The Fed's 'taper' and other fairy tales

As Japan's problems continue, investors worldwide are still largely convinced central bankers are in control. They're not. The market is.

By Bill_Fleckenstein Jun 7, 2013 4:01PM

Economic forecastingAs I noted last week, I am focusing much more than usual on Japanese markets, since I believe there may be important information to be gleaned from the action there in stocks and, particularly, in Japanese government bonds (JGBs).

 

The Nikkei 225-stock index was hit hard on Monday and Wednesday, making the cumulative pullback in Japanese stocks about 20% from their recent high. Yet the bond market has rallied only about six basis points from its worst level. Obviously, the Bank of Japan has its work cut out for it as it tries to create negative interest rates and a bond market that doesn't collapse.

 

As my friend the Lord of the Dark Matter summed up in a recent email: "We all get that (Bank of Japan Governor Haruhiko) Kuroda wants Japanese real interest rates to be negative, but achieving that without implied yen-rate volatility trending higher and Tokyo banks realizing losses on JGBs is going to be tricky."

 

Bond market to introduce 'start loss' orders

I would go one step further and say it's going to be impossible.

 

Basically, bondholders have to be willing to accept a negative real rate of return, and although that has been the case worldwide for quite a while, the bond market at some point is going to believe central bankers when they say they want more inflation, because they will get it (in fact, they have already).

 

Once the perception changes to inflation being the only outcome, life for central bankers is going to become incredibly complicated.

 

One reason markets have become so ebullient, particularly here in the United States: They have concluded that money-printing has created a Goldilocks environment instead of the stagflation or inflation I have long expected. Obviously, Goldilocks is a state of mind and can only last so long, but when you are in the money-printing "sweet spot," anything is possible.

 

I never would have dreamed it could last this long, nor gone to the extremes that it has, but, then again, we have never had the world's central banks printing this much money.

 

When you consider that the BOJ and the Fed together are printing $170 billion a month, and that only about $50 billion of liquidity provided by the Fed in the winter of 1999 blew the top off the stock market then, it is easy to see why insanity rules.

 

However, minds may be changing. David Rosenberg, of Gluskin Sheff, to cite one example, is now expecting stagflation. When the bond markets of the world collectively have the same opinion, the funding crisis will be upon us. (That is not yet today's problem, even though -- as I noted recently -- the very early stages may be occurring in Japan.)

 

Heading into negative knowledge territory

As a bit of an aside, I would like to make a point about the media and the 20% decline in the Nikkei. Most media talking heads know nothing about investing, yet love to talk about a 20% decline as the definition of a bear market, and other assorted nonsense.

 

The fact of the matter is that 20% doesn't mean anything. It is just a decent-size decline. It could be a correction or the early stages of a bear market (although that is quite unlikely at this early juncture for Japan). Nonetheless, a bear market is a bear market, but it doesn't become one when you cross 20%. You've quite likely been in one, and it might be over, or it might have been just a correction. In any case, thinking about things from that perspective is totally useless.

 

We have room only for the big picture

Speaking of wrong-headed, large numbers of investors still believe it is possible that the Federal Reserve will stop its quantitative easing efforts, let alone "taper" them. I continue to believe it is very unlikely that Fed Chairman Ben Bernanke will ever willingly taper.

 

After all, we've had five years of 0% interest rates, and the Fed can't even talk about an exit strategy that allows it to sell bonds, only buy fewer of them. The same sort of discussion has been held every year, but the masses fail to comprehend that, and get more excited with each QE-inspired rally -- with the latest goosed by the BOJ actions.

 

Once it is clear that tapering is not likely to occur, it will be interesting to see where the stock market is. It is quite likely to have a failing rally and, in the interim, stock market weakness might give us some insight into where the bond market might fail.

 

As I have noted, there are plenty of crosscurrents, and in this era, they can be incredibly violent. Unfortunately, when there is so much money printing going on around the planet, virtually all trades are macro.

 

On the air

In my latest interview with Eric King on King World News I talk about one of the most exciting investment opportunities I have ever seen in my career. Eric called it my "most powerful interview ever." Interested readers can listen to it here.

70Comments
Jun 8, 2013 7:08AM
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The party will last until all the booze and drugs (money printing) run out. We will still have to pay the rich (and getting richer) dealer back. Going through withdrawal will be sobering to those wishing to fool themselves by believing the fairy tale.

 

Can anyone seriously think that this will end positively? Thanks Bill for being one of the few journalists not drinking the Kool-Aid.

Jun 7, 2013 8:36PM
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How about obamanomics just letting wall street run crazy thinking this will fix everything.175,000 jobs in May,holy----!We need 360,000 a month for the next three years to get the unemployment down to six percent.
Jun 8, 2013 6:58AM
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"The Fed isn't going to do anything to derail this recovery. Regardless of what all the talking heads and the hoi polloi keep mumbling about, the Fed will continue it bond and other asset purchases."

 

The Fed already derailed the economy by giving psychopaths $85 billion monthly to control us with. It should occur to everyone that printing $170 billion/month instead of generating it through effort is the economy killer. In Andrew Dickson White's book: Fiat Money Inflation in France, he chronicles that the People, when left out of the Inflationists' initiative (over-printing) resorted to sub-economies. As I read your take, Bill... I was not surprised by your reference (and equal awe) that, instead of admitting that this is all a dismal failure and Japan is a dead radioactive island off the coast of Oblivion, they are now concocting impossibilities and other Central Bankers and rallying behind them. Why? Because there's every chance of the globe wiping them out- the minute they throw up their hands and says- oops, we were wrong. For America and real Americans, there is a pariah on every corner and two more near-by to go through his wallet and clean it out. The "shift" toward sub economic survival has two legs- first, organized finance can't constructively follow it, and second, from it comes the stabilization (effort) that is sorely needed. Building houses for the destitute is a noble charity but not an economy reviver. Building a sub-economy out of the destitute that benefits as many as who want benefit over stagnation is the key. Growing, making, reconstituting it is how we restore the American Way, not printing it. Yesterday's 200+ point gain was a direct reply to the potential selling off of stocks and shifting of organized investment to lower risk anticipated Friday. They obviously went 'over the top' in compensation for it, so we were treated to how scared they really are about being revealed as mistake-makers. There was no other legitimacy for doing it, the job creation thing was phony and they are only creating a no-credibility factor now.

 

The truest statement: "The individual investor has the most power right now." Getting them to see that and use it responsibly to snuff out Central Bank bamboozling is what this coming week is all about. SPEAK, America, before the wool pulled over your eyes is a coffin lid of your own making.

Jun 8, 2013 8:42AM
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The Shell game continues. I can not believe it myself. FIVE YEARS of FUNNY FED FUNDS. When all of these dollars come home to ROOST. We are TRULY TOAST. One day soon the American Dollar will not be the worlds standard. This will be the true END of our economy. 
Jun 8, 2013 10:45AM
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"I'll gladly pay you Tuesday for a hamburger today"
Jun 8, 2013 8:23AM
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One curse of ultra-low interest rates is that once they start rising from a low base (like they have in the last few weeks) the value of underlying investments falls much more quickly. A half percent hike in interest rates from 5% to 5.5% is no big deal to the underlying market value of a bond. A half percent rise in interest rates from 1.5% to 2% is a very big deal to the underlying bond market value. The Fed is holding trillions in Treasury bonds on its balance sheet which change in market value with interest rates. I’m curious, what interest rate rise across the yield curve would make the Fed technically insolvent? I wish one of those congressmen at the next hearing with Bernanke would ask him that question, instead of complaining about all the money he is printing for them to spend.

Jun 8, 2013 12:10AM
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Now getting back to the Global Fed Printing. If you told anyone years ago that the Global Feds would be printing Trillions to buy their own Bonds and other assets, most if not all would have predicted that the Markets must be crashing. So crap on Bill if you like, most know that deep down, he has been dead on in his remarks.

The talking Heads act as if a 10% correction solves everything, well it doesn't. Until a living wage is enacted and Corporations stop hoarding loads of Cash, the economy will never truly recover. This Global Money Printing is literally a ticking Time bomb. Bet that's a trigger word for the Gov't snooping. Well anyway, When a bomb ticker gets started, there is usually one final result, things go BOOM!

Jun 8, 2013 9:45AM
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The medical equivalent to what Bernanke the quack has done to our country (his patient): first he amputated both arms and legs, then the head, next he removed the heart, lungs, liver and all of the blood. He then held a press conference and said that the patient is recovering, but was still a little sluggish, and may need more surgery.  
Jun 8, 2013 10:42AM
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between us and japan, 170 billion a month out of thin air ....poof there it is. A trillion dollars every 6 months. Most of this isn't making its way down to the average joe it's just rolling through the financial institutions and a lot is just sitting there. That's why we haven't had inflation from this. Yet anyway.

 

Have a friend with 30 plus years in banking and asked the same question as someone did below about when Bernanke will stop this crazy printing. He laughed. Then said maybe a slight taper, but stopping.....ha.

 

5 years of this isn't enough?  Nobody in Washington wants the funny money to go away. Interest on the debt will crush us when it does and within 10 to 15 years the dollar will cease to be the international currency basis.

Jun 8, 2013 1:22PM
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The Feds Exit Options:

1)Sell some the Assets on it's Balance Sheet.

2)Sell all the Assets on it's Balance Sheet.

3)Hold all Assets to Maturity, that would effectively monetize the DEBT left on it's balance sheet.

Regardless, it's weird how the FEDs can buy via Credit, then collect Interest Payments which it gives back to Uncle Sam. Last year, it paid Uncle Sam about $90Billion from interest via assets bought on Credit. Now that's the ultimate Ponzi Scheme.

Jun 8, 2013 9:15AM
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 I have an friend who was a branch bank manager for 15 years at Wachovia. I recently ran into him and asked him when he thought the Fed would tighten and raise the federal fund rates to a sane level? His response to me was quick and strong,"NEVER".Flek please tell us when you think the implosion of the bond market will occur? This QE can not last forever.
Jun 8, 2013 12:47AM
Jun 8, 2013 1:51PM
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The simple fact is, that our economy can't move forward without something to pull the wagon. You can move the wagon with oil, agriculture, manufacturing and the hospitality industries, but the wagon is very heavy and until you add housing and full employment, the wagon will only limp along. Housing is currently being added to the team, but we need to achieve full employment by adding 3 1/2% to the payrolls, this can be done by congress allocating dollars to build infrastructure projects such as roads, bridges, levy's, solar panels on federal buildings, modernizing the electrical grid and yes, building the Keystone Pipe line around the Nebraska aquifers. This will reboot the economy, achieve full employment and end the bond buying cycle. Congress needs to stop sitting on there hands and act, the economy will only adjust to demand, no demand, no strong economy.
Jun 8, 2013 10:40AM
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Always confused and overwhelmed by all of this money stuff I recently stepped out of our Vanguard high yield bond fund. Sad and hard to do as we  had some nice gains over the past year adding shares back some 4 years ago when it was in the dumps. But I've lost faith in the bond market, well at least for now.

 

On the brighter side were having a yard sale this morning. Going to see if I can make some real money. Hey Big Ben wants us in the market so were going to spend the day marketing away.

Jun 8, 2013 7:13AM
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By the way, Bill... your little aside comment hasn't been discussed much. Paul Voelker was a genius. When faced with inflation caused by inflationists, he raised the Prime Rate to record levels, but didn't print more money than his economy could deal with. It pinched deadbeats and wiped out enterprises without substance. If we assume May, 1979 as the kick-off, he touched the economy down safely by January, 1982. The next two years was the business sector fall-out from attempted manipulation that bit itself. Anyone who doesn't see a direct relationship in the inflationary initiatives then and now isn't aware of history. It was the same big money doing the same moves, bringing in older tactics to make sure they won. One major tactical move-- Bernanke. IF Obama had replaced him 4 years ago, we'd be in a different point in our recovery, not facing inevitable collapse. So... yes, I blame Obama for keeping the republican and not installing commonsense. Some say Yellin is the likely successor to Bernanke, she's a puppet. We NEED commonsense, not book smart ignorance in the Fed. I hope we find that person and the Red States impeach their no-sayers so we get a shot at Progress.
Jun 8, 2013 12:08PM
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There is a move to collapse the current financial system. You tube "economic collapse" educate yourself outside the mainstream media. Why do you think corporations are hoarding cash along w/banks their preparing the taxpayer is paying for it. Every dollar is debt there's nothing of value backing the dollar. So smart money says prep food water couple months worth. Don't forget metals gold silver cooper lead. Watch for Cyprus action to start in Europe to pay for the banks that's when it will move here(USA). There talking pension replacement w/government bonds socialized pension. This didn't work with social security???
Jun 8, 2013 2:01PM
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dave1230, these obamaites, believe you can borrow and spend your way out of debt, and that the path to prosperity is to TAX and Print.

 

You cannot talk economic sense to them.  Japan has been practicing Obamanomics for 25 years.  In that time their bond market has tanked, their stock market is one third of its all time high, their middle class has been turned into poor, they run massive deficits, their growth has been sub 1%.  The Japanese have a debt to gdp ratio topping 200% and more than half their budget goes to debt payments. 

 

Do they really think people will lend the Japanese government money for a 2% fee per year?  Would you pay someone 2% to watch your money all the while it is inflated out of existence?   If I were in Japan, I would convert all my Yen holdings to stocks or specie, or better yet move it all overseas where their socialist government cannot seize it.    And I recommend the same for US citizens while you have the freedom to do so. 

Jun 8, 2013 7:10PM
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Do not believe they are that "rich"...these that make "millions".  The dollar and the bond market are juxtaposed for a reason. This is simply raping those that actually invest in the "markets" and, few do here.  The "investors" are boxing "themselves" and that will be shown.  They are the same and the taxpayer will eat it again.   Half of the nation on welfare of one sort or the other and it is getting worse.  Simple economics.   
Jun 7, 2013 6:16PM
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What a "goldilocks" NFP report we had LOL
Jun 9, 2013 7:14AM
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Have you ever noticed that when Fat Cat tries to give the "educated" response... it's some mumbo jumbo financial over-control stuff that leave the People entirely out of the solution? What you can take-to-the-bank is that the Fed and it's banks are on their way out along with anything financial. We need ECONOMY and that comes from dismantling controllers and manipulators and restoring the core-- you work, you get paid, you have pay, you can live. Administration, pariah professions, paper and button pushing... are all dinosaurs of the past. Less than 10% of the world's People control 99% of it through bad finance, we are well on our way to no longer recognizing it and the threat of war only works if you can pay armies. If the war is over bad finance, People just leave YOU out of the prevailing economy and suddenly there is peace, prosperity and no more rich people. Try READING the posts of others rather than condemning them with foulness and condescension. The world will get over greedy grubbers, but once you've let yourself live for greed, Earth is no longer interested in you living on it. So says the majority.
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ABOUT BILL FLECKENSTEIN

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This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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