The following is a pic of a Malayan Tapir. Note the distinctive black and white markings of this animal.
Now consider this picture of Bernanke’s taper. It too has distinctive black and white markings.
The Malayan tapir comes by its coloring scheme naturally. The Bernanke taper has black and white shades that are man made. It’s perfectly natural for the tapir to have mixed hues. It is totally impossible for Bernanke’s taper to be a mixture of black and white – it has to be one or the other.
The white side of the Fed’s taper is benign. The markets should not be afraid of it; there are no significant consequences. The black side is the other extreme. Bad things will happen when the taper is implemented. So which is it? Is the Bernanke taper black or white?
I’m concerned that the Fed is going to try to accomplish a “Taper Lite” in an attempt to engineer a ‘white’ outcome. An attempt at a ‘white’ taper would be:
FLASH – Fed to reduce QE by $5bn per month starting in October.
FLASH – Fed to reduce QE by a total of $15bn from October through December and thereafter leave monthly purchases at $70Bn per month for the indefinite future.
FLASH – Fed anticipates that it will take no additional policy steps until after January of 2014 (post Bernanke replacement).
FLASH – The Fed may elect to increase monthly purchases after January of 2014 based on data.
This small ball approach will backfire. Dragging out the process will drag out the pain. As of today there is not much evidence of Taper Pain in the USA. But the money is moving quickly outside of the border. How long will it take for some of the Black side of the taper to come back home?
Obama’s decision on who to nominate as the next Fed head will be influenced by what happens as a result of the ‘Taper Plan’ to be revealed at the September Fed meeting. Two possible outcomes:
I) Bernanke spells out a Taper Plan that brings QE to zero over nine months. The US markets puke. All hell breaks out in India, Brazil and Indonesia.
– Obama quickly appoints Yellen – she does a dance for the Senate and talks all Dovey.
II) Bernanke somehow pulls of a Taper that is “Just Right” and the markets rejoice.
– Obama pauses a few weeks, sees that there is no Taper Crisis, and then nominates his pal Larry. Summers also dances for the Senate, he says nothing and confuses everyone.