Deutsche Bank Floats The "Why Bother With Tapering At All" Bubble
With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street's experts have fallen back to what they do worst: attemping to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but increasingly the probability, that there may not be a taper. At all. Well, Deutsche Bank - the first of any major Wall Street institution - just floated "that" particular bubble. To wit: since "the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?"
From Deutsche's Jim Reid:
After yesterday's payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn't improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.
If you're looking for a less consensus view, I was chatting with DB's US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting "late cycle" tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don't quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed's taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.
Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will proceed to monetize even more than $85 billion per month, crumbling collateral environment and shadow banking be damned. Heretic, because it will mean that the Fed not only can't limit its monthly flow any more, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.
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