Don’t Fear the Taper

Don’t Fear the Taper

Screen Shot 2013-06-15 at 3.48.24 PMIn this week’s newsletter, we present reasons for being long stocks and discuss the “Taper.”

Click on link: Don’t Fear the Taper, 6-14-13.

Excerpt:

Quantitative easing (QE) programs, courtesy of the Federal Reserve, have pushed cash into Primary Dealer accounts at the fastest rate in history. This has been massively bullish for equities over the past four years, as the Primary Dealers used some of that cash to bid up equity prices. This will likely continue until the Fed significantly curtails or discontinues its QE operations. 

US stock indices have been marking time during the past four weeks gauging “talk” about whether Chairman Ben Bernanke will slow down his printing presses. Notwithstanding the rumors, we doubt that QE tapering is on the horizon.

In our view, unless the Fed stops funneling money to the Primary Dealers, which we deem doubtful, pullbacks in stock prices are likely temporary pauses along an upward path. Therefore, in both of our Virtual Portfolios (Value and Put Selling), we are remaining long and unhedged.

Screen Shot 2013-06-12 at 6.59.39 PM

The Fed is Unlikely to Taper

America’s national debt now runs approximately $16.5 trillion. President Obama use his power to hold rates down because the cost of higher debt service would devastate his political agenda. 

Bernanke does Washington’s bidding so he is probably just ‘talking down’ market enthusiasm by leaking news of a coming ‘taper.’ In this fashion, he uses fear of reduced QE to contain equity prices without actually changing the Fed’s policy.

During the fiscal cliff debate in December 2012, people assumed tax rates would be much higher in following years. That precipitated an enormous amount of accelerated income and dividend payments that would have been made in 2013. Because of the higher income booked in Q4 2012, estimated tax payments due January 15, 2013, soared. This reduced the size of the expected Q1 deficit. 

Bernanke’s primary mission is to monetize the debt created by federal budgets that far exceed revenues. We see no way for the Fed to reverse course on QE regardless of the whispers to the contrary. 

The Fed has painted itself into a corner and there is no way to unwind the QE trade without debt service costs eating everyone alive. Unwinding would cause interest rates on U.S. sovereign debt to soar, because no one would buy debt at interest rates the government could manage. For every one percent rise in interest rates, there would be an estimated $80Bn in increased annual debt service costs at the federal level. The payment of interest would overwhelm all other spending.

In Love with TINA explains why stocks are attractive. There are no viable competing investments if you seek to protect your life saving’s long-term buying power. Absent a major change in policy, a full allocation to equities seems reasonable, as does avoiding fixed income. Bonds today are in a bubble, and a pop of the fixed income bubble is apt to be louder and more astonishing than anything we will see in the equity markets.

Featured articles include: My Deere, Market Shadows added agricultural machinery manufacturer Deere (DE) to our Virtual Value Portfolio. And When Tear-Gas Flies, It’s Time to Buy (buying EMF). 

Read the full newsletter here. 

Chart by Lee Adler of the Wall Street Examiner.

 

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Comments

  1. Thanks Ilene.

    Why do you no longer notify me of these things?

    • Hi Jesse,

      Sorry!!!

      My intent is always to notify you though I’ve been so slow at getting everything done, instead of doing the whole newsletter thing in one day (like before), I’m now spreading the work over a few days. Simply pathetic.

      We are working on getting another person involved in this project to help with the newsletter and website management – it takes a surprising amount of time – you may know this. Slow learning curve, things going wrong, and I’ve had less energy than usual. Anyway, check your email. :-)

      Ilene

Trackbacks

  1. [...] (QE or “money printing”) will continue despite Bernanke’s rhetoric about cutting back. (See Don’t Fear the Taper). Funding trillion dollar annual deficits requires monetization of debt. America is almost trillion [...]

  2. [...] market (NYSEARCA:SPY) reacted negatively, bonds (NYSEARCA:IEF) sold off and yields spiked up. In Don’t Fear the Taper, we surmised Bernanke may talk the taper, but ultimately cannot risk soaring interest rates and a [...]

  3. [...] growing economy. The stock market reacted negatively, bonds sold off and yields spiked up. In Don’t Fear the Taper, we surmised Bernanke may talk the taper, but ultimately cannot risk soaring interest rates and [...]

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