Fed Shocker: No Taper

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The Federal Reserve today (9/18/13) surprised the world, and me, too, by not reducing the amount of bond purchases from the current $85 billion per month to something less.  The guesses and expectations were for between $10 billion and $15 billion less per month, to bring the number down to "only" $70 to $75 billion per month.

But the actual reduction was $0, leaving the purchases at $85 billion per month.

The financial markets reacted instantly.

Of course, the dollar got hit right away – and for a pretty good amount, given that it's the world's major reserve currency – losing more than 0.75% in the blink of an eye:

Gaining far more than the dollar lost was pretty much everything else.  Stocks went up hard; bonds, gold, oil – you name it.

Starting with the bond market, the ten-year U.S. Treasury yield fell by more than ten full basis points, or one tenth of a percent, which is really remarkable for such a large and liquid market:

What this tells us is that lots and lots of market participants had been selling Treasury notes in anticipation of a $10 billion cut in the Fed current quantitative easing (QE) program.  I guess we can further infer that $10 billion/month buys you about ten basis points, which I suppose is a good deal – as long as you are printing money out of thin air.

Next, the oil market took off as well, although it had been rising steadily all day for some other sets of reasons, but the non-taper announcement tossed another buck onto the price:

Finally, gold really punished the shorts today, and on massive volume, too, popping more than 2% instantly on the news.

In summary, the U.S. financial markets just exploded on the idea that the Fed was not going to reduce its asset "purchases" (in quotes because purchases are usually made with money that was earned).  Of course, none of these movements reflect anything more or less than the idea that there will be ever more money flooding into the system, which will cause things, but especially financial assets, to go higher in price in the future.

The ultra-rich are going to be thrilled with the Fed, and they should really send the Fed a nice gift this year – perhaps the deluxe fruit basket, during the holidays.

Combined net worth of America's richest rises

Sep 17, 2013

NEW YORK (AP) -- Life is good for America's super wealthy.

Forbes on Monday released its annual list of the top 400 richest Americans. While most of the top names and rankings didn't change from a year ago, the majority of the elite club's members saw their fortunes grow over the past year, helped by strong stock and real estate markets.

"Basically, the mega rich are mega richer," said Forbes Senior Editor Kerry Dolan.

Dolan noted that list's minimum net income increased to a pre-financial crisis level of $1.3 billion, up from $1.1 billion in 2012, with 61 American billionaires not making the cut. "In some ways, it's harder to get on the list than it ever has been," she said.

(Source)

Fed Speak

In its release, the Fed noted concerns about both rising mortgage rates and the lack of additional excess in fiscal policy from D.C. as being drags on growth. 

They also said this, indicating that they are adopting a 'wait and see' approach:

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.

However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

(Source)

More evidence?

In the past month we've seen articles like these:

If you had told me a decade ago that we could have both headlines like these and an $85-billion-per-month, thin-air money printing program by the Fed, I would not have believed you.  At least not without a plummeting dollar and gold over $5,000 per ounce. 

But we have neither, and the entire investing world is celebrating not only the Fed's largess with wild abandon, but also the efforts of all the other OECD central banks.

If one takes the Fed's words at face value, then one knows that it is not going to do anything until in its judgment, the labor market hits some appropriate threshold, and inflation gets back to a level that it feels gives itself, and the big banks, more breathing room.

In the Fed's own words:

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. 

To this, the Fed also essentially promised that interest rates (meaning the Fed Funds rate) would remain near zero until 2015, removing even the option of slight interest-rate tightening for another year.

Taken together, the Fed essentially said, nobody seems to mind that we're printing up enough money each month to bail out southern Europe, our best friends (the 400 richest people on the Forbes list) are applauding us, and the financial markets are giddy, so why stop now?

Boxed In

As I have long argued, the Fed is boxed in and almost certainly will continue to print as much and for as long as necessary. Along the way, everybody knows that the financial markets are becoming more dependent on continued Fed stimulus and that tapering, let alone actual unwinding, becomes an ever harder and more remote possibility.

Further, we all have to try to make sense of the growing gap between the Fed's actions and the reported economic statistics.  After all, $85 billion a month is an emergency amount.  And so we have to ask, where's the emergency?

It's not in housing, or auto sales, or the headline GDP number.  Nor is it in bank earnings or growth in wealth for the already wealthy.

The simple truth, as I see it, is that the Fed now knows that as soon as it takes the punchbowl away, all of the apparent wealth evaporates and the market crumbles.  Here we might note that if several years of truly historic money printing has not yet provided enough self-sustaining recovery, why exactly is it that the Fed thinks more of the same will do the trick?

Something just does not add up in this story.  What is it that they are not telling us?

Well, one thing that really does not fit in this story is that oil over $100 per barrel.  As far as I am concerned, there will be no such thing as a resumption in the type of growth the Fed wishes to see before it willingly begins tapering (end eventually unwinding), because of the price of oil and debt levels that are still far too high.

Which means the Fed will keep on printing money until something happens.  More bluntly, I think the Fed will keep printing until some form of market accident happens that forces it to behave differently. 

When that happens, the Fed will be following, not leading. And many will be cruelly punished for believing that the Fed had some magical ability to re-write economic laws. 

Conclusion

By failing to taper, the Fed has all but admitted that it is quite worried about something that it is not publicly disclosing.  But it's not that hard to read between the lines.  The Fed, along with everybody else, knows that the markets are elevated mainly because of the QE money-printing, and it is desperately afraid to find out just how much elevation it is supporting.  The best guess is a lot.

For now, the whole world seems content to just go along with the story and buy up everything that isn't nailed down, which is just another way of saying don't fight the Fed.

To my way of thinking, this is just inflation, pure and simple, and the Fed has engineered another huge bubble, this one bigger than all the others put together.  It is now our job to figure out when and why this one, too, shall burst.

Again, I consider all of this to be perfectly reckless behavior. We have to be open to the possibility that rather than being a paragon of competence, the Fed is actually staffed with ordinary humans who have no better idea of where this is all headed than anyone else.

With history as our guide, we're pretty confident saying that this ends badly, and given that this is the largest bubble by far, we might even guess that it ends really badly. 

But we can never know the when of such matters, and so we continue to prioritize building resilience at the personal, financial, and community levels. 

~ Chris Martenson

This is a companion discussion topic for the original entry at https://peakprosperity.com/fed-shocker-no-taper/

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Chris, I suspect others share my interest in how the Fed's suprise lack of taper affects your stated intuition of a market correction occurring this fall. Timing is always the trickiest (a straight answer is not necessary), but does this news push back your general timeframe, or does it suggest to you that the veneer of abundance and functionality is thinning rapidly and the insiders/FED know it? If the later is true, would not that be consistent with the suprise reversal away from Summers in the FED chairman sweepstakes? Afterall, Yellen can be simplicistally called the no-taper candidate while Summers was at least thought to be more hawish/tapery (although I agree with you that he would really do nothing other than serve insiders/big players). I'll open the question up to others too: do other readers have thoughts along these lines?

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In my limited understanding of these matters I have always thought that the bond purchases, either direclty, or indirectly were undertaken to keep the government afloat.  By providing a steady lender for government borrowing the Fed was both allowing the government to continue deficit spending and kept interest rates down by purchasing the bonds at levels private investors, or foriegn governments might not find appealing.  This being my fundamental understanding I was puzzeled the past few weeks as everyone said the Fed was going to "taper" its purchases. I could not come up with a list of likely purchasers should the Fed step away.  If suddenly the government couldn't borrow at will and/or had to pay real world interest rates the true fiscal cliff would be reached.  From this perspective I was not at all surprised by today's announcement. 
I agree fully with your first comment.  The Fed has put itself in a box.  It cannot let government finances collapse for the backlash would be the collapse of the stock and bond markets and ultimately the Fed itself.  The real question now, is how long can people be made to believe that this in not increasing inflation and lowering our standard of living.

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jtwalsh,  I was thinking the same way as you.  That there was never a serious intent to stop bond purchases.  In fact, I would go a step further.  Back when the Fed announced that it may start tapering later in this year, I had a hard time believing that they didn't already know there would be a backlash from the markets.  Therefore, I had a hypothesis that the true intent was nothing as it appeared, and that they would very quickly backpeddle (which they did).  My hypothesis was that perhaps it was a smokescreen to 1.) test the markets and 2.) when the markets reacted negatively (as they figured was most likely), then they could use it as an excuse that "oh well, we were going to taper, but look at how much damage it could cause to mortage rates and the housing market… we better keep injecting for a while".   In short, plausible deniability.  It helps with the act - makes it look plausible that they are ready to stop injecting stimulus (to avoid a run on treasuries), while never actually stopping the injections (to continue to fund the federal government).
Now with today's announcment, this theory seems bolstered.  What do you guys think?

 

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For those of you that have read, “The Creature From Jekyll Island” this should all sound very familiar to you because it is the last chapter in the book that is unfolding as Griffin predicted in his worst case scenario.  You may want to reread that chapter or for those of you that have not read that book…I suggest you do. 
Broadspectrum
 
And from
What To Do With the Federal Reserve 
By Michael Busler 
Wednesday, September 11, 2013
 
Many people today want to abolish the Federal Reserve System. The primary reason is that these people fear a severe inflation problem coming very shortly. Why? Over the past four years the FED has been "monetizing" the public debt by purchasing $85 billion dollars per month of U.S. Treasury bonds that are used to pay for the huge annual deficits that the current administration has incurred. Each time the essentially unregulated Fed buys bonds, they inject reserves into the system which increases the money supply. Will this cause the rapid inflation that people are worried about?
 
A new documentary called Money for Nothing directed and produced by Jim Bruce has just been released. This film details the history of the Federal Reserve, and provides excellent information about why the FED should be abolished. Read about it here; If you want to see the movie, click here to see if it is showing in a city near you.
Michael Busler, Ph.D. is a public policy analyst and an Associate Professor at Richard Stockton College.

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perhaps the FED's stockholders havent had enough time to complete their objectives? 

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One reason why the masses haven't picked up their pitchforks and torches: they don't even understand what "quantitative easing" is.
From Yahoo! News:

Poll: With the end of Fed's QE in sight, U.S. public says 'Huh?'

The Fed's $2.8 trillion "quantitative easing" program has, among other things, lifted stock prices to record highs, driven interest rates to record lows and put a floor under what had been a reeling housing market.

Yet barely a quarter of Americans even know what it is.

A poll leading up to the Fed's pivotal decision, expected Wednesday afternoon, found just 27 percent of U.S. adults could correctly pick the correct definition of quantitative easing from among five possible answers.

Quantitative easing, or QE for short, is when the Fed buys bonds in order to push down interest rates and boost the economy.

The ongoing Reuters/Ipsos poll included interviews with 857 adult Americans between September 12 and 16. The result's credibility interval, a measure of its accuracy, is plus or minus 3.9 percentage points.

A populace that blindly confers so much power to a private entity is complicit in any abuse that ensues.
8

Now that we have accomplished our mission of bringing China and Russia back into fold through our Sabre rattling over Syria, the market will go to 20K. Or so the story goes:
http://finance.yahoo.com/blogs/daily-ticker/history-suggests-markets-soar-fed-qe-ends-says-182712192.html

And this is based on history…or is that his story? But wait, QE isn't ending. Oh no, now what? I feel I'm at a schizophrenic party. (me three)

The hangover is going to be a doozy.

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With only five possible answers on the survey one could reasonably expect roughly any given answer to receive 20% (1/5) even if 100% of those surveyed were guessing.  That tells me the actual number of people who understand QE id likely far lower even then the 27% revealed by this survey…gross America, gross.

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Those of us thinking and talking about this are getting a bit fatigued, yet only a quarter of the population even knows what QE is? They say the hospital patients that do the best are the ones in complete denial of their condition. Are we surviving all this through pure denial, is this that wile e coyote moment, standing above the canyon on thin air, held perpetually in place by pure ignorance.

They say if you think education is expensive try ignorance. Seems like ignorance is working out pretty well for most of the american public. I catch conversations in the hall about the latest football game or the start up of the fantasy leagues. The latest shows on HBO or some cool TED talk about some arcane subject, some new deal on product x that just came out, etc.. The texture of daly life.

Seems like the sudden collapse fans have got it wrong. If it was impossible for the extend and pretend to go on this long mathematically, then what terms are missing from our equation? Seems like Ben painted himself into a corner a long time ago, paint must have dried by now, I think Ben is leaving the room.

Recently I heard a story in the main stream press that the wealth gap in the US has now reached the point where it was during the robber baron period of our past. It's the end of the world as we know it and I feel fine. Big industry flipped everyone the bird, hey you want middle class wages, environmental and financial regulations, see you later, were heading to a third world country far from you, when you get hungry enough we'll be back. Regulations have been decimated, middle class has disappeared, hey were back, woo-whoo, lets through a party! Remember those headlines, industry is coming back?

The technical classes that do the work of the uber rich will do fine, we'll have our small piles of PM's and smart investments. It amazing what a large hard working thrifty underclass will do to stabilize the economy. Remember Potter from its a wonderful life? Money printing is just the way to get there. Relax, there will be no collapse, just make sure you wind up on the right is of the tracks when the dust settles.

The tea party will road block the budget negotiations, maybe a new sequester, any bits of money still headed towards the working poor will be eliminated. Corporate welfare, “defense” and security state spending will barely get nicked. To big to fail and jail will just get bigger.  It'll be eighteenth centry London, families starving to death in the streets.

What is it that we are prepping for, solar panels so we and our neighbors get a hot shower once a week, maybe a garden so we can have a few fresh veggies mixed in with our industrial GMO ag gruel in the summer time? We've been here before. First it was slavery, then indentured immigrant labor, then empire and the exploitation of mother earth on a scale we have not seen before.

Is there an alternative, is there really enlightenment, will we trust our own intelligence. Can we go beyond financial survival and organize ourselves differently. No heros or leaders and no ism's. No left or right, just each of us willing to live fully in the present moment, heads in the clouds, but feet firmly planted in the soil of the earth. Can we scale things so we can look each other in the eye, rather than through the electronic fog of a computer screen?

The odds are always tough, but we are at that hundredth monkey moment, where things can be different then they have ever been before. This is such a moment in time as humanity has never seen before, we can do the impossible only if we believe in the future and do our piece, live the gift that we individually have been given and transform the world together. Think big and live an even bigger life. Its time to take risks and dream the impossible.  A collapse will not do the hard work for us that some have hoped for, darker alternatives are in the offing. We all need to roll up our sleeves and do this, what else is there in the world is worth working for?

 

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Nothing will ever change until limits to greed and power are made and enforced. Im not talking about socialism, communism or any other ism. Just a hard limit on how much crap your allowed to have compared to the lowest fellow man.do people really need to be billionaires? Even millionaires?
i believe an all out nuclear war will be required before people will accept this simple truth.

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I'm with you FreeNL, as long as I'm on the committee that decides who gets how much.I'm of the opinion that "We have met the enemy, and he is us." As long as human beings are part of the equation we'll have the same problems we' ve always had (more or less). What we need is a power greater than ourselves to serve as our moral compass and empower us to make the changes in ourselves that exceed our current abilities.

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Here is a short piece for those interested in reading a response from a relatively large, but not the "typical" mainstream financial advisor. I thought it was interesting not so much from any detailed analysis it provides, but more from the general tone it sets which begins with it's title "Much Ado about…Nothing?" and concludes with "We remain committed to serving our clients through tragedies and comedies alike".  Reading between the lines, I sense that they have a real feeling of forboding.
http://www.captrustadvisors.com/pdf/CAPTRUST_September_2013_Market_Thoughts.pdf?utm_source=Market+Thoughts%3A+Capital+Market+Assumptions&utm_campaign=57d8e9fc63-Fiscal_Cliff_Market_Thoughts_II_Plan&utm_medium=email&utm_term=0_61304a5f6e-57d8e9fc63-48639193

 

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Good Morning,
Our cooperative and exhaustive analysis of the true situation (superbly articulated in the 3 E's lens) only serves to provide us with an understanding of the AMOUNT OF PRESSURE in the system.  When everyone is willing to make believe, we can all pretend for a long time.  

Declining wages? - Print and issue SNAP, disability, Cost of Living adjustments etc.

Financial crisis? - Print and bailout as much as necessary

Currency too strong? - Print and weaken to stimulate exports

Nations moving away from Bretton woods? - Print, fund, and invade

As long as the "dollar" in its current form is the World's Reserve Currency, we can throw serious money at our problems and hold them at bay for far longer than would otherwise seem possible.

How then shall the end come?

There will be an outside (non-financial) shock to the world that will begin the failure of the doe eyed confidence the masses have in this edifice of horseshit.  Never forget the powerful forces in the world who REALLY Hate The United States.  We really should start an PP.com pool:

  1.  Serious war in the middle east.  Really, need I say more?

  2.  Islamic takeover in Saudi Arabia after the king dies - imminent.

  3.  Anything that spikes the price of oil again (like 2008?)

  4.  A collapse of China's potemkin village.

  5.  Any nuclear detonation  - anywhere

  6.  Japan's final collapse. etc., etc., etc,

We continue to correctly note that the serious rot is everywhere, and within every governmental, financial, legal, medical, etc. system we see imminent catastrophe.  An exogenous shock will shake the house of cards, and then all the pressures will cascade within a week, snowballing along the way, and sweeping all the sheep into the sea.  We have used the avalanche analogy many times here at PP.com and it has been snowing like hell for five years.  We are truly screwed, but I don't worry about it, because I am prepared.

Fear not!  It will be good for us.

Rector

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http://www.cnbc.com/id/100798203
 I wasn't sure what to make of this when he spoke in June; trial balloon, forecasting[taking some of the heat off Bernake] the next Fed move…obviously wasn't this at this point, or maybe thinking of the Fed's [his & Bernake's] legacy as he saw the train wreck ahead. Anyway I didn't see much response this when Greenspan spoke & thought it was very important at that time; & it seemed relevant here to puzzle out what is going on.

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I'm gonna jump in here with one observation.A bit back Arthur posted Max Keiser's interview with Jim Rickards.  Towards the end, Jim says that the derivatives casino is so overleveraged that the only "bank" big enough to cover the mess is the BIS or IMF or World Bank (one of these guys), by issuing SDRs globally.  So, in one fell swoop, we have a one world currency, and viola, a one world gov't.  Game over.

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Rickards has been trying to soften the blow of this scenario for years.  He's also a known councelor to the Financial Elite/Banking Cartel so, what he says, is what he's being told to say.  Pretty simple.CNBC doesn't allow (especially any longer) people to come onto their show unless that person is there to help the cause (Ron Paul Excluded).  
In other words:  Don't trust Rickards.  He's working against the citizen, not for the citizen.
 

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  1. No end to Q.E. progarms by the fed

  2. Extraordinarily measures at the treasury dept, just robbing Peter to pay Paul.

  3. Goverment shut down maybe at the end of the month.

  4. Need to increase the debt limit ?

                                           How long before someone  no more?

                                                                Pat the rat 

 

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…although I thought war in Syria/greater ME was going to provide the excuse for no taper.  
So the Fed plunges forward, even further into uncharted territory.  I probably don't need to say to my fellow PP folks that we are, at this point, so far out on the edge of the map that we're even beyond the areas marked only by "Here Thar Be Dragons"…

So the Fed plunges forward, dragging us with them.  Folks can be outraged, or sanguine, or clueless, but other than the vanishingly small number of folks off-grid (literally and figuratively) and disconnected from reliance on the system, we're all riding in the Fed bus driven by Bernanke.  Folks like us are getting into position to hopefully survive the crash when the wheels come off.

So the Fed plunges forward, casting away the last appearance that they're anchored in any sort of reality as we understand it.  All the more reason for us, each and all of us, to continue fashioning anchors of our own – which will with hard work and good luck, hold us steady through the storm to come.

Family, Community, and resilience preparations (and PMs [+Bitcoin for Jim and like-minded folks!] for those with financial stakes to preserve).  Keep plugging away, y'all.  As our good doctor once said (paraphrasing), when the time comes, it'll happen fast and it won't ask permission…

Viva – Sager

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Ostensibly, the FED is purchasing  productive assets - US treasuries. Does it not follow that tax payers must cover the interest payments? Isn't this a stealth tax? As far as the rest of the junk paper the FED is soaking up, isn't this more TARP, just under the radar this time and not subject to congressional approval?