· Does Bernanke want to get taper started?
o He sure does. I explained at length when I summarized his Nov. 19th speech.
o He made it VERY clear they are worried about the “efficacy and risks” associated with QE. That’s a strong admission.
o He essentially begged the markets to put more weight on forward guidance over continued QE.
o He called the selloff in bonds last time he tried to taper “neither welcome nor warranted”.
o That statement alone, demonstrates how serious they were about starting taper.
o If you read the speech, there is NO DOUBT he’s anxious to get it started.
· Why do I think they’ll taper today?
o Bernanke tried to taper in Sept. floating the idea in June. He obviously wants to get it started.
o The 10yr yield gaped up from about 2% to 3% very quickly on his floating the idea. Thus they decided not to.
o Taper-talk by the media and Federal Reserve presidents have increased over the past couple of weeks yet…
o This time, the 10yr has remained stable currently trading at 2.885%. They HAD to have this to begin taper.
o The stock market has remained stable as well. But I believe 10yr stability is more important to the Fed right now.
o They have “talked” taper to death since June. Talk is cheap. It’s time to actually DO something.
o What more can be said? They’ve TALKED this thing to death. There is NOTHING NEW to say.
o They’ll never know what to expect from the market until they actually DO IT!
o What better time to do it then now. “If” a taper turns out to cause “unwanted” market moves, what better time to change your mind than with a new fed chairman.
o Can you imagine how bad it would look if Yellen started taper, causing huge market moves, forcing her to change her mind? She’d look ridiculous.
o However, as a new chairman, she can come in and say that her and the new vice chair disagreed, and pushed to have the levels reinstated to $85bil total, if not more.
o Something that has been missed by most of the media are the recent statements by several Fed presidents about how CLOSE the decision was in Sept.
o The dissenting president’s also said they have move “closer” to voting for a taper in the past couple of months.
o No one from the Fed really ever said that until recently. This suggests to me that it’s going to be “close” again, but to the taper side this time.
o The next FOMC meeting is January 29th 2014, Bernanke’s last meeting. And there is no press conference scheduled to follow.
o I can’t fathom the Fed would “start” a taper at a meeting where there will be a new chairman days later.
o And I can’t fathom the Fed would “start” a taper without having a press conference to explain why.
o That means the “possible” start of taper would be pushed to the next FOMC meeting on March 19th 2014.
o I don’t think there is anyway the Fed wants to wait until March to get this taper started.
· Why $10 billion?
o This was the number floated back in June.
o Any less, they’ll look silly.
o Anymore, and it could freak the markets out. No surprises!
· Why $10 billion from just treasuries?
o They do not want to do anything to hurt the housing “recovery”.
o Even today, and even though, housing starts hit a 5yr high, the Mortgage Bankers Assoc. applications index hit a 13yr low!!!
o This is an odd relationship, and it holds for mortgage “purchase” applications and starts as well.
o This is evidence of the huge numbers of homes being bought with CASH. And I think that also means investors. That’s not necessarily a good thing.
o That means less financed refi’s and purchases, both of which will be needed to free up consumer cash, and to continue the housing price recovery.
· Other Fed “qualifications”?
o Percentages! Treasury issuance and mortgage issuance has been decreasing over the past year.
o THUS, the Fed’s “percentage” purchases of outstanding issuance has actually been increasing! Most people miss this.
o THUS, even though they are tapering, the “actual” effect, due to lower issuance, will not be as large as the $10bil suggests.
o They’ll again STRESS the importance the market “should” put on their forward guidance of zerobound rates, and far less importance on their monthly purchases.
· Any more evidence?
o You bet! For anyone who watches CNBC, you’ll be familiar with their head economist Steve Liesman.
o But if not, suffice it to say he RARELY sticks his neck out. He ALWAYS plays it safe.
o Given that, Liesman did an about-face two weeks ago from a no-taper bias at this meeting to a taper bias.
o Rick Santelli described it perfectly, saying there’s no doubt Liesman has excellent access to Fed participants, and given his change of mind, he’s betting someone “whispered in his ear”.
o I totally agree with this. Liesman NEVER takes risks. And changing his stance weeks before the meeting is significant.
o I think he “knows”!
Randy Woodward
Managing Director, Fixed Income Capital Markets
One Burton Hills Blvd, Ste 225, Nashville, TN 37205
( Toll-Free 800.764.7621
6 Mobile 615.969.2682
Randy.Woodward@RaymondJames.com
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