Gov cannot afford to pay higher rates on it's unpayable debt so it will not. I tiwll do what every other government (with less than a handful of contrary examples) has done in the past when it owns a printing press. It will print and it will print to infinity. All the while rates on USTs will be effectively zero.
Investors will be guaranteed return of their dollars but not return of thier wealth. That's the only game in town.
They might do it anyway.
Which takes us straight into a US Government fiscal/bond crisis. If that isn't good for gold I have no idea what is.
Projected Q2 GDP is south of 2%, probably even south of 1%.
How can he possibly withdraw QE with GDP of 1%? Why is this even being discussed?
Exactly. The economy is further spiked by the 6.9% of GDP spent into the economy in 2012 via federal deficit spending and the further 0.7% of GDP from state deficit spending.
This chart is highly relevant:
http://3.bp.blogspot.com/_pCDyiFUv9XU/S_HzX0bUJZI/AAAAAAAAJxA/UtOGAm5DPP...
A very bad outcome for a "debt is money" system.
Behold oil scarcity.
That "No Exit" avatar needs some flames shooting out his ass.
There will be "tapering".....it will be "'intangible' tapering"
the fed gets to claim it exited on time, but the juice will continue to flow.
It's nice to hear what I have been saying come from a contributor....but Mark Grant....crap...
Where he is right. "Then as the Dollar strengthens and as both European and Asian investors move out of their troubled economies and into Treasuries for safety there will be increased demand from overseas. "
Where he is a paid piece of garbage "The Fed should also concentrate on its primary objective which is the financial well being of America"
and most importantly where he is oblivious....17 trillion and counting and deficits as far as the eye can see. He, like everyone else, just ignores it.
He does sound very optimistic, considering the current situation.
But maybe the key is "baby steps". Instead of easing 85 billion per month the FED could be easing 84999 million. Hey, a million is a lot of money for a baby :)
I more and more question the vetting and decisions regarding Guest Posts.
I enjoy ZH, but am taking it less and less serious on a daily basis. It's nice fodder... but I think they are changing the game.
Though I dislike the racist, anti-sematic trolls, the new BAN/CENSORSHIP of language made me question the future of ZH. Is the added attention it's getting altering how it works? Are they becoming more palatable for the MSM and their links/mentions?
First they came for the racist posters
And I said nothing, because I was not a racist poster ...
You can't be simultaneously anti-establishment/anonymous & reknown/MSM palatable. (maybe anti-establishment isn't the right word - perhaps anti-TBTF/status quo)
Just saying.
The ban makes me think we're on the wrong side of a slippery slope... hope not.
"The Fed should also concentrate on its primary objective which is the financial well being of America."
FAIL
everything is positive....we live in UTOPIA..........a magical land where growth numbers are always positive, recessions never shall be........where the almighty dow grows lush and verdant each and every day........................a land where debt brings prosperity..................ohhh america, america.........
>Monetize debt
>Strengthen dollar
Pick ONE.
A radio business station always pops up in Boston when margin interest is running at all time hights...another sign of a top.
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It is waaaaay past time for Treasury rates to rise back to proper levels. I've been long on them, and they WILL pay off, once the Chairsatan stops coddling and rewarding the criminal Banksters.
That is the equivelant of saying "It's waaaaay past time for these bankers to voluntarily blow their brains out"
Right on BOTH points!!!
Let's start with your idea, which will then precipitate mine!
They are at their proper levels, for a GDP of 1%.
Heh.
"... giant upheavals can be avoided by a studious and honest approach"
"... buy the bonds directly from the Treasury ..."
This is total and absolute Bull Shit.
Who the fuck is the asshole who posted this shit?
At least buying the bonds directly from the treasury would be more honest. They are buying the bonds anyway, so why give other dealers a profit? To pretend they are not the buyer of last resort?
How else can Bernanke keep a straight face when he claims they aren't monetizing the debt?
The dealers are their criminal bankster friends and their profits are the main reason the government does anything.
If ZH/Tyler believe the system is broke beyond repair - then why this post? This is a road map back to the status quo
"...honest words backed up by policies that match those words will go a long way to preventing serious market erosion."
Honesty and market erosion will not be allowed.
Ctrl-P to the Moon and back in perpetuity.
Regardless of what ZH readers think about the Fed it is staffed up with smart guys trying to figure out how to keep things from falling apart.
Its equally likely that a first choice by the Fed is to stop buying longer duration paper. It can let the paper it holds ride. It will be a long time before it matures. That they have a interest rate loss holding the paper til maturity as later issues yield rises matters little really since the funds to buy the Treasury paper they hold was created out of thin air. Any yield produces income out of nothing for them.
Another option, even though the Fed will take a loss against par is to actually sell some of the longer paper before maturity. Again the loss is in "electron dollars" created out of nothing. Its an effective way to take the money back out of circulation and eliminate an inflationary risk.
Most likely is that the Fed will come short on the yield curve and put any continuing purchases there. The Fed would still be buying enough to suppress interest rates. This works to support Treasury borrowing needs if they push all their refinancing needs short as well. The Fed doesn't need to suppress rates on the entire yield curve to help the Treasury.
With Japan debasing its own currency money from Asia is likely to come into the US bond market. Withdrawing support at current levels from Europe would have the same effect. Europe isn't propped up by the ECB and Germany....those two are propped up by the Fed. The Fed backs away and Europe will wind up having to debase the Euro to keep its nose above water. Its the ultimate "begger thy neighbor" strategy. Dollars will become a progressivley stronger currency in relative turns and all that helps draw capital from around the world back here.
The "guys" at the FED are either diabolical geniuses or complete morons.
Either way they were diabolical idiots for propping Wall Street and punishing citizens - unless that is their goal.
My vote is for diabolical morons.
Of course that was their goal. What other reason do they have for doing anything?
Well, if you overlook unfunded liabitlities then you would be mostly correct, unfortunately these liabilities are still unfunded and the debt is still there dipshit. Go ahead, let treasury yields rise, I double dog dare you. It cannot happen. Fucking moron.
fed is buying up too much 'collateral'. they need to taper so rest of financial sector can hold enough treasuries.
also they need to taper so when tshtf again they can show up and be able to buy 50b+/month wiithout forcing the banks to use gold as collateral which some say has been a cause of the gold futures dumps. (lender of the cash, accepting gold as collateral has to hedge said collateral, so sells gold futures)
if Q3 the US govt indeed doesnt run the forecasted massive deficit they wont be creating enough new treasuries to satisfy global demand.
taper, yes: initial reaction were already seeing is a spike in rates; longer result is buying of treasuries by everyone, brics/middle east/hedge agasint spx decline; only acceptable global finacial capital.
it'd much moreinteresting to see the govt run deficits if ti were doing something interersting...moon/mars, new spaceships, flying to a comet, exploring the deepseas etc.
The Fed’s tapering off of their European support will also be a positive for Treasuries and American credits as spreads will begin to widen between the two groups.......
oh please...as if anybody knows the true extent of the feds european support...there will never be any type of tapering of support to europe as long as they are in the hole.............how many trillions did bernanke spread around the world during the last downturn?? 14 trillion, 17 trillion???....this article is complete fucking bunk.................
Quite right none of us know the foreign support going on ...
All the central banks could be propping each other up re off-the-books currency swap lines that are continually rolled over ... Possibly:
Ben supplies hedge funds in the Caymans with fake digital Bernanke Bux that buy Spanish and Italian bonds
Mario Draghi gives some boutique outfits in Dubai some fake digital you-ros to buy US bonds
London and Tokyo in the loop as well, a grand global cluster-frack
Some time around the year 2050, a few decades after the collapse, we may learn the real story
Yes, but eventually, real commodities/products still have to be delivered and unfunded liabilities and debt has to be funded.
dont worry laws......they have an app for that..............
And the sequestration is ongoing, inflation is ongoing, the crash of 2008 is ongoing, the contraction of the economy in the west is ongoing, the contraction of the US military is ongoing, medicare financial budget contraction is ongoing, the inflation of equities(so that the rich and connected can exit same with a profit) is ongoing, decreased gold prices so that conversion of digital money to present and future physical gold is ongoing, the repeat of 2008 colapse scalping the sheeple in equities and pensions is on going, the digitallization of all currency is ongoing, the increase in farmers markets is ongoing.
Ammo for guns and physical gold is scarce and getting ....
You get the picture.
The Boomers are the trouble...once they are dead we split their gear.
b
Like a junky trying to kick it. The taper method. 6 months later you have a cold stiff in the alley. Dead from an overdose.
There is no "gradual" exit. The instant the Fed begins any real level of withdrawal from QE, the whole easy money, "we've got your back," chained debt leveraged Ponzi comes crashing down. Hard.
What will they do then with the loss of credibility they should have lost a very long time ago with the last three bubbles/crashes they've blown? The same stupid things they've done every other time because that's all they've got when dogmatically following their proven to be bankrupt economic theories.
Yep, they'll do the same thing as always, but this time, it shall be known as "tapering," as anyone with any sense knows one can only "ease" and "twist" for so long.
I think this fits into Jim Sinclair's "MOPE" (Management of Perception Economics).
I find it to be hilarious that propping up the market consists of trying to undermine those that are front-running their actions, otherwise, it all gets too lopsided, and there's nothing to skim.
The reality of debt is. If it's not getting parabolically larger, it's actually getting smaller.
Fast money has their finger on the sell button as soon as they smell 'QE' is ending.
There should be something said about luck, since this FED and the worlds' Central Banks have gotten away with Monetary Suicide....policies that historically that they would have been crusified for. Ironically, it's been the awful economic response to their "new normal" policies that is actually saving their collective asses....that if they achieved the kind of economic growth they hoped would happen with 10 Trillion in money from heaven, we would be looking today at out of control inflation and wildly higher rates. So, exiting QE, fast or slow, will result in dire economic consequences. The time to pay the piper is quickly arriving
Stay tuned. The next phase of this globalist economic experiment is going to be more interesting than the first phase.
Your name and avatar reminded me that the Bowery Boys in those old movies, used to pay their tab with 'IOU' notes at that diner where they used to hang out
Or like Groucho Marx said once in a film, « I'll give you my personal note for 90 days ... and then if I don't pay you, you can keep the note »
Duh....We will have another recession and "crisis" long before the Fed has gotten any where close to "normalising".
There is no way out.
I'm sure we're participating in Europe/EU/Euro stabilization out of the goodness of our hearts. Surely contagion of a rapidly deflating Europe could never impact the US!
Right or wrong everything is connected. The US is propping up Europe because without it they'd start falling like dominoes. So investors and quick money would flee to the US in the short term and then the US companies involved with Europe would collapse as they take defaults and haircuts.... Goldman, JP Morgan, Deusche, etc. oops!
We will not dig out of our troubles without legalizing a lot of things that are currently illegal now. Increase the quantity of goods and services on offer and you lessen the crash or (if we're truly lucky) avoid it entirely. Drill for energy near everywhere, regulatory reductions and holidays, sell off government assets that are not being used to their fullest, in short increase value creation.
I didn't realize until very recently that the FED has its own anthem or fight song. Rather catchy tune!
http://www.youtube.com/watch?v=KLNkN6O4ifY
how about if they just fuck off? thats pretty simple.
"This is a situation that I have contemplated for some time and I have been asked about it by some of the most senior people in our industry. So this morning I will share with you and the Fed some of my thoughts."
Supercilious cunt.
This is as likely as Obunga announcing that he is, in fact, a Kenyan muslim drug-addict psychopath faggot who despises all things American...
One answer....gold standard
Another statist.
Eliminate the fed. Let chips fall where they fall.
Eliminate fiat money. Return to the real, honest, physical gold standard.
What is the "real, honest, physical gold standard"? This simply means people exchange, barter, trade, sell, buy in whatever form they choose. The only reason this is called a "gold standard" is because the "standard" (conventional) way to state the "value" or "price" of any item, in terms of "grams of real, physical gold".
That doesn't mean gold needs to be involved in any transaction, it only means the exchange rate between any two goods is computed by dividing the "price in grams of gold" of good #1 by the "price in grams of gold" of good #2, generating the "price" of any good in terms of any other good. Which goods are actually exchanged is entirely up to the individuals making the transaction.
Why is everyone a statist? It is insane that people adopt the endless craven, diabolical, destructive premises of the most extreme statists... and then give opinions about how to tweak inherently corrupt, destructive acts. That's like debating exactly where someone should be sliced with a knife to bleed them to death. How about we debate whether harming people is acceptable behavior instead? Oh, right, can't do that, because that is a sane thought process.