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Thursday, November 21, 2013

Taper Talk is Back – It’s Not Going Away This Time

 

The capital market for new issues and refinancing of corporate debt has been on a tear the past few months – I think that ended yesterday.  That’s because the dreaded Taper Talk has resurfaced. The Fed minutes yesterday rekindled Fear of Taper.

The Taper On/Taper Off story has been with us for six months now. It started in May with the release of the Fed minutes and the first “whisper’ of the Taper. The talk of the Taper reached a zenith in late September as the debt markets were convinced that Bernanke would start the Taper in October. It was a big surprise to players when Good Ole Ben chose to delay the October start and push it to sometime in the future; and now it’s back.

 

novembertaper

 

An interesting consequence of Taper Talk is how it affects the Corporate new issue bond calendar. The following chart shows how talk of taper killed the ReFi market in June/July/October, and it also shows how the window for new issues opened right after Big Ben delayed the taper for a few months. Up until yesterday the corporate finance types and bond dealers on Wall Street were having a daily party. As of today, they will be back to struggling to push deals out the door.

 

reuters

 

My read of this is that the debt market does not work well unless there is the perception of QE -4 ever. The capital markets freeze up whenever the threat of a disruption of the $85B of grease the Fed provides every month arises. When the capital markets are working well, the deal flow is there, and this is good for the economy. When there is Taper Talk the refinancing gears get gummed up, and it acts like a drag on the economy.

There is no doubt in my mind that Yellen is going to push off the Taper for as long as she can. But even the Great Dove can’t push the Taper off for too long. I think that Yellen will be forced to initiate a Taper by March. That suggests that there is a four month window before the actual event, but I don’t think the Taper Talk is going to subside as it did in October/November. The Talk of the Taper will be with us (and the closing of the refinancing window) for months. As a result we are going to see a pause in the up move in equities and a closing of the bond window. This will translate into an economic drag. Whatever your forecast of 4th Q and 1st Q growth were on Tuesday, you should mark them down a bit today.

QE is the lubricant of the system. But when it is ended (or threatened to end) it causes pain. We’ve had five years of grease, now we are going to have to pay a price. My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months. The Taper sign is now on, it will remain on until the talk is turned into action. When the Taper Talk sign is on, beware. The sign is now brightly lit.

 

tapersign

 

Comments

  1. Conscience of a Conservative says:

    Mckinsey put out a good piece today on the negative effects of Q.E. and zero interest policy. Much of the positive effects are arguable and came at the expense of large segments of the household sector and pension and insurance beneficiaries.

  2. First, there are diminished returns to policy accommodation. Next up, there are negative returns to accommodation. Taper isn’t a choice, it is a consequence.

    Bosses cannot fix an energy (shortage) problem with credit, give them props, they tried.

    After negative returns comes energy conservation … real … stringent … energy conservation.

  3. Seriously? Like most politicians, the Fed’s pain threshold is practically non-existent.

    Back in the 2000′s when the FFR was 1% there was always talk about how the “next (rate) move was up”. Now in the 2010′s we hear about “taper”. As before, it’s all bark and no bite.

    • Transitory Taper Talk says:

      agreed, the Fed won’t/can’t end QE until the Invisible Hand gets angry and bitch slaps the primary dealers. At which time the press will blame everything on some Youtube video.

      I cant tell if Bruce wrote this article just to stir things up or what? 5 years of monetary stimulus and all I have to show for it is 2.5% gdp growth and an ERP that’s flashing “50% correction imminent.”

      • This is the correct way to view taper. No government agency has ever done something because it is ‘right’ or theoretically ‘correct’ – the government operates to secure votes. No one wants the consequence of taper, which will be lower markets and the perception of impending disaster. You can talk until you are blue in the face about how ineffective it is but Ben and Janet only care about keeping their keepers happy and that means easy money and a rising stock market.

  4. I think taper talk is a policy tool like forward guidance. IOW, I think it’s hot air. It’s a ruse to keep the stock market from getting too irrationally exuberant. IMO, the Fed is trying to keep the market where it wants it with the “right” combination of dovish and hawkish talk. If market sells off, turn up the dovishness. If market gets too frothy, turn up the hawkishness. Repeat.

  5. there will be no taper…until the dollar hits 72.0

    • The FED isn’t comprised of stupid people. They manipulate markets, the Plunge Protection Team, etc. Why would one think that pronouncements from the FED isn’t also manipulative. The questions that need be asked is, what is the 85 Bil a month buying and from whom and to what goal, is it 85 or more like 130 bil a month? Bernanke just doesn’t make idle slips of the tongue. He had a goal in mind when he talked about tapering. As I stated in the comments in Bruce’s last blog, I think that tapering is to crash the stocks and move money into bonds. Do you really think that the FED really wants to hold on to 4 Tril worth of QE purchases, if so why? These QE purchases are the “Ole Maid.”

      Anonymous—When the dollar hits 72, it is going to put upward pressure on bonds forcing interest rates higher. Higher interest rates it the Killer, therefore the FED will do everything to keep the rate low.

      The FED doesn’t really set the interest rate the buyer sets the rate, the FED can only offer. In today’s market where the FED is the seller and also the buyer, anything goes.

      Yes, I think that tapering will occur, but only when there is upward pressure on the bond rates.

      • Upward pressure on bond rates? What do you think Taper will do? As soon as the word ‘Taper’ is whispered the bond market tanks. The only reason rates are where they are is that the Fed is buying everything under the sun. Taper won’t happen because the Fed doesn’t want to see a 20% correction in the stock market and 100+ bp rise in the ten year.

        • Cow—What would cause upward pressure on bond rates? 1) selling But all bond holders aren’t like PIMCO. Bill Gross is out, and probably for good reason. I’d like to know what he is currently “in” as money doesn’t sit and stagnate. Pension funds, insurance companies and other bond holders just can’t bail.as easily. 2) a dearth of buyers would force up rates if it was a true auction market. The Fed then would be the buyer of last resort. 3) rising yields on the 10 yr bonds would alert bond holders to future events. Would you buy bonds today if you knew tomorrow there would be a 100 basis point move higher in the 10 yr. ? 4) taper? I don’t know how much of the Fed’s easy money largess is flowing into treasuries. I would think that most of that went into equities and housing. If it is a substantial amount and tapering occurred that would cause less demand for bonds as that money is withdrawn, putting upward pressure on rates as you suggested, Cow.. (see 2) But how much juicing is there?

          My thinking is that QE will halt at some point in time and that the mechanism for that halt whether gradually or suddenly because of some “black swan” will be called “tapering” or some neutral term. It just sounds better than “cold turkey”. Markets don’t like surprises. Since there is only so much in resources to spread between bond, stocks and PMs, this money will be moved to the market that is most advantages to the Fed, US gov. and Goldman – JP, who get paid handsomely for doing the dirty work. Of course, Goldman and JP trade on inside info carrying out Fed policy. That Info puts them on the right side of the trade, about every time.

          1st. the PM got smashed (small market), next the equities will get hammered through “tapering” ( medium market). There would then be an increase demand for bonds (huge market) for safety and yields as it is the only game in town. Increased demand will keep rates low. The only thing that will tank the bond market is a increase in interest rates. That can’t happen as the interest paid by the US would create a cataclysmic problem with no solution other than default. So, what can’t happen won’t happen. This is my thinking on “tapering”.

  6. I don’t think there can ever be an end to QE (except with a systemic collapse). The political consequences of a stock market collapse will be amplified by an economic slowdown (from already bad conditions).
    To end QE would destroy the present system. To not end QE will destroy the present system.
    Which is easier. To stop taking the adrenaline that keeps your heart going but will eventually cause it to arrest from over stimulation or to to continue the injections and hope someone will come up with a miracle cure for you. One is certain death and one is a pleasant delusion.
    They’ll keep pumping until it blows because they know to stop pumping is suicide.

  7. Good points Homer. Last week it was reported that the fed added 43.5 B to the market when the POMO was only about 3B. Where did the other 40B come from and what did it buy?

    Your point on crashing the market and moving it into bonds is a good one but the bond market is much bigger than the stock market so all fed assets will not be sold for a profit.

    Things are crazy and the fed is talking about tapering in December but in January or February we could have another shut down which will make the taper talk silly as they wait to see the effect. There are endless impediments to taper, at what 10 yr rate do they take the plunge and stop QE? On a non compound basis a .25% increase reflects 42.5B on 17 trillion. How muh do you think they can stand?

    • Joe–Yes, the bond market is the Big Kahuna, Top Banana. My thinking is this: The law will be changed. 10% of all pensions must be invested (I say that with tongue-in-cheek.) in government bonds for safety, of course. Maybe part of your deposit accounts, too through Bail-ins. The American people will foot the bill along with foreign buyers, that’s for sure.

      Also, the perception of safety ( today, perception is reality) of gov. bonds will increase demand keeping interest rates low. I don’t know how it will exactly happen, but I believe that 80% of the wealth will end up in 20% of the hands when it’s over. There is only so much wealth and a hell of a lot of paper chasing it, 188 mil for a picture? You gotta be kiddin! Also, lots of “black swans” in the mix.

      The Fed has already made their profit, by printing currency from thin air.

  8. BK–I would sure like to know your reasoning as to why you said, “I think that Yellen will be forced to initiate a Taper by March.” and why you said, ” The reason is that there is next to no basis to believe that QE can be continued beyond a few more months.” Peter Schiff as do others believe, it QE forever. That the withdrawal from QE will be so painful that it won’t be attempted. But there are limits to almost everything in the universe. So…I have stated why I think QE will taper (rising bond rates), but I want other informed reasoning, too. Heck, I’m just here to learn. If tapering does commence by March, it would portend serious, very serious, consequences, unintended or not. An informed consensus would help to separate the chaff from the wheat.

    • Rising rates would warrant MORE QE, not less, as the Fed would have to ramp purchases in order to cap those rates. If the 10YT ventures beyond 3% there will be hell to pay.

  9. They say they’re going to taper, but they won’t do it until the S&P is printing north of 2000 imo. Even if they slow down the mortgage purchases, there’ NO WAY around monetizing Uncle Sam’s Treasury bonds to the tune of tens of billions per week. Not unless you want to see interest rates back around historic norms which would destroy the economy and the fake recovery. As my name implies I’m pretty happy to pick up some nice silver under $20 for not much more than I paid in 2006,T2007,2008,2009, 2010…

    This whole QE taper talk is overblown. Fed bond buying can never end! The fact remains: Treasury bonds need buyers. Unfortunately that is only the Fed. lol UNLESS, there is a steep selloff in stocks…

  10. QE will officially get tapered… but a Stealth QE will actually increase the QE monthly allotment from the present $85+bn

  11. tj–I think, I know what you are saying. If there is upward pressure on bond rates, then the FED would step in and buy their own bonds, capping the rate to what ever goal they had in mind. This would add to QE. Of course, the FED being the seller as well as the buyer, they can manipulate the rates to what ever they desire. I believe that the FED gives money to other central banks to buy our bonds, thereby hiding their purchases. The FED is the FED’s own shill. The question is, how willing is the FED to increase it’s balance sheet. I think they have a plan to push it on to the public and tapering is part of that plan.

    Slvrizgold—You make my point. That is, taper will be used to crash the market. When will that happen?
    When the FED’s toadies, Goldman Sachs and Morgan Stanley have positioned themselves on the other side of the trade (shorting) and buyers of our bonds want higher rates. I hear that China’s not buying and that Japan’s not buying. Who else are the buyers of our debt? Are they buying? So, maybe BK is right. It might be March. A confluence of events may make it so.

    musivick—You could be right, but it could currently be much more than 85 Bil a month ( the advertised price). Stealth QE ?, nothing would surprise me.

  12. “We’ve had five years of grease, now we are going to have to pay a price.”

    Check your past entries Bruce. How many times have you made similar statements, only for them to be proven wrong? We are NOT going to pay a price (yet), because it is not in the political interest of a Highly politicized economy. This country doesn’t ‘roll’ the way it used to Bruce. It’s time to finally look that cold hard fact in the mirror and deal with it.

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    of great interest and this obviously makes these plans, somewhat expensive.

  14. backwardsevolution says:

    “QE will end because it has to end, not because The Fed wants it to end. And it will not end well either, because attempting to continue the charade that we can put six dollars of credit into the economy for every dollar of economic output increase, was was happening in 2007, is utterly unsustainable and destined to collapse.

    The real failure is that despite having this data in front of their noses in the previous years and The Fed’s clear mandate under the law to regulate both monetary and credit availability to prevent this sort of thing from happening they did neither and have escaped being held to account for both that failure and the harm done to the economy and ordinary people as a consequence.

    The abuse of leverage in this regard is a losers game unless you have inside information and can evade being prosecuted for using it. As we have repeatedly seen that “privilege” belongs to only a few people — the rest of us get it up the backside repeatedly.

    Yet we continue to not only sit for it but we also listen to the “punditry” that refuses to acknowledge that there is a debit for every credit and that policies such as this are nothing more than a money and time shift.

    Who’s fault is that?”

    http://market-ticker.org/akcs-www?post=226328

  15. backwardsevolution says:

    “Everything in Economics is a Balance Sheet”:

    “We’ll take this $100,000 and borrow it for 30 years @ 7%. This produces a payment of $661.44 per month for 360 months (30 years of 12 months each.) The total paid is $238,119.87 over that time, so just over $138,000 is paid in interest, or just over $4,100 a year on average (this is misleading, however, as at the start of the loan most of the payment is interest and that falls off over time.) We will further assume that this 7% rate reflects a reasonable return for the risk that you will not pay and that inflation will occur — that is, the rate is negotiated between the lender and borrower using all known facts and no lies or distortions.

    Now let’s assume we “lower rates” (by any mechanism) but the risk does not materially change. We lower them to 4% by employing “QE”.

    The payment is now $475.83, or a total of $171,298.51 over 30 years. Note that approximately $65,000 in interest was saved by the borrower.

    This is a benefit to the economy, right?

    WRONG.

    It is in fact at best neutral to the economy because someone holds the loan and every dollar the borrower saves the lender loses!

    That is, over the 30 years $66,821.36 is not received by the lender. The borrower saves that $66,821.36 and can thus spend it on something else but every one of those dollars is not collected by the lender and thus he cannot spend them.

    Net benefit? Uh uh.

    Every dollar benefiting one person comes out of someone else’s back side.”

    http://market-ticker.org/akcs-www?post=226031

  16. backwardsevolution—I read the same article and agree. This is why there is “no free lunch”. It is unfortunate that the people running the Con aren’t the ones getting their backside reamed. Just like the article said, it is hard to convince a person who is getting up front benefits that they are going to get their comeuppance down the road. People, most often, live in the present and not the future. When the future arrives, they point their finger at who’s to blame, not realizing that 3 fingers are pointing back to them. Of course, the politicians and mainstreet media act in shock disbelief that such a disaster could happen and lead the charge to find the culprits responsible ignoring their culpability in the matter.

    That article was a good read

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