The T-Report: Will Ben Keep an Ace up his Sleeve?

Posted by on Dec 12, 2012 in The T-Report | No Comments

Ben Wants to Ease and Eventually Will

David Copperfield doesn’t do the disappearing elephant as his first trick. Houdini probably did some sleight of hand before getting chained up and immersed in water. While Ben wants to ease, he may want to wait a little to bit.

Ben is ready, willing, and able, heck, chomping at the bit to unleash more accommodative actions. I think he will be easing until unemployment is below 7%. He is far more scared of taking his foot off the accelerator too soon than keeping the pedal to the metal too long. Ben would much rather his legacy be remembered as “Ben the inflation creator” than “Ben the depression creator who didn’t follow his own advice.”

All else being equal QE open ended would go to QE more open ended. There are orders of infinity – (real numbers are a greater order of infinity than integers). I never really understood that concept but think that is where we are in the Fed easing cycle. The next step is from unlimited to even more unlimited.

The Timing Isn’t Right

There are a few reasons to hold off right now

  • The Fiscal Cliff. Ben is aware that the politicians might screw things up and leave us in a world of uncertainty and he will want that ace up his sleeve just in case he needs it
  • The Holiday Effect. If his sole goal was to push the markets higher, than now is as good a time as any. The thinly traded market would do well, but with the holidays coming up, there is a greater risk that momentum is lost, so better to wait until next year.
  • No Fixed Income Supply. The entire fixed income space is searching for bonds. New issues are low. There just isn’t much coming in the way of new paper so any Fed money now seems less legitimate as a form of support and purely a tool to force people into ever increasing risk. This is the least likely of the reasons to hold him off, but is out there nonetheless.

What Will We Get?

We won’t see a change in the size of the purchase program. There will not be an increase, but rather than buying only mortgages, he will add treasuries to the mix.

Frankly, I think they are having trouble sourcing mortgages and are scared that they could create the embarrassing situation that new eligible mortgages would trade at negative spreads, so now is a good time to add treasuries to the mix.

It sets him up to increase the size next year if he feels the need. It leaves him the all important ace up his sleeve, while trying to fix an unintended consequence of their last policy. I think that will disappoint the market.

How Does That Leave Me?

Bullish China as data seems to be okay, and the stock market has underperformed by so much.

Neutral Europe as the next key is to see how aggressive the EU is in terms of easing terms for Greece now that the buyback is done, and what they do for other countries.

Bearish the U.S.. I am increasing my bearishness on the U.S. markets here. The only assets that scares me to be short is HY CDS. If we rally, that strikes me as having as much or more upside than almost any other asset class. In meantime I’m just not short it. I am not fully bearish yet, as I can see the bull case, but am growing in intensity and will look to add unless something changes my view.





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