Tags: recovery | rates | Fed | damned

Fed Tapering Is Backed Into a Corner

Thursday, 12 Sep 2013 08:49 AM

By Ashish Advani

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I was watching President Obama's address to the nation the other night about Syria. For a person with great oratory skills, it seemed like his heart was not really in it. He seemed to get his scripted message across, but lacked conviction or passion. The prime cause? The Russian offer to mediate.

If we analyze the whole situation, following a scripted path is easier when you are either ready to act or when you know all the facts and your belief is unshaken. In this case, he made a passionate plea to attack Syria, had a change of heart in asking Congress for approval and then became sidelined in his conviction when diplomatic initiatives started popping up. He is now in the unenviable classic proverbial "Damned if you do, damned if you don't" situation.

Mind you folks, I am completely against this and the past two wars that America entered into. But if you are not going to follow through on your words, why utter them at all?

It is better to stay silent and let the world wonder if you are a fool, rather than open your mouth and dispel all doubts.

So what does all this have to do with tapering?

Let's go back to May of this year when Federal Reserve Chairman Ben Bernanke made the announcement that the Fed might start tapering its stimulus program. While his intent of giving the markets a heads up may have been noble, it has now landed him in the same proverbial soup that I described above for Obama.

When he made the announcement, he indicated that the tapering would be data-driven and that unemployment had to be at 6.5 percent or lower before he would consider reversing track.

He then seemed to show unnecessary haste in solidifying the market conviction about the timing being sooner rather than later. I am not sure what Bernanke's motivation was in indicating haste when he made the half-baked tentative announcement of tapering, giving himself giant back-out clauses of data dependency. If he was not sure what the data would prove, why whip the market into a frenzy?

Was his guilt at leading this world into the financial abyss leading him to try to atone for his sins before leaving office? Or was he just plain old misreading the situation?

The housing market boom, which was touted as the major indicator of the recovery of our economy, has its wheels coming off. Mortgage applications are at five-year lows and large banks are laying off mortgage staff in massive numbers. Bank of America has laid off a massive number of staff, and Wells Fargo has dismal results in mortgages and will soon follow.

The main cause? Rising mortgage rates and no real jobs, which give people income to buy homes.

As a result, this tapering talk by the Fed is the main reason the fledgling economic recovery (if there ever was one) is crushing any remnants of the mirage of a recovery.

As I warned you a few weeks ago, this euphoria around rising rates will diminish by end of summer or early fall. So far, it seems like the script I had written is playing out.

Now if the Feds do not taper in September, they will look weak. And if they do, the rates will jump up even more and definitely crush the housing recovery.

Damned if they do, damned if they don't.

I suspect they will taper by $10 billion and then send a message to the market that they will stay at that bond-buying rate for a long time to come. They will continue to fuel America's addiction to cheap money and help them avoid taking the bitter medicine and start down the road of a real recovery.

Stay long Treasurys and avoid this short-term trap in the rates market.

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