If there is one thing that seems certain, Fed tapering of QE is coming and it is now media obsession number one. This will continue until it becomes fact (a fact that the market probably has already priced in). The Fed could probably end quantitative easing “cold turkey” without a whimper from the market, provided they did not announce it.
You say, “How could this be?” Well, I have checked the numbers, QE versus the average daily trading volume in U.S. Treasury securities and agency mortgage backed securities. Our source for these figures is the Securities Industry and Financial Markets Association (SIFMA). According to SIFMA the average daily trading volume in treasuries and AMBS is over $700 billion per day. This dwarfs the $4 billion per day ($85 billion per month) in QE coming out of the Fed. QE on a daily basis is a rounding error. Credit for pointing this out goes to economist and portfolio manager, Jeff Miller in a piece he posted on Seeking Alpha May 15, 2013. Miller asserts QE represents only a minor overbid in today’s treasury and agency mortgage backed markets. I have not heard or seen one major media outlet give this kind of perspective on the issue of Quantitative Easing or the tapering thereof.
At any rate, when the “Dreaded Taper” begins there will be a slight (but decreasing) overbid in these markets. When QE is reversed, a slight over-offer will exist. The operative word here is slight. This might be the stuff that slight corrections are made of, but not the stuff bear markets are made of. Oh yes, rates will go up on longer-term bonds (conversely prices will come down). Maybe the buyers of that paper will start getting a real rate of return on those instruments for a change. If you believe inflation is running at 2%, a 3.6% ten-year t-note might look a bit better than the 2.6% rate currently available….that is if you believe 2% is the number and it won’t trend higher. Even under this scenario, stocks look like a better deal. Please, if you have a good rebuttal to this argument, fire away!
On a brighter note I would like to compliment Jeff Sommer and the New York Times for coming a long way in their thinking since a February 16, 2013 article, “Jumping Aboard The Train, As If There Won’t Be Another.” The story contended that,“the little guy” was flocking to get back into the market. This was patently untrue then as it is now. We roundly criticized the piece in Session 8. Six months later in today’s Times (8/11/2013), they got it right in “The Iron Man Market Is Still Lacking Respect.” This article rightly contends that investors are still not flocking back into the market. They are fearful and leery of stocks and the market. This is in my mind is a healthy sign.
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.