Wednesday, September 18, 2013

FOMC Taper Decision Today

The much-awaited Fed taper decision day is here. The consensus is for a 10 to 15 billion per month taper to begin. The Fed outright purchases are currently at a rate of 85 billion/month. Chairman Bernanke said he would like to be out of this by mid-2014. Therefore, folks are performing simple math taking the October to June period, 9 months, and dividing it into the 85 billion to arrive at 9.4 billion, calling it 10 to use a whole round number. Thus, if the Fed tapers the stimulus at a rate of about 10 billion per month, this QE Infinity program would end in June (the 85 billion per month would drop to 75 next month, then 65 the month after, and so on down to zero in June).

Taking the math a bit further, based on what Fed member Williams (Keystone thinks it was Williams but it may have been a different member) said a couple weeks ago, is that most members favor the move to taper but it 'may not begin right away'. This may be an important statement that was glossed over by the media. So what are the taper amounts using an 8-month or 7-month period? If the taper begins in November and ends in June, 8 months, that would be 10.6 billion, call it 11 billion per month. If the taper begins in December and ends in June, 7 months, that would be 12 billion on the dot. It is always nice to see symmetry in numbers and a 7-month period at 12 billion is an exact match to the 84-85 billion. Note that all the numbers fall within the consensus 10-15 range.

In the broader context, the Fed intervention began in March 2009 with QE1 that stopped the ongoing market crash. Shamefully, here we are 4-1/2 years later with a sick 2% GDP after wasting all that money digging a deeper hole. Folks love free markets when stocks are going up, but the minute a correction is needed, and for sick companies to be trimmed and sent out of business, no one wants the bad side of free markets to occur.  This is the moral hazard. Banks will always leverage-up and play fast and loose since the government, and actually Joe the Sucka Taxpayer, will always bail them out. The banks are bigger than in 2008, still too big too fail, and the bankers are wealthier than ever. How is your life going?  The purging of sick companies in free market capitalism is a very important function that must be performed, otherwise, the markets are not free, like now.  Free markets are a joke currently as evidenced by everyone hanging on what one man says, Bernanke, this afternoon, to determine how to trade. It is all so very shameful.

The goal of the Fed is to extend time as long as possible since the more time that goes by the more chance there is that the economy will pull itself out of the grave. So any move by the Fed always has this can-kicking goal in play. Bernanke, a scholar of the Great Depression, thinks that the stimulus provided back then was too low and too slow, exacerbating the sick conditions through the 1930's. Thus, Bernanke has dropped money from helicopters for over four years, huge amounts faster, testing out his thesis. The final results of this epic economic experiment are not yet available.

Bernanke's commentary at 2:30 PM EST is very important. The decision is announced 2 PM EST. The split between tapering on mortgage debt versus Treasury debt is also important today. Also in play is Bernanke's tenure as Fed. He is a lame duck now and since he started this unprecedented stimulus, he would like to at least provide an exit strategy before he leaves, even a fig leaf approach. The academics protect their own, so colleagues should help Ben seek an avenue to exit gracefully with accolades.

So, here we are only a few hours away from the decision. Since a delay in the start of tapering may serve to calm markets and give them a couple months to adjust, and the least amount of controversy can be created by reducing an equal amount of mortgage debt and Treasury debt, a guesstimate of 12 billion per month tapering to begin in December and end in June, may be a logical choice, with an equal split of mortgage and Treasury debt. Of great interest will be if Bernanke utters the word 'taper' today since he has never said taper on the record as yet.

Note Added at 6:53 AM on 9/19/13: Markets were expecting a modest relaxation of QE but instead the Fed announces NO TAPER shocking the investment world and global markets. Very few expected no taper. The stock market catapults to new all-time highs. Treasury yields plummet as traders buy stocks and bonds with the Fed's easy money.  Utilities jump a huge 3% on the lower yields. Chairman Bernanke punts the ball to the 10/29/13 and 10/30/13 FOMC meeting. The Fed is likely concerned over the political battles now occurring in Washington, D.C., with the CR deadline (9/30/13) days away and the debt ceiling limit hitting in mid to late October

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