Taper Talk: Here Are Some Questions to Ponder
“The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa.” — Werner Heisenberg, 1927 [aka “The Uncertainty Principle”]
Last week was the one week every year I do some volunteer work, which leads me to having basically no time or access to the news. So, obviously, it was also the week where the market got a bit dicey. I have yet to catch up on everything I missed (should be done by September!) but I guess my main question is this: has anything fundamentally changed?
Yes, I realize folks feel Fed tapering is more likely, but what is the rationale? Is it because unemployment is on a trajectory that will already get it where they want without needing the current amount of QE? Is it because they are concerned about inflation?
I assume the response most folks would give (based upon the synopses I’ve gotten this past weekend from some associates) is that the economy is getting better and/or asset price bubble concerns. Interestingly, neither of those two are the main focus in the U.S. Federal Reserve’s dual mandate (jobs and inflation are), but they are surely correlated issues.
And how will the Fed go about unwinding? Some have said they’ll unload the MBS first, others TSYs, and I’ve even heard some suggest they’d raise rates before trimming the balance sheet (though not as much lately). As for some practical implications — here are a couple more issues to consider:
Bond yields: Spike city has the 10 yr US TSY at about 2.6 percent as I write this — will they ever go below 2 percent again? (I mean it’s been a while since they’ve been there, i.e. about a month!) Probably.
QE: Will they actually taper? Perhaps. Will the markets beg for more? Probably. Will the Fed give it to them (and this is potentially the biggest question)? Probably. (though that issue makes me think discerning who will be the next Fed Chair is a more important question than ever.) Accordingly, even if they do taper, it wouldn’t be a surprise to see them get back to $85B a month (not because they should), if not more (hello $100B+).
Fed Funds Rate: When will they raise! Based upon my previous comment, you can guess that I don’t think it’s anytime soon.
So do I feel confident in the above conclusions? Yes, especially that the 10 yr TSY will drop below 2 percent again at some point.
But I should point out the Prober corollary to the Heisenberg Uncertainty Principle: If I share an opinion, then it becomes more likely that it will be wrong. Perhaps I should’ve stayed at a Holiday Inn last night!
Seriously though, after a few days of trying to catch up on everything I missed I remember this awesome article by one of Twitter’s finest contributors, @behaviorgap (aka the brilliant Carl Richards) that made me feel better about feeling more clueless than usual: What You Don’t Know About Your Portfolio May Help You
It’s all good, markets are still up on the year, everyone I know is still doing their best to get things done and, as I’ve mentioned before, I am confident the wealth of human capital in this country will do what it takes to continue moving the country forward.
The ride may be feeling bumpier than usual, but it’s all good, we’ll be fine. Don’t take it from me though, to quote the wisdom of billionaire investor Warren Buffett:
“It’s never paid to bet against America. We come through things, but its not always a smooth ride.”
Jonathan Prober has specialized his academic and practical endeavors on the five pillars of professional services: finance, economics, financial accounting, taxation, and the law. His professional experience includes dealing with business and legal issues, including wealth management, financial valuation, and corporate strategy. For more, visit Prober’s Playbook or follow Jonathan on Twitter at @jonathanprober.
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