Saturday, August 24, 2013

Black or White?


The following is a pic of a Malayan Tapir. Note the distinctive black and white markings of this animal.




Now consider this picture of Bernanke’s taper. It too has distinctive black and white markings.




The Malayan tapir comes by its coloring scheme naturally. The Bernanke taper has black and white shades that are man made.  It’s perfectly natural for the tapir to have mixed hues. It is totally impossible for Bernanke’s taper to be a mixture of black and white – it has to be one or the other.

The white side of the Fed’s taper is benign. The markets should not be afraid of it; there are no significant consequences. The black side is the other extreme. Bad things will happen when the taper is implemented. So which is it? Is the Bernanke taper black or white?


I’m concerned that the Fed is going to try to accomplish a “Taper Lite” in an attempt to engineer a ‘white’ outcome. An attempt at a ‘white’ taper would be:


FLASHFed to reduce QE by $5bn per month starting in October.

FLASHFed to reduce QE by a total of $15bn from October through December and thereafter leave monthly purchases at $70Bn per month for the indefinite future.

FLASHFed anticipates that it will take no additional policy steps until after January of 2014 (post Bernanke replacement).

FLASHThe Fed may elect to increase monthly purchases after January of 2014 based on data.


This small ball approach will backfire. Dragging out the process will drag out the pain. As of today there is not much evidence of Taper Pain in the USA. But the money is moving quickly outside of the border. How long will it take for some of the Black side of the taper to come back home?




indian rupee-wapo






 Obama’s decision on who to nominate as the next Fed head will be influenced by what happens as a result of the ‘Taper Plan’ to be revealed at the September Fed meeting. Two possible outcomes:


I) Bernanke spells out a Taper Plan that brings QE to zero over nine months. The US markets puke. All hell breaks out in India, Brazil and Indonesia.

- Obama quickly appoints Yellen – she does a dance for the Senate and talks all Dovey.


II) Bernanke somehow pulls of a Taper that is “Just Right” and the markets rejoice.

 – Obama pauses a few weeks, sees that there is no Taper Crisis, and then nominates his pal Larry. Summers also dances for the Senate, he says nothing and confuses everyone.




  1. Conscience of a Conservative says:

    At least with regards to MBS purchases, I believe the taper is being forced upon the Fed. Simply put with refinancing volume down, and purchase loans not going up either the Fed will need to curtail purchases or risk serious liquidity issues in the mortgage market. Laurie Goodman @ Amhearst has put out a good piece discussing this very real issue. If you buy the logic, and I do, then it might be that Bernanke is talking taper just to make it seem that he’s leading and not reacting.

    All this taper talk is all well and good, since there’s never been any real proof that Q.E. has had any real positive impact especially when one considers the distortions added to the market.

  2. The constant jawboning and testing of the water is the Fed’s way of attempting to engineer a Goldilocks exit. There is NOTHING they would like more than to be able to undertake an incremental, consequence-free and as much as possible unnoticed taper. Much as a polar bear swimmer enters frigid water firstl by splashing a little over himself, the market is slowly being inured, by constant tests and threats-to-taper-or-not-to-taper, to potential pain…which, through this method, the Fed hopes will never materialize.

    Will the markets see through this technique? Will they play along? More importantly, will the fundamental credit conditions existing during a balance-sheet reduction even ALLOW this to work?

  3. I second your conclusion: Taper Lite. Worst possible outcome. Governments always screw it up. All the Fed will accomplish is to add more uncertainty in the markets. Outcome is kind of interesting as with ZIRP, the short end of the yield curve is pegged. I’m thinking gold is the buy here due to the uncertainty.

  4. Bruce, I missed your posts… Welcome back!

    All this QE business brings me back to this:

    “In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster.” – Sir John James Cowperthwaite

  5. I think it might have been more apropos to have used a photo of an Appaloosa horse’s ass

  6. Rusty Brown in Canada says:

    I just don’t get it: if the Fed doesn’t buy these billions worth of government paper every month, who will? Eh?

  7. it’s all noise until they mess with the front of the curve. BK, it looks like they still plan to move the FF from 9 bps (or whatever it is right now) to 1.00% in 12 months, and the plan to make that happen is with fixed rate repo. Assuming they don’t understand/respect the downside risks, couldnt it lead to the mother of all liquidity events which is never a good thing for a highly leveraged primary dealer with HQ in Frankfurt, DE.

    hope you’re almost done writing the great american novel because the blogosphere is sub-par without you, (either writing fiction or you’re still using $100 bills as toilet paper from that short yen trade…)

  8. It will all be moot as bonds rise. And they will rise pretty soon. Even sooner if the US intervenes (govspeak for limited war) in Syria. Just watch Japan, China and Russia. They hold wild cards called UST-bills. It wouldn’t take much to dump more than the Fed is currently buying. June was $40B, waiting for July figures.

  9. When will people realize the world is not black and white?

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