The Inevitable 'Taper' And Avoiding 'The Giddiness Of Weimar'
With all eyes fixed on GDP and unemployment data this week (and all their revised and propagandized unreality) for more hints at if (not when) the Fed will Taper; the dismal reality that few seem willing to admit is that it is when (not if) and that the announcement of a "Taper" has nothing to do with the economy. There are three key factors driving this decision: Bernanke's bubble-blowing and bond-market-breaking legacy, the political 'clean slate' his successor needs, and, most importantly, the fear that QE will be discovered for what it is - monetization. As BoJ's Kuroda admitted last night "if QE is seen as financing debt, this could lead to rise in yields." With deficits falling, the Fed's real actions will be exposed (unless QE is tapered) and as Kyle Bass has explained before, it was out of the hands of the BOJ (or The Fed) and entirely up to market psychology.
The announcement of a "Taper" sooner rather than later has nothing to do with the economy. It is driven by three main factors as confirmed by CS' Harley Bassman:
1) Bernanke's bubble-blowing (and market-breaking) legacy: This was his "irrational exuberance" speech to deflate the asset bubble the Fed has so assiduously inflated. By stopping out the over-levered trader's who were trying to monetize the "Bernanke put", the Fed is trying to mitigate a 1994 or 1998 or 2007 scenario (the last times that gamma vols sunk below 80). Mr. Bernanke does not want a Greenspan redux where a financial calamity occurs soon after his departure and he takes the blame. He also does not want to entirely break the market - his only transmission channel.
2) Political positioning. Mr. Bernanke is the only person who can start the taper process and keep his hands clean. If the job falls to the next Fed Chairperson, it will be met with a cacophony of second guessers (think Krugman). By doing the dirty job himself, he provides a clean slate to his successor.
3) QE's Monetization Demon and destabilization. No matter the unemployment or inflation rate, QE will soon become destabilizing, even for the most Dovish. As much as bond vigilantes have cried about inflation, QE1 + QE2 + QE3 + QE4EVA had yet to fully monetize the budget deficit.
This will change soon...
...as such, the Fed needs to pare back if they hope to not exceed the giddiness of the Weimar Republic...
Recently, a Hayman Capital representative had dinner with a key member of the Bank of Japan and was afforded the opportunity to question him about the expansion of the BOJ’s balance sheet to purchase Japanese Government Bonds (“JGB”) (monetizing debt). The BOJ representative had just finished a statement where he denounced monetization of debts when we asked him how he defines monetization (we define it as central bank balance sheet expansion in order to purchase sovereign debt).
After a long pause, he said “It is only monetization when the market tells us it is monetization. When yields go up, not down, when we buy bonds, then the market says we are monetizing.” When we pressed further, he acknowledged it was out of the hands of the BOJ and entirely up to market psychology. Wow, we wonder how that makes JGB investors feel.
In other words, the taper is a done deal (barring some catastrophic event) as 'the people' will shift their pschological bias to recognizing the Fed's actions for what they are - monetization - and once that occurs, the 'giddiness of Weimar' is upon us.
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