5 Things To Ponder This Weekend - The Taper Edition

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

This past week the Federal Reserve began tapering their current large scale asset purchase (LSAP) program, more commonly referred to as Quantitative Easing (QE), by trimming $10 billion in bond purchases from the previous monthly totals.  This week's "Things To Ponder" is a diverse set of views on the potential effect of the taper on the financial markets and the impact to investors.  Regardless of your personal expectations as to the impact of the reduction of liquidity in the months ahead, it is always a good mental exercise to consider opposing viewpoints to balance your own views by eliminating confirmation bias.  Here are 5 disparate views on the effect, and potential outcome, of the Federal Reserve's latest move.

1) The Fed Is Just Winging It Now by Jeffrey Snider, Alhambra Partners

I have discussed in the past that the Fed's primary concern are the deflationary pressures that continue to plague the economy.  (See here and here)  Jeffrey did a terrific job discussing this point, and the entire post is well worth your time reading.

"In the wake of finally (FINALLY) reaching the primary taper point, it is worth remembering exactly what QE was supposed to do. QE is the 'extraordinary' policy tool that accompanies ZIRP. That mystical lower bound of 0% rates is believed penetrable by jiggering with inflation expectations. Thus, QE is meant as a means to increase inflation expectations, leading to negative real interest rates – and economic panacea/utopia from there.


Instead of that, we still have ZIRP now almost for five full years and inflation behaving very much contrary to modeled and publicized expectations. That is true not only in the CPI, but in nearly every official measure of inflation. That would make this a curious development in the light, again, of what QE was supposed to accomplish."


2) Fed Taper Begins, What Happen's Next by Mohammed El-Erian

Mohammed points to four reasons why the Fed's actions make sense:

1) Fed is right to be more confident of the economy.

2) Fed's confidence is not overwhelming, just better.

3) Mixed outlook calls for delicate policy balance.

4) Fed still has room to lower the overnight lending rates.

"Investors are right to take all this to mean that the Fed remains highly committed to supporting an improving economy — and, since it seemingly can only do so through 'the asset channel,' the institution thus remains committed to supporting markets.

This is particularly good news for equity markets in the short-term, building on what already has been a great performance year. It also contains the disruptions to bonds."

3) Post-FOMC Strategy by Doug Kass

Doug does a good analysis of the Federal Reserve's QE program.

"1) QE has provided a stock market put and has also prevented the natural discovery of prices in both the stock and bond markets.


2) The general belief is that the U.S. stock market will be able to overcome the reduction in bond buying.


3) The critical questions are whether the economy can handle higher interest rates and whether stocks can rally in the face of a less liquidity.


4) The addiction to low interest rates runs deep with consumers, corporations in the private sector and our government in terms of financing the U.S. deficit, which will weigh on optimistic growth expectations and the consensus view that stocks will rise further.


5) The domestic economy is heavily doped up by abnormally low interest rates and monetary accommodation.


6) Monetary policy (the Fed) has been needed to support growth in our domestic economy. With that monetary support moderating coupled with the lack of fiscal responsibility and the inability of Democrats and Republicans to come together, more uncertainty than less certainty of policy lies ahead.

This should be valuation-deflating.


To a person, the talking heads in the media who provided instant analysis of the Fed's tapering decision were bullish late yesterday afternoon. Not surprisingly, many of the same commentators who were bullish after a 300-point rise in the DJIA had previously cautioned about the market's likely adverse response to a tapering.


It is for the reasons listed above (and others) that I shorted yesterday's market rip and moved from a market-neutral stance to a net 10% short position. (I have since shifted back to neutral.)


What keeps me from moving more aggressively short is that I have learned to be respectful of the market's unbelievable price momentum, and frankly, I don't know the timing of a downturn/correction with any degree of certainty or precision.


That I am certain of is, as The Oracle wrote, it might shortly 'be time to be fearful when others are greedy.'"

4)  5 Reasons Stocks Didn't Suffer A Taper Tantrum by Adam Shell, USA Today 

"The past two times the Fed warned of tapering, the Dow fell — 4.9% back in May and June, and 5.6% in August. The declines were dubbed 'Taper Tantrum 1' and 'Taper Tantrum 2.'


So why did stocks go up when most pundits figured they would go down?


Here are five theories why the first taper didn't tank the stock market:


1. It signals the Fed's faith in the recovery.

2. It reduces uncertainty.

3. It amounts to 'Taper Lite.'

4. It caught Wall Street off guard.

5. It doesn't change the Fed's dovish stance.


The takeaway: The Fed will remain highly accommodative for years."

5) The Taper Morning After: A Full Summary Of What "They" Are Saying via Zero Hedge

"Strategists were largely wrong about the yes taper in September, and then they were just as largely wrong about the no taper in December, and yet their opinion is just as largely gospel and people continue to listen to them (what else is there to be distracted by in a still very much centrally-planned market and economy). Which is why the below summary by Bloomberg of what global financial strategists and investors, also known as "they", are saying about how to trade assets in the post-taper world, should probably be taken, largely, with a grain of salt."

Views from PIMCO, BlackRock, HSBC, UBS, Morgan Stanley, SocGen and others.  It's a good read particularly if you have a currency bias in your portfolio.

Chart Of The Week - What Difference Does $10 Billion A Month Make

The chart below shows the Federal Reserve's balance sheet as compared to the S&P 500 with both being projected through the end of 2016.  The dashed lines denote the projected expansion of the balance sheet, and the correlated rise in asset prices, both before and after the Federal Reserve's most recent "taper."


Wishing you a very happy holiday season and a merry Christmas.

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LawsofPhysics's picture

So the "taper" makes no difference at all, full QE/manipulation is still ongoing.  I am shocked, just shocked I tell you.  /s 


Seriously though, let's hope they can drive oil and gold down even further...

Might as well be optimistic.

Merry Christmas all.

Try the buffet, I'll be back mid January.

bigdumbnugly's picture

ok, so why does a turd taper at the end?

bigdumbnugly's picture

of course the answer is so your butthole doesn't slam shut.


i suppose we'll see if that holds true in this case or not as well.

prains's picture

.....because the bearded raccoon says it will be so and we listened

AngelEyes00's picture


10 year down .04 cents today from 2.93 to 2.89

Wasn't taper suppose to cause it to rise instead?

Obama_4_Dictator's picture

Yeah, WTF!?  I think the FED pulled it off...unreal - *Bows to the great Bernake.*

AngelEyes00's picture

Yeah, bows to Bernanke so far.  He must be strutting around like a rooster.  Later if something goes wrong it will be all Yellen's fault (at least as the news will report it).  Wall Street should lift that guy on to their shoulders and do a few hip hip hoorays for Ben the Print Wizard.  GDP is way up, stocks are up, 10 year down, it's a frickin miracle whip.

CrashisOptimistic's picture

If you want out of stocks for 2014, bonds are the obvious thing to buy.

Also, Q4 GDP is going to be smashed by the demand pullforward that goosed Q3 GDP pre shutdown.

And then there is oil headed for $100+ . . .

The future is not bright.

Ness.'s picture

As soon as the 10yr started sniffing 3% someone (.gov) with ALOT at stake decided to send a message that they (PPT) are not to be fucked with when it comes to rates.  The day of reckoning comes when China decides it's "go" time and dumps UST en masse.  It's coming.  

Jannn's picture

SGE Physical Delivery 2073 Tons YTD, 50 Tons From 9-13 December



Al Huxley's picture

Well that's nothing!  That's less than annual production!

kliguy38's picture

I'll be buyin' phyical tomorrow..........so I wanna say thanks cartel

Obama_4_Dictator's picture

My take - The Fed pulled off the impossible, it's over, they won and we the people lost....I never would have thought they could do it.  Time to join the party....

Dick Buttkiss's picture

"Time to join the party..."

Right when they're about to stumble out of the building and get behind the wheel?

I don't think so.

And in any case, it's better to be a year early than a day late, so best to sit this party out and prepare for the hangover:


Obama_4_Dictator's picture

This "Happy Hour" is going to last longer than you and I can stay solvent....time for a drink, it's 4:15 and there is still a long time until it's over.....

Dick Buttkiss's picture

Happy Hour lasts until 4:15?

Again, I don't think so.

And you sure as hell don't want to find yourself on the roadside when the sun comes up, especially since tens of millions of others will:



Obama_4_Dictator's picture

No, Happy Hour lasts until 5pm, we are only at 4:15 pm (IMHO)....still a long time left in the party of fools....

Harry Dong's picture

What's wrong with : week one - bug out to Puerto Rico?

Al Huxley's picture

Me, I'm just pondering how much HLF, FB and TWTR are going to be up by this time next week.

TheRideNeverEnds's picture

I am guessing at least 10% more on the upside in those before the end of the year then small down in JAN possibly but its a given the S&P will trade up past 2000 next year as we ramp towards the old highs around 5-6000 in the SPX (adjusted for inflation) so you have to just buy basically everything. 


The mistake people are making is that they are looking at the nominal values; adjusted for M2 inflation the SPX is trading the equivalent now of like 500 back in 2007.



the grateful unemployed's picture

don't trust that M2 inflation the Fed is in the MMs, just like the BOJ during their lost decade (er golden age) if any parallel are possible long ups and long downs, and net net no growth for years

besnook's picture

i think the fed is taking the higher lows and higher highs approach to interest rates and the purpose of the taper was to move the ten year above the last high giving the fed more room to take it down to <2 but higher than the last low. rinse and repeat for another 5 years and you have a recovery. at some point all the money in the income funds start making enough money for people to spend foolishly(baby boomers) and bread is still less than 5 dollars/loaf.

JR's picture

In other words, the banks can be the economy and the idea of money as a store of value is as antiquated as American freedom. Your formula explains that central planning works, which would be unusual since it would be the first time in history. Wiping out Main Street to repave Wall Street in gold may be recovery for Wall Street, but mark my words, it won't be long until they can't pay Wall Street, either.

besnook's picture

this entire system is based upon a model that can be manipulated at will simply by adjusting the value of variables. the system vulnerability is the ability to control the flow of cash, the final product of digital fiat. that is why the infusion of massive amounts of magic .gov and fed cash was so critical to the solution for the crisis.

history says wall street or whoever controls the currency of the day always wins, has always won even if they are the one who caused the problem. that is the depressing fact. the best you can hope for is to be one of the ones alive when it is all over in the worst case and still under roof and fed in the best case(or on the inside, with us or against us and all that). these people are ruthless.

odatruf's picture

Control of the currency PLUS enough guns, bombs, dones and tanks to keep that control.  With that, they've got a > sporting chance.

JR's picture

How long are the implications and projections going to continue when the so-called outcomes of the Federal Reserve are no more complicated than discussing what a crew of robbers is going to do with the money they’ve just stolen?

For Heaven’s sake, it is time, past time, for identifying these unelected American oligarchs who are designing private policies to make themselves rich and the American people and the American nation poorer.

And it’s not anti-Semitic but a fact that these oligarchs are primarily Jewish which connects to the traditional Jewish policies of socialism, of multiculturalism for all cultures except for their own, for dominating the financial business of nations, for opposition to European cultural and conservative economic standards, and for their consistent tendencies to bind together in political cults.

And if the financial domination of the American finance is not a cult, then the word has no meaning.

Instead of making guesses as to where the Fed goes from here, it’s time to move Bernanke and Yellen out of those chairs and to demand a true accounting of where that $75-$85 billion monthly is really going and exactly who’s getting it. And once more, how much more is being stolen that is never mentioned.

And if Congress is so imbedded with these people that it will continue to refuse an accounting, then this Congress needs to be removed – one way or the other.

Kayman's picture

Every dollar conjured up by the Fed is a claim on American assets.  In plain English, it is theft from the real economy.

Harry Dong's picture

Also known as a haircut when it happens to your stock...

Also known as a tripling of the money base...and then  some more each month.

Absolutely this = inflation.  Don't see it? Then maybe you're not looking at the increase in the stock market IS inflation.


Don't think we have inflation now? oh we are, we are.

Might as well join the party and BORROW as much 30 year free money as you can, eh?

AngelEyes00's picture

I read the Rockefeller email.  Probably just his opinion rather than inside information. 

socalbeach's picture



"Regardless of your personal expectations as to the impact of the reduction of the rate of liquidity increase in the months ahead, ..."

the grateful unemployed's picture

the only caveat is they do ring a bell at the top, but not everybody hears it and theres the rub, the BTFD crowd will get monkey hammered. the only real strategy is to buy, set your stops tight, and DO NOT GET BACK IN. its the same rules as amateur marijuana farming, your first conviction is a warning and probation. after that its hard times.