Afraid To Taper?
Posted on Friday, September 20th, 2013
Just when I think I’m out – they pull me right back in. – Ben Bernanke
We suppose that you know that the above mentioned quote should not be attributed to Ben Bernanke but to one Michael Corleone. The Fed Chairman must have felt this way though as the FOMC decided not to pursue any taper at all at the September meeting this week. Here is another quote – from Deutsche Bank this time- that sums up the Fed’s conundrum.
“…the path of tapering is going to be tough because every time the market thinks they are going to taper, yields will likely rise and conditions will tighten” – Deutsche Bank
It is interesting to note that the Fed passed on a free option to Taper their purchases. The question is – Why? We have postulated that the level on the 3% level on the US 10 year Treasury is the most important metric to watch. As the level was approached due to Taper Talk the rate of mortgage originations began to decline rapidly. Layoffs in the mortgage departments at JPMorgan and Wells Fargo also certainly caught the good doctor’s eye. Is the 3% level the new Maginot Line?
The Fed’s new transparency has the market on edge. The Fed led the market to tapering but didn’t make it drink. The street is now questioning leadership and the Fed may not be able to jawbone the market as the street loses confidence. The market feels as though it has been lied to and the Fed now has a credibility problem. So much for trying to be more transparent.
Will the market take off now that the Fed is monetizing even greater amounts of the government’s debt? Is the Fed afraid to taper? Is the economy that weak? We do know that they are blowing an even bigger bubble that will at some point break. Remember central banks don’t create growth they only pull demand forward much as they have pulled market returns forward. Does it make sense that the market is at all time highs if the economy is so weak that the Fed cannot withdraw? The Fed has pulled market returns forward by pushing investors into riskier assets. Markets will reprice at some point.
Asset prices are getting bubbly again as investors from Cooperman to Druckenmiller to Buffett and Witmer are of the opinion that asset values are fully priced. Equity prices have risen due to the expansion of P/E. Simply stated, earnings have not risen but investors continue to pay higher prices for the same $1 of earnings. Should the amount that investors are paying for $1 of corporate earnings be above the longer term averages if the economy is not growing? More and more investors are reaching further and further out on the limb to grab the fruit.
Market technicians say that market spikes – like the one on Wednesday – are followed by a couple of days of follow through buying but then produce less than stellar returns over the next two months. The debt ceiling talk may also help produce that result. However, any market pullback should be met with buyers as the longer term bull is still intact. That is until the Fed withdraws from the battle field.
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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.