It’s the Fed PR, stupid (repost)

Revisiting why the FOMC minutes and economics don’t count.

NO QE taper until Janet Yellen’s first meeting as Chairman.

© 2013 ROHR International, Inc. All International rights reserved.

COMMENTARY: Wednesday, December 18, 2013 (early)

There is cause to revisit our November 22^nd views on why there will most likely NOT be (only a 5.0% chance in our view for) Fed QE taper today. The reasons are clear below that while the economics are likely either in order for that or at least very close, this is a political and public relations exercise attendant to the transition to Janet Yellen as new Chairman.

Three things deserve mention. The first is this being an ‘open source’ post. In other words, there is no higher level blog subscription necessary to read the full analysis (as it was when it was first posted.) Secondly, there are other related posts on different aspects of why the Fed might be hesitant to taper its major quantitative easing program at this time. One of those that is also ‘open source’ is the November 29^th analysis focusing on the comments of ex-Fed governor Kevin Warsh. We encourage you to take a quick look at that as well. (However, archived posts require a free Silver subscription signup to access that analysis.)

Last, but by no means least, is our parody of Bill Clinton's statement from back in the 1992 US general election campaign. The word "stupid" on the end was not meant to characterize any particular individual or group, as it was only part of Mr. Clinton's previous pointed statement. And it was most certainly not intended to characterize CNBC's Steve Liesman as stupid… he is anything but.

In fact, we rely heavily on his rapid fire assessments of the subsets of headline economic data when major reports are released. While we differ with him on the likelihood the Fed will indeed taper QE today, it just happened that the CNBC video back on November 22^nd represented the best of the conclusions by those who believe the Fed will taper today.

And with that we leave you to review the previous posts on the way into what we believe will be continued full Fed QE for now. Of course, that also means Mr. Bernanke will have a lot of explaining to do at today's press conference, but we are sure he's up to it. The original November 22^nd post continues directly below.

And as always, thanks for your interest.

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It’s the Fed PR, stupid

Review of why the FOMC minutes are useless and there will be NO

QE taper until Janet Yellen’s first meeting as Chairman in March

© 2013 ROHR International, Inc. All International rights reserved.

COMMENTARY: Friday, November 22, 2013 Weekend Read

There are still quite a few folks bothering to analyze the likelihood of an early Fed Quantitative Easing taper in December. CNBC's estimable Steve Liesman presents a case he feels is within the realm of possibility. It is well thought and worth a listen.

However, we have a different view, and it is why the equities are acting so well on bad news (QE) AND good news (no early taper.)

The bottom line is this: There will be no QE taper until Janet Yellen’s first meeting as Chairman in March. Period.

The folks at the Fed, especially the most influential, are not stupid. And what we are witnessing is their rightful engagement in basic game theory to effect as credible a transition as possible to a new Fed Chairman. And it has a clear precedent.

But first, after everything Ben Bernanke has done to bring more transparency to the Fed, it is not actually working right now. Wednesday’s FOMC meeting minutes release elicited a predictable response in equity markets sensitive to any hint of early QE taper. They got their knickers in a knot, and dropped right after the release. That is due to any early QE taper discussion being unexpected after the extremely dovish Senate confirmation hearing for Dr. Yellen. That was followed by Mr. Bernanke’s further extensive support for QE-Infinity Tuesday evening.

And in fact there was no clear indication of any early QE taper in meeting minutes that were among the most useless in the history of the Fed. This is the ultimate evolution of Bernanke’s transparency drive. If they tell us everything from every stripe of sentiment as well as any bona fide plans, we don’t really know anything. And the markets are responding in kind by beginning to ignore the Fed. How could they not?

The discussion which upset the equities and government bonds was, “However, participants also considered scenarios …to wind down the program before an unambiguous further improvement in the outlook was apparent.” So they also might ignore a good deal of what they just told us about still weak conditions. Great!

That was followed on the same page by the obvious indication they have not even begun to discuss how (paraphrased) “…future asset purchase reductions might be split across asset classes.” Maybe more Treasury security tapering, maybe more MBS, maybe an even split.

Are they kidding? How are folks who have not begun to decide the asset class split on tapering going to taper in December? While I know it is not intentional, this and much else does nothing more than confuse the casual observer. The same can be said for the endless financial luminary communication tsunami. Over the past 30 years central bankers have gone from inscrutable to insufferable.

Not much of it matters anyway. It is also the case that in spite of all the discussion around this and other issues, the Fed Chairman has the power to sway the committee. And Ben Bernanke could not be clearer that he is against any near term QE taper. The same goes for his obvious successor.

And if they do not want to taper, they have many reasons for standing pat even if the US economic data improves. There are the continued Washington DC follies. Further acrimony is likely after Senate Democrats just launched the ‘nuclear option’ of making all appointment approvals by simple majority (versus 60 votes previous.) And there is the extreme economic burden it is now apparent Obamacare is foisting on the middle class.

The succession public relations strategy also has a well-established precedent in Mr. Bernanke’s ascent to Chairman. One of the key challenges which Mr. Bernanke and Dr. Yellen have both faced is a reputation for being overly dovish. Mr. Greenspan paved the way for Mr. Bernanke to mitigate his ‘Helicopter Ben’ image (referring to Bernanke’s comment on throwing dollar bills out of a helicopter if he thought it would help a very weak economy.)

Greenspan only put through 25 basis point rate hikes in late 2005 and early 2006 where more might have been needed. That allowed Mr. Bernanke to implement another hike at his first meeting as Chairman in March 2006. The same is now the situation for Dr. Yellen needing, at the very least, to avoid looking even more dovish than she probably is. That is where game theory comes in.

The Fed likely could care less about an additional $30 billion on its already Brobdingnagian balance sheet if it does not taper in December. What it cannot afford is to taper in December, and then see the economy weaken into early 2014. Under that scenario new Chairman Yellen would need to re-expand asset purchases as her first official act.

That would reinforce the perception she is too dovish to be trusted as Fed Chairman. Whether than means she should automatically taper at her first meeting is irrelevant for the transition. The key is to not leave her in a position where she might need to re-expand QE after an initial taper.

Our Conclusion is reserved for Gold and Platinum subscribers.

Conclusion

And that is why all the discussion of a possible December QE taper is a waste of time and effort. That is in addition to the degree to which (on etiquette and protocol) Mr. Bernanke should not say anything about it for a long time after his term lapses in January.

That lengthy comment blackout period on the part of any outgoing Fed Chairman regarding the policies and performance of their successor is enlightened. In this case it is especially important Dr. Yellen take full ownership of the tapering process, rather than have Mr. Bernanke initiate it and disappear.

Then again, it is also incredible (and possibly just a bit perverse) that the man who turned the Fed (in the words of Warren Buffet and others) into The Greatest Hedge Fund in History will not be saying anything at crucial times in the near term. After the current very vocal show deflecting any calls for early QE tapering, The Silence of the Bernanke will be playing soon at a prominent central bank near you.

Thanks for your interest.