By Michael A. Gayed
I don’t understand why there was so much
shock over the Federal Reserve's non-
taper.
Wall Street convinced itself that a
small cutback in bond purchases was
coming, and yet the elephant in the
room, which I have been pounding the
table on, is falling inflation
expectations. Bernanke acknowledged
"tighter financial conditions" which is
code for spiking yields.
Those tracking my writings over the past
few months know I have been addressing
this continuously, and the Fed seems to
have finally given a nod to it. Speed
can be far more dangerous than level,
and the significant overreaction in the
bond market TLT 0.10% now seems
likely to reverse in the near-term.
I think it has become clear that the Fed
has lost control, and underestimated
just how much panic the word "taper"
would cause in the heart, soul, and life
of the free enterprise system. The anti-
taper trade of bonds and emerging
markets GMM -1.42% soared, while U.S.
averages like the S&P 500 SPY 0.08%
rallied on the idea that more stimulus
is coming.
Yet, every single U.S. investor needs to
at some point question why after $85
billion/month reflation is non-existent,
and inflation expectations are not
picking up. There is an undeniable
disconnect here. While emerging markets
have priced in a crisis that never
occurred, U.S. stocks and bonds have
priced in reflation which isn't
happening. Both disconnects are
exploitable.
I believe the Fed is in a no-win
situation now. Every time they threaten
to pull back on bond buying, the market
panics and causes yields to spike. That
very same spike in yields translates
into tighter financial conditions, which
then prevents the Fed from pulling back.
Furthermore, the Fed is now clearly
risking another bubble in the making in
their desire to push money into risk,
rather than the economy. Every failed
attempt to step away from stimulus only
weakens the Fed's deflation fighting
credibility more, and entrenches
downward price expectations. Yes folks —
we may be in the midst of the Last Great
Bubble bursting, i.e. faith in the Fed
to force inflation and solve all
problems.
What's the way out of this? I have no
clue, but the U.S. market must at some
point deal with how disconnected
inflation expectations are with equity
levels. Perhaps the only real "solution"
is to break the Dollar ala what Abe is
doing to the Yen FXY 0.07% in Japan
DXJ 0.02% . If demand pull inflation
isn't happening, then perhaps cost push
inflation becomes the way to reverse the
negative deflation expectations cycle.
Take a look below at the PowerShares DB
Dollar Bullish Index Fund UUP 0.04%
Check out a larger version of the chart
here.
PensionPartners
The trend certainly does look set to
continue on the downside, and with the
potential for Janet Yellen to head the
Fed next year, continued dovish
expectations in the currency market
could cause a real breakdown in the
greenback.
This would lift commodities, foreign
denominated equities, and might reverse
the trend in inflation expectations.
Will the emerging market currency crisis
somehow morph into a U.S. dollar crisis?
I don't think anyone wants that to
happen, but the fact of the matter is
the U.S. needs a weaker currency to
import inflation, while emerging markets
need strong currencies to import
deflation.
QE ain't cutting it folks, and do not
underestimate the potential for a doozy
of a correction in U.S. averages. I have
seen prolonged disconnects before, and
they have a funny way of violently
resolving when you least expect it. Not
that any of this is Ben Bernanke's
problem should he step down. Rumor has
it he is being cast in the next season
of “Mad Men” under the character name
Don Taper...
I don’t understand why there was so much
shock over the Federal Reserve's non-
taper.
Wall Street convinced itself that a
small cutback in bond purchases was
coming, and yet the elephant in the
room, which I have been pounding the
table on, is falling inflation
expectations. Bernanke acknowledged
"tighter financial conditions" which is
code for spiking yields.
Those tracking my writings over the past
few months know I have been addressing
this continuously, and the Fed seems to
have finally given a nod to it. Speed
can be far more dangerous than level,
and the significant overreaction in the
bond market TLT 0.10% now seems
likely to reverse in the near-term.
I think it has become clear that the Fed
has lost control, and underestimated
just how much panic the word "taper"
would cause in the heart, soul, and life
of the free enterprise system. The anti-
taper trade of bonds and emerging
markets GMM -1.42% soared, while U.S.
averages like the S&P 500 SPY 0.08%
rallied on the idea that more stimulus
is coming.
Yet, every single U.S. investor needs to
at some point question why after $85
billion/month reflation is non-existent,
and inflation expectations are not
picking up. There is an undeniable
disconnect here. While emerging markets
have priced in a crisis that never
occurred, U.S. stocks and bonds have
priced in reflation which isn't
happening. Both disconnects are
exploitable.
I believe the Fed is in a no-win
situation now. Every time they threaten
to pull back on bond buying, the market
panics and causes yields to spike. That
very same spike in yields translates
into tighter financial conditions, which
then prevents the Fed from pulling back.
Furthermore, the Fed is now clearly
risking another bubble in the making in
their desire to push money into risk,
rather than the economy. Every failed
attempt to step away from stimulus only
weakens the Fed's deflation fighting
credibility more, and entrenches
downward price expectations. Yes folks —
we may be in the midst of the Last Great
Bubble bursting, i.e. faith in the Fed
to force inflation and solve all
problems.
What's the way out of this? I have no
clue, but the U.S. market must at some
point deal with how disconnected
inflation expectations are with equity
levels. Perhaps the only real "solution"
is to break the Dollar ala what Abe is
doing to the Yen FXY 0.07% in Japan
DXJ 0.02% . If demand pull inflation
isn't happening, then perhaps cost push
inflation becomes the way to reverse the
negative deflation expectations cycle.
Take a look below at the PowerShares DB
Dollar Bullish Index Fund UUP 0.04%
Check out a larger version of the chart
here.
PensionPartners
The trend certainly does look set to
continue on the downside, and with the
potential for Janet Yellen to head the
Fed next year, continued dovish
expectations in the currency market
could cause a real breakdown in the
greenback.
This would lift commodities, foreign
denominated equities, and might reverse
the trend in inflation expectations.
Will the emerging market currency crisis
somehow morph into a U.S. dollar crisis?
I don't think anyone wants that to
happen, but the fact of the matter is
the U.S. needs a weaker currency to
import inflation, while emerging markets
need strong currencies to import
deflation.
QE ain't cutting it folks, and do not
underestimate the potential for a doozy
of a correction in U.S. averages. I have
seen prolonged disconnects before, and
they have a funny way of violently
resolving when you least expect it. Not
that any of this is Ben Bernanke's
problem should he step down. Rumor has
it he is being cast in the next season
of “Mad Men” under the character name
Don Taper...