Thursday, September 19, 2013

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.


  1. I have doubts regarding the psychological coherence of FED members.
    They won't stop the printing process until they won't be able due to USD value to pay the US debt to foreigners (it's all about bonds) using 2 cans of Coke and a box of popcorn...
    That's my opinion.
    They will destroy the USD value until 2015 or 2017. QE end is not so close.
    That will call also for a huge ramp of oil marking one more big top in stocks.
    After that .... QE withdrawal syndrome comes... but the tapering or elimination of QE will not be market effective.


  2. KS How much lag will your system sustain before exiting this long and going short. From your past signals it looks like you lag the mkt by 1 to 2%. I have a nice 4.2% gain on this move I'm hoping not go give up more then 1% on a reversal.

    If you have any thoughts on limiting lag on reversals I'd like to hear it.

    1. It varies a lot due to the news-driven events that spike the markets up and down. Keybot is pushed up into the ceiling now so it is tough to expect a higher print than +79, maybe a few more points but that would be it. Markets may move flat for a while. There is never anything wrong with taking profits and locking in those gains. One possibility is simply to take the money and run and then turn around and buy back say 1/4th of the position scaling-in back in on the long side. That way if a quick downdraft occurs, the loss would be far less and your gains would be locked in. So it is really a matter of trading techniques rather than to correlate the move to Keybot. Or buying puts to protect your position and other strategies are available as well. Another option is scaling out which may be the most attractive. Cash-out of say 1/3rd of hte position right now. Then another 1/3rd if SPX moves up into the mid-1730's, and so on. That way you lock in gains while still letting some of the position run. These markets appear very erratic and unstable despite the run-up. There is nothing wrong right now with exiting all longs and going into cash and waiting for some of the political stuff to play out. That may end up being the smartest place to be. Cash is a position. The complacency has to be respected. Traders are now even more drunk with happiness due to the Fed. The party always ends in tears.

  3. Hiks, can i get ur opinion on usdjpy? I am confused as why it made such a strong rebound when usd is crushed

    1. It takes two to tango. You must think of currencies always in pairs. There is lots of interplay between them all and that is what a forex trader focuses on. The euro, yen and dollar are in a continual dance. For the dollar/yen pair, USDJPY, now at 99.37 at this writing on Friday morning, watch the dollar basket, $USD, and the yen, $XJY. So when the dollar is up and yen is down, the dollar/yen pair moves strongly higher, if the dollar is weaker and yen stronger, the dollar/yen moves lower. So the answer to your question is the weak yen is what caused the rebound in the dollar/yen but it is moving sideways through the 97.8-99.40 area for a few days a far cry from 100+. The BOJ easy money policies, like the Fed, will send the yen lower and dollar/yen higher. The Fed pumping weakens the dollar which sends the yen higher and creates drag on the dollar/yen pair. When the dollar drops, like after the Fed, note the euro moving higher, now at 135.34, at highs not seen since January! This is due to Chairman Bernanke burning the dollar in a fire pit (weakening the dollar due to easy money policies). The higher euro will hurt Europe since they need to boost their export and manufacturing industries to help their economy recover, the higher euro works counter to this goal. So, keep an eye on euro, yen and dollar. Euro may set up as a short but not quite yet, maybe next week, EUO may be a potential play to put on the list for a potential long entry in the days or week or two ahead.


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