Home > Uncategorized > 2013/09/19: Taper to come under Yellen, so Mr. B. spikes the punchbowl

2013/09/19: Taper to come under Yellen, so Mr. B. spikes the punchbowl

© 2013 ROHR International, Inc. All International rights reserved.

‘Mr. B’ …kinda sounds like a cocktail mixer brand, doesn’t it? “Mr. Bartender” evidently is not aware of a little nicety known as the ‘dram shop laws.’ For those who are not acquainted with this term, it applies to the liability attendant to serving liquor in excess to others. The ‘host’ or establishment must keep in mind they might well be liable for any damage the inebriated patron causes due to their intoxicated state. We wonder if the Fed carries dram shop insurance.

It seems that it should if it is to continue to extend the sort of unmitigated monetary stimulus that sends folks on an intoxicated chase for yield when short term interest rates offer none. It is not very critical of the Fed and its Chairman to inquire whether they have failed to learn the lesson of Mr. Greenspan leaving interest rates too low for too long. One of the things that great traders try to accomplish during their development is not just to learn the lesson of their last mistake, but also think about the variations of that error so as to avoid all (or almost all) of the variations in future as well.

As we noted in Tuesday’s Weekly Report & Event Summary Perspective (available via the link in the right-hand column), the Fed has also benefitted from some still reasonably mediocre US Employment data. That was a blessing in the form of an excuse to proceed with less tapering from the outset than might have otherwise seemed credible. And as many with the Fed had noted, and we agreed from the start, going from $85.0 billion (plus all that reinvested yield) to $75.0 billion would not have been a tragedy.


And it is hard to gripe about the euphoric response of the equities to the shocking lack of any tapering… so what could be wrong with creating a bit more wealth? Well, that’s not really the point. Rather the lack of any tapering at all in light of the general improvement in the US economy is an issue for just when do you ease back on the accelerator? Think about it… There is NO CRISIS right now of any sort in the US!!

With Europe stabilizing and China picking up again and even the Emerging Markets having already discounted the anticipated tapering, what could have possibly been the problem? Going from $85.0 billion per month to $75.0 billion, or even the slightest retrenchment to $80.0 billion would have been modest in comparison with original inferences back in May and June that the Fed might cut back to somewhere around $65.0 billion. This has a much more pernicious aspect now that the Fed has passed on the window to taper at a very opportune time.

And we will allow that the looming food fight between the US Congress and the Administration over various financial matters like Obamacare and the Debt Ceiling might create some economic damage along the way. But with no incentive from the Fed to feel that they are not going to get monetary support for acting out in their equally benighted approaches to government, they have no incentive to get serious about constructive compromise. And that’s going to continue to be there across time. If the US political class not getting its act together is a reason to continue extreme accommodation, it will be here unto infinity.

The far more pernicious aspect is whether Mr. Bernanke is just another academic who is frozen in fear at the throttle of a program he is terrified to unwind. Just as Mr. Greenspan cited low inflation as justification for leaving interest rates very low on the way to creating his bubble, so Mr. Bernanke appears committed to endless monetary stimulation with much the same rationale. That doesn’t mean it is not creating a bubble.

Note that the equity markets’ new highs are right into warnings about the general unstable state of the economy from corporate CEO’s. There are also the headwinds from Obamacare and the higher US Payroll Tax that many discounted as an influence when they didn’t bite from the top of the year. Yet, consumer spending patterns are sometimes slow to adapt, and we can add high energy prices to the sorts of things that are restraining Retail Sales figures now. So equities moving sharply higher would seem a purely financial surge rather than based on solid economic right now.


The problem is not that there is continuing QE from the Fed. As noted above, even a drop to $75.0 billion more or less would not have been a tragedy. Likely the equities had already discounted that sort of move and could have continued to trend higher. And the govvies had similarly expected it, so not likely much further damage would have occurred there either. The dilemma now is that it seems the Fed is terrified of somewhat higher long term yields.

That is in spite of the fact they are still very low against a long term (going back a century) average 10-year yield of approximately 5.25%. Possibly not right to let them go higher in this US economy? Maybe. There is a not unreasonable fear that Housing and Autos would suffer if yields push up. Yet, those two are always going to suffer at least temporarily under higher yields, but that didn’t stop then cold in previous cycles. And as those are two of the healthiest areas of the US economy now, when do you ever stop aggressive accommodation if not now?   

Let’s leave aside for a moment that the further enrichment of the investor class is creating more economic inequality overall. With no crisis to counter four years into an economic recovery, what is the purpose of further aggressive QE? If it has worked, it is time to move toward its ultimate end. If, as some claim, it has not worked (at least after the essential initial round in 2009), than it is well past time to gradually end it.

Nope, the only reason to continue it apace rather than taper is as we feared: Mr. Bernanke seems terrified by the prospect of seeing what happens when his baby is put to bed. Sad, because he should at least be giving the next Fed Chairman the opportunity to see what happens across a reasonably lengthy time so they can assess how they will need to manage it after he is gone.

General Market Observations

The December S&P 500 future push above psychological and technical resistance at the early-August 1,705 high is impressive, as that was interim weekly oscillator resistance. For now it is most interesting it has already tested the key 1,725-30 area resistance even prior to its shift to lead futures when the September contract expires at today’s Close. It is a more major weekly oscillator threshold (MA-41 plus 135-140), and much above it the 1,750 area might be a likely next target. Of course the area around the early-August 1,705 lead contract trading high should be support on any retracement.

Please find our latest VIDEO ANALYSIS & OUTLOOK on the full range markets we cover in these sorts of assessments at http://bit.ly/1f9wLlK (timeline at the end of the post below.) It is an important follow up to previous views on the likely QE tapering by the FOMC, which of course did not occur. In that regard our views on continued strength in equities and weakness in the US dollar were prescient, and consideration that primary government bond markets would suffer under the weight of further equities strength less so… at least for now.


And the operative phrase there is indeed ‘for now’. For all of the strength of the govvies they are only up to extended resistances and falling back in the face of the sustained equities strength; not a huge surprise in spite of the knee-jerk bid the govvies experienced after yesterday’s FOMC surprise. And the track record of govvies performance under QE is not very good.

And that’s in spite of them being the ostensible object of QE’s desire. The most pointed case was the summer 2010 anticipation when govvies rallied right along with equities (what we refer to as a “hostage to fortune rally” for govvies.) However, that led to a major govvies top once QE implementation actually began in November (right after the US midterm election.) It was one of those major corrections that “QE is good for govvies” fans can never anticipate. Lead contract T-note future went from the 128-00 area to the 118-00 area from November to February before any substantial bounce. And the resumption of the overall bond bull did not really begin a major up trend again until mid-April 2011.

We do not necessarily anticipate any sort of similar weakness in the already beat down govvies at present (the 2010 spill was from the top of a major rally.) Yet, it is of note that December T-note future has only rallied to near 126-00 in its full point discount to the September contract (also expiring today) that failed up near lead contract resistance in the upper 126-00 area. Similarly and even worse for the December Gilt future, the rally has only carried up near the lead contract major failed 109.15 Fibonacci area. While it could have reasonably rallied up near 110.00 to test higher resistance, in this case (and the others for that matter), we would keep an eye on the equities. And the December Bund future has outperformed the Gilt by ranging up near its historic and current (MA and Fibonacci) resistance at the 140.00-139.60 failed major congestion. Here as well the market has backed off markedly, even it is still holding up for now back above the significant 138.41 September 2012 low.

Foreign exchange has seen the US Dollar Index test the .8000 area support we had been expecting for a while, and that is consistent with our recent expectations for other currencies to continue to improve against it. We can certainly thank Mr. B. for that.  The video contains many more details on the FX trend perspectives, and we refer you to that for those indications.

The timeline of the video is as follows: it opens as usual with S&P 500 future, and then the other equities (from 08:00), with govvies analysis beginning at 10:30, and the foreign exchange commencing at 16:05 with a shift to Asia and some cross rates at 20:40, and a return to the S&P 500 future for a final key short-term consideration at 25:20.

Thanks for your interest.

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