Taper-In-Name-Only May Be What We Get in September

By Tim Thielen  SEP 09, 2013 12:30 PM

Recent bullish data may encourage the FOMC to begin the taper in September, but it is likely to ease into it.

 


Strange trading action in the euro recently (possibly signifying a re-emergence of systemic concerns or the sprouting of new geopolitical issues and concerns), the somewhat sketchy nature of recent Chinese growth data (in that the numbers are improving, but are we really to believe them?), the sticky jobs situation, and very modest nature of the economic growth here in the US all provide plenty of justification for the Fed to be very careful about the implementation of any tapering plans.

Factor in the additional concerns over the US’s involvement in Syria and the specter of a nasty budget battle in Washington and one could easily make the argument that the Fed should not do anything right now to upset the apple cart. 

One more small issue: As someone commented to me over the weekend, “Who’s big enough to take the other side of the trade on an aggressive tapering program? The Fed is the market.” While the point is, as I’m sure Bernanke himself would scream, debatable, it is nonetheless thought-provoking. I mean, even if you were big enough to take the other side of the trade -- and few are -- why would you? The countries who can make that trade are not our buddies right now, so becoming more indebted to them would only be beneficial to them if they were betting on rates dropping or staying flat. Do we really want those entities hoping that things get dicey enough over here that rates drop, and having enough strings to pull to make that come to fruition? I mean, we’re probably already there in that respect, but why allow ourselves to get deeper into that situation?

So why is the market still pricing in tapering?

All that being noted, here are, in my humble opinion, the key fundamental, economic, and procedural points that traders and analysts must process when considering tapering.
Technicals in favor of tapering:

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All that being noted, there are plenty of reasons not to press the brakes at all, and Bernanke does not want to be known as the bad guy who sent the economy back into a tailspin, so anything the Fed starts in September will likely be just on the other side of symbolic.

Technicals in favor of "tapering light" or no tapering at all:

The equity markets’ refusal to really crumble recently -- modest pullbacks notwithstanding -- is a big sign that institutional investors either don’t believe that the Fed will taper at all or that it will very gently ease its way into its efforts to return to normalcy. Given the fact that yields and the DXY are not tumbling precipitously, the chances of no tapering at all in September would seem to be minimal, so we’re left with “tapering light."


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Summing up

As noted, all of this points to a very modest tapering effort beginning in September -- if one begins at all. There is no indication in the facts or the rumors that the Fed’s tapering will be overzealous in nature. Let’s put it this way: When considering the law of unintended consequences, the Fed had better not be overzealous!

Twitter: @seachangereport

No positions in stocks mentioned.

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