Taper or No Taper?
The word on the street is that come September 18th we're going to see the Federal Reserve "taper" or cut back the amount of money they're printing to buy up toxic assets from the banks and Treasuries from Uncle Sam. For most people, they don't pay it much attention...but trust me, nothing is more important for your portfolio than whether they taper or not.
This entire market, and this entire economy has been built on nothing but Fed money pushed out to the 21 primary dealers, who then take large portions of that money and plow it right into the stock market. We don't have organic growth, we have junkie growth. Injection growth. They inject the "stimulus" and the economy shakes and jerks in something you might call "weak growth" . But nowhere is the effect of their printing 85 billion a MONTH as evident as in the stock market.
Our market has soared straight up since November of last year. Usually folks equate the market rising with a strong economy, but that is far from the truth. The market is NOT a reflection of the economic strength. In fact, if you compare S&P earnings this year to last year you'll find earnings are down almost 3%. So why are markets soaring higher if profits are actually fading?? Quantitative Easing. That's it. Nothing else. A TRILLION dollars a year printed out of thin air and jammed in the system.
But there's all manner of "push back" against the Fed printing all this money. So for months now they've been hinting about the idea of "tapering off" the amount of money they print and inject into the zombie. But here's the question, and we've debated it now for 4 months. Will they or will they not taper? I can make the strongest argument you'll ever read... for BOTH yes and no. So, lets just take a peek and see what each means.
On the "no taper" argument, the ammunition is simple and abundant. The economy stinks. The jobs recovery is 78% part time service junk paying pennies. In real terms, a person making minimum wage in 1967 is actually "wealthier" than someone making 10 bucks an hour today because of the insane inflation we've suffered. Our savings are in the toilet, yet millions are trying to retire but have no means. We have record amounts of folks on food stamps and disability and Government assistance. Government red tape has ruined the small business man, Environmental laws have stopped thousands of budding entrepreneurs from moving forward on their projects. Housing is crippled, and millions are still "upside down" on their mortgage. Shall I go on? I can site hundreds of "issues" that show the overall economy is really just barely alive. But, I'll spare you.
So if you add all that up, you come away with the idea that "no, they can't taper". If they've injected trillions ( they have) and five years later the best we have is this subpar "zombie" growth, doesn't it make sense that if they taper back the amount of QE they do, it will hurt even more? It does. There's absolutely no way they can cut back the amount of QE without us seeing drop outs in economic activity, activity that was only working because of QE in the first place. If the market is only where it is because of all this Fed money finding its way into stocks ( it is) then doesn't it make sense that if they cut that back, the market will fade off? Yes it does and it will.
Thus the first take away is that all this taper talk is simply fear mongering so that everyone doesn't get giddy and send the DOW to 20K in a year. They use the taper talk to keep a lid on things so it doesn't get "out of control". In fact we've seen this for quite a while. They've told us many times that "when the data suggests enough strength they'd remove accommodations". It has been effective in keeping the froth out of the markets.
But there's another argument that you can make. Consider this... four months ago we wrote a piece talking about tapering and in that piece I suggested that the only way they'd want to taper is 1) if they have decided that the global economies are simply too corrupted and debt filled to be saved and they're willing to crash it and then do the global "reset". Or 2) with Bernanke leaving as the Fed head next year, he could be willing to give the incoming Fed head some "wiggle room" to play with. In other words let's suppose that he were to taper us off, the economy sags more the market sags and then the new Fed head can boost the QE right back up and look like he/she is rescuing us.
But there is another angle that is considerably "darker" to consider and it is one I tried to not give much credence. Yet I'm witness to something very very criminal, and when they do this, there's ALWAYS a reason. Follow along with me.....
For months the economic reports have been really poor. In fact it was in May where the reports were so horrid that even the ultra bulls were suggesting that the Fed couldn't be serious about tapering because the economy was so soggy. Yet that has changed in a big way. In just the last few weeks we've seen some of the most tarted up reports I've ever seen. The ISM's were outrageously strong. The trade deficit was better than we've seen in many years (granted it was energy import/export, but no matter it adds to GDP) We saw better reads on all sorts of reports. Something had changed.
First off realize that the true economy is in stall speed. We're in a depression. Yet they use the data to justify what they want to do. You've all seen it, as sometimes good news is good news, and bad news is even better news, etc. They twist the reports to sound wonderful if that suits the agenda, they report them as horrid if they want that to help their agenda. So, what do we make of the fact that the last rafts of data are so dolled up as to show incredible strength??? Why did they allow lousy data in May and June and then all of a sudden the July data shows that we're in the roaring 20's?? Something has changed.
Since they ONLY jam the data around to "justify" as a reason for what they're going to do next, you can make the case that the next move out of the Fed is indeed to start tapering off the QE. But again, why? Are they willing to crush the market? Are they just going to create "headroom" for the next Fed head? What is the point?
The one choice that I've tried to ignore, but does make its presence felt is this... what if they know that we're close to some real economic damage, and want to distance themselves from it? In other words, if you're a central banker what is your ultimate goal in life? To remain the king of the hill. To keep the bankers in their position of elitism. To "rule" the commoners. So, what happens if after all their trillions and all their "unconventional accommodations" the economy simply dies? Do they want to be blamed for that?
At first you'd say no. But, what if they play the "hey we tried but your Government wouldn't help us, card?" Several times in the past year Bernanke has said while at meetings with Congress that they needed to help the Fed with political policy that helped rebuild the economy and all they did was bicker and do nothing. Benji asked for some solid policy agreements from the administration and got nothing. Could it be that they're willing to tell everyone that "we did all we could do without ruining our balance sheets to the point where they couldn't be repaired. We pushed as hard as we could, but inflation is becoming an issue and we have to taper our policy so that prices don't start to rise. Congress didn't do a single thing to help you people, they fought us all the way. We have to reduce our accommodations to remain solvent, keep in inflation tame and if the economy sags even further, it is your Government you have to blame".
Is that sort of posturing possible? I believe it is. In other words, the Fed could use a scare tactic. The Feds could FORCE our Congress to actually do something for a change. Maybe the plan is to cut QE, watch the markets fall and the economy stall and then scream at Congress that they were warned. In a perverted twist they'd be looked at as some form of mutant hero's for forcing Uncle Sam to get off his obese butt and actually do something for a change.
The bottom line is that IF they do some taper it is because they have an agenda to promote. We know that the economy is not really strong enough to survive a taper and they do too. So if they do one, it's for a reason. It's some form of punishment or other reason. What that reason is, isn't quite clear yet...but as you can see there's a few ideas I can come up with.
I know many of you will ask... have you changed your mind? See, I've been saying "no taper". In fact, to keep things just chugging along as they are they need MORE printing. But seeing them doctor up the lousy economic reports has gotten me rattled a bit. They've done that for a reason. Right now this very second I'm still thinking that September will come and go and there's no change in policy. No taper. But there's something going on, and it doesn't smell right. I'm not even 60% confident now that they won't do the taper. That creates a HUGE problem. If they don't taper, the market will set new highs. If they do, we could face a very serious sell off.
Likewise the gold and silver market will be problematic. If they taper, "some" amount of the lumpinvestorate will sell thinking that inflation will come down. They could hit both of the metals pretty hard. But like stocks, if they don't taper, I could see Sept - into October being very strong for the metals. So, what do we do? Unfortunately we have to tread lightly. You can't get over invested here in case they taper and the market goes to heck...but you can't be "out" in case they don't. So, smaller positions and some defense makes sense.
If we do get a taper and the gold and silver market take a huge hit...I'll be a buyer on the dip. I don't think you'd be wrong to do it too.
The Market...
Warning! Danger Will Robinson! Remember the robot from the old Lost in Space TV series of the 60's? Well right now the market is flashing warning signals all over the place. Why? A combo platter of reasons really. First and foremost is the argument about the tapering or not tapering that I commented on in the commentary. Everyone knows that if the Fed tapers the amount of money they inject, the markets will fall in respect to the size of the taper. But there's other things brewing, many of them technical. If you're a chart slave, you're familiar with the idea of the "Hindenburg" omens. First off, what are they? Well they're a cluster of technical factors that taken together often signal something "bad" is coming. Here's some of the traits:
The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent. The NYSE index is greater in value than it was 50 trading days ago The McClellan Oscillator is negative on the same day. New 52 week highs cannot be more than twice the new 52 week lows
Now if you believe the stats, and I think they're close, we find that...within 40 days of a Hindenberg there's a 77% chance of a 5% drop. 41% chance of a panic sell off and a 24% chance of a major stock market crash.
That is why they're so "looked at" when they appear. But like all things technical, they don't always work. For instance there's never been a market crash without a Hindenburg preceeding it. But, there's been many Hindenburgs that didn't produce any drops. So why the problem this time around? Because if you see "one" Hindenburg, you can often ignore it. But when you get clusters of them, they tend to mean more. Well, we've had 4 of them in a week. That's a cluster all right.
So beyond the cluster of Hindenburg's we have more "interesting observation". If you take a long term snapshot of the market, you can make the case for a monster "megaphone" pattern, often called the jaws of death pattern. They resolve themselves basically 100% via a major market fall. I'm talking 50%.
Add up the size of the run up, the increased chances of a taper, the lousy technical's, and you have the ingredients for a market that is struggling to hold up. While we can always find a stock or two that is still able to move higher on poor market days, the fact is the selling has been pretty wide spread. I'm not surprised.
Thus we are a bit concerned. Unfortunately, we have 6 weeks of this "taper on, taper off" argument to wade through before we ultimately find out if they're going to yank the plug or not. 6 weeks in this market is more than two eternities. We'll see them talk about it, then ignore it, then talk about it more day in and day out. We could very easily enter a wicked period of ups and downs and recently we've seen just that. Just a couple days ago we were up 80, went all the way down to red by 40 and back green by 60 to end the day up just 30+. That's a ton of movement in one day. Expect more days like that.
So, we've entered a time where the ONLY thing that truly matters is the Fed and their printing press. Forget the blowhards on TV telling you how great things are and that we don't need the Fed. Ask Detroit how they're doing. Or Chicago. Ask the now "new record" food stamp recipients how things are. I can see no way for the market nor the economy to hold up if they do start tapering. So, if they do it...this is going to get awful interesting.
Be careful and I'll see you on Wednesday.
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