Dave Skarica: “The Fed Is Trapped, and the Taper Won’t Happen Until the Market Tanks” – Minyanville

Posted on :Sep 24, 2013

By: Dave Skarica


September 23, 2013

Ben Bernanke and the Fed have lost control of the  bond market and are fearful of its impact on stocks.

Now can we please stop with  all the taper nonsense? Taper this, taper that. The Fed — and most media  pundits, for that matter — need to taper their mouths shut. The Fed is  never exiting; it is never cutting back on stimulus.

The problem: Now the Fed is in a box and can’t get out. Printing money leads to lower rates and helps to re-inflate the real estate market. However, these low rates, and the 10-Year Treasury bond (INDEXNYSEGIS:AXTEN)  falling to as low as 1.38%, also help to keep the government’s borrowing costs  low at a time when it’s running huge deficits.

Did you know  that despite the national debt being nearly triple what it was in 1996, the  nominal interest  payments are actually about the same as they are today? This means that despite the far  higher national debt, the government pays about the same amount as interest on  this debt. If you adjust for inflation, this means that interest payments are  actually lower. It’s low rates that make this possible. Instead of paying 3% and  7% on 1-year and 10-year Treasury bonds respectively, the government is paying  0.25% and 2.5%. Therefore, a lot of the thinking behind keeping interest rates  low is not about benefiting the economy or the housing  market,  but rather about keeping the government itself solvent.

Now this  brings us to the bond market. The reason that the bond market was going down,  and why interest rates were going up, was that the Fed was going to taper. Now  there is no tapering, and bonds have not rallied that much! Why? Because the Fed  is losing control of the bond market; the bond market is telling the Fed that it  has printed too much money.

This brings us to the stock market.  The S&P 500 (INDEXSP:.INX) and Dow Jones Industrial  Average (INDEXDJX:.DJI) broke out to new highs. Part of the reason, I  believe, that we got no tapering is because the Fed is somewhat scared of what  it would do to the equity markets. Part of its belief is that the re-creation of a wealth effect (even if  only a small amount of investors have profited) has trickled down into the  economy. Now the Fed is scared to take the punch bowl away — or better yet,  it’s scared to confiscate the heroin needle away and take the market off of its  juice.

The next meeting is in December; at that time, Bernanke will be one month away from stepping down. The next meeting after that is in  March, and Janet Yellen, frontrunner for the Fed chair,  will be barely two  months into her job. I do not see major shifts with an incoming or outgoing Fed  chair.

I actually think that investors should ignore the talk of  taper. The Fed is going to print until it can’t. Until bond rates  spike and the market starts to tank and inflation takes off. Then the market will take  the printing press away. However, until then, the Fed is trapped in a box and  can’t get out.

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