The Fed 'No Taper' Aftermath

The smoke continues to clear after the bombshell Fed decision to not taper the 85 billion per month ongoing QE program. Nearly all traders, pundits and analysts expected at least a modest taper to be announced. All were wrong. The Fed lowered guidance forward and thinks the economy is so sick that it cannot even sustain a paltry few billion reduction in outright purchases. This blows a hole in the thinking that the economy was improving, supposedly the reason for the stock market moving up recently.  Of course the true reason for markets moving higher, which now continues over 4 years time, is purely due to the Fed pumping. The Fed, and other central bankers, are the market. The proof is provided yesterday.

There will be lots of Fed analysis in the media over the coming days. In a nutshell, the Fed, and Chairman Bernanke lost credibility yesterday. This is confirmed by the near +5% jump in gold. Interestingly, the Fed has achieved its goal of more transparency, but with that the assumption is that clarity is provided as well. Instead, there is increased transparency but less clarity. The Fed decision has created confusion. In the Q and A session, a coy Bernanke responds to a question by saying 'the Fed never promised anything significant to occur at the September meeting'. This statement is a bit cheesy since Bernanke has been in hiding since July, and he could have easily toned down expectations for a taper at any time, as well as his surrogates that regularly speak to the media. Bernanke had previously said that the QE would begin later this year and end in mid-2014 but appears to flip-flop from this position? This type of baby behavior creates a loss of clarity moving forward, decreases Bernanke's and the Fed's credibility, and creates confusion.

Two main themes may serve as a basis for the Fed's no taper decision. First, the Washington, D.C. politics are likely in the way. The Continuing Resolution (CR) to fund the U.S. government deadline is now only 11 days away on 9/30/13. In addition, the U.S. reaches the debt ceiling limit sometime between 10/18/13 and early November. The next FOMC meeting is 10/29/13 and 10/30/13 so at least the CR situation should be resolved by then. Thus, the Fed may still be on the path to taper the QE to zero by next summer. The drama will now build towards the late October meeting. Second, the new Fed chairman will be in place late January and if Yellen is selected, who has the reputation for being the most dovish member of the Fed, her and Bernanke, then Bernanke likely did not want to begin tapering that may be reversed early next year. Bernanke is concerned about the Great Depression repeating since the Fed pulled back to soon back then which then created the prolonged misery through the 1930's. He thinks it is best to simply kick the can down the road and why should he care anyway, he will be fishing come February. After the late October meeting, the FOMC then meets in mid-December, 12/17/13 and 12/18/13, and then in late January, 1/28/13 and 1/29/13.

The decision to not taper clearly slaps the savers and retirees further. To H*ll with Aunt Agnes and Uncle John; throw them under the bus. Bernanke wants everyone to move into risky assets as he pumps asset bubbles higher. Remember, the Fed's goal is to create as much time as possible for the economy to heal, while at the same time creating the wealth effect that will spur spending and bring the economy out of the doldrums. The shame of it all is that the no tapering decision only makes the wealthy wealthier, creates bigger asset bubbles, hurts the savers and retirees, and will do nothing to cure the structural unemployment problem. Bernanke obviously supports the rich folks at the expense of Joe Sixpack; his policies favor the 'have's' while pounding the 'have-not's' into the dust. The Fed's move will only serves to increase the inequality in America and foster discontent. At this point, the Fed likely has no choice except to keep pumping. There is no Plan B. Bernanke is supplying the market junkies with heroin each day and now it is at the point that he cannot even wean the addict off the drugs without killing the patient. As Oliver Hardy, of the comedic team of Laurel and Hardy would quip, "well, here's another nice mess you've gotten me into."

The recent strong move up in rates likely spooked the Fed. Markets are binary and are not going to move in a steady slow direction as the Fed hopes. Markets view tapering as tightening policy so the expectation is that yields will move higher and stocks lower. That is why the opposite occurs on no tapering with yields plummeting as traders take the Fed's easy money and buy both stocks and bonds. This morning, considering the big drop in yields (higher bond prices), traders are already proclaiming the long Treasury note and bond trade to be golden moving forward. You know what happens when traders all move to one side of the boat. The likely scenario is that yields probably remain flat moving forward for months to come. The scenario no one thinks about is that with obscene asset bubbles now on the agenda, and many traders up with big gains this year, the logical move is to lighten exposure to equities moving forward and lock in all the gains for this year, taking the rest of the year off. Some of that money may move into bonds which serves to keep rates flat or lower along with the Fed actions. Thus, a lower stock market and lower Treasury yields, as Keystone continues to mention this year, may be the outcome. This behavior is disinflationary and deflationary and leaves the 1930's redux firmly on the table despite Bernanke's excessive and quick QE stimulus experiment that is ongoing. Cash is king in deflation.

Ending on a somber note, the outcome ahead is not rosy. Sure, another short-term Fed punch-bowl party is in place now, however, the picture will likely become much uglier moving forward. The weight of all the QE easy money will eventually come to bare with ugly, violent and negative market reactions ahead, the question is, as always, when? Other outcomes which would serve to remedy this mess include a world war beginning, or a global pandemic, but obviously these tragic situations will take a massive toll on humanity. The Fed statement sends shock waves around the world. Asian and European markets are higher this morning. Several days will be required to allow the smoke to clear and sort out a path forward since the Fed is not providing clarity, only confusion. Keystone's projection for yesterday was no taper until December, then a 12 billion per month reduction in QE from December to June 2014, but the anticipation was that the Fed would announce this clear plan forward yesterday. Instead, the Fed does not taper and does not provide clarity moving forward.  Bernanke is much more preoccupied with keeping the easy money policies in place, supplying syringes and drinking glasses to all the junkies and drunkards that pump asset bubbles higher.