While the Fed pays lip-service to its increased transparency, the volumes of caveats and wordsmithing we exposed last week continue to surge [8]. The problem is becoming worse for the Fed and is showing up in the oddest correlation to the Fed Balance Sheet we have found yet. As Deutsche Bank's Thorsten Slok shows, as the 'unemployment rate' approaches the 6.5% 'threshold', FOMC statements have surged in their verbiosity. Simply put, as Slok quantifies, it is becoming more and more difficult for the Fed to explain (away) what it is doing (and more and more expensive). And another thing we can look forward to: when the Fed's balance sheet hits $1 quadrillion in a few short years, at the current pace of expansion the FOMC statement will be 25,000 words, or the equivalent of a 100 page book.
[9]
$6 billion per additional word... Will the taper means fewer or more words? (but as @Not_Jim_Cramer notes, Every additional word in the FOMC statement since 2008 was worth $18 Billion in equity market value.)
Remember, while the 'better' economic data provides the cover, there remain critical reasons why the Fed has to stop its QE program (or at minimum show it can reduce it) - even as the Fed itself admits to asset bubbles and risk concern [10]s:
1. Deficits are shrinking [11] and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets [12] due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; [13] if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly - and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. [14] As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time.