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Now say it … Taper !

/By Pinchas Landau/

This column has always seen it as its solemn duty to keep readers abreast of the latest developments in the ideas as well as the action in the financial markets, even if these are no more than fads and ‘buzz words’ or phrases that have a brief season of popularity and then fade away into richly deserved oblivion.

Pinchas LandauIn that vein, it is now incumbent upon everyone who seeks to at least mount a pretence of knowing what’s going on, to talk with great authority about ‘the taper’. This is not, as some anachronistically-educated persons might think, something to do with medieval illumination devices. It refers, instead, to the possibility that the Federal Reserve might choose to begin, at some point in time in the not-too-distant future, to gradually reduce (as in ‘taper’) the amount of money it is pumping into the US and the global financial system.

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 This possibility, indeed the mere discussion therof, is enough to cause ructions in the American and global financial markets. Almost every day, one or more members of the Board of Governors of the Federal Reserve Bank, makes a speech or delivers ‘remarks’ in which he or she opines that the Fed should / should not begin to taper, sometime in the foreseeable future. These words supposedly then impact the markets.

Thus, if you read the mainstream financial media or watch the mainstream financial TV, you will have been informed that this week’s weakness in the markets is due to concern about, in a word, ‘taper’. And if you should have the temerity to ask why the markets feel obliged to hang on every word of every member of the Fed — even though many of them don’t vote, and even those who do usually fail to walk the talk by voting against Chairman Ben Bernanke, which is what their public comments would have required them to do – the answer is that the huge liquidity-pumping operations by central banks are now critical to the wellbeing of the markets, and any withdrawal of this liquidity will send them into a tailspin. Therefore, the mere mention of the possibility of such withdrawal is enough to send everyone running for cover.

The interesting thing about this way of looking at the markets is that it highlights the degree to which Bernanke and his colleagues, as well as his peers in other countries, are now trapped. They are riding the proverbial tiger and if they get off, it will eat them. If so, there is virtually no chance of tapering occurring in reality. Yet the continuation of Fed purchases of $85bn worth of government and agency bonds every month is also unthinkable. Why? Because the swollen Federal Reserve balance sheet is now equivalent to some 20% of the total American economy. The bigger it gets, the more destabilised the system becomes This is all very frightening, hence the nervousness of the markets as the tapering debate has developed into the topic of the month.

However, it is possible to at least suggest that the entire taper blabberfest is not really the prime mover of the markets. Instead, two other, more important, factors are at work. One is that the data on the US economy are deteriorating. Inflation is at a very low ebb and the threat of a Japanese-style drop into deflation is not remote, despite all the liquidity pumping of recent years. Wages are not rising, and the apparent rise in productivity that was reported for the fourth quarter of last year now turns out to have been a statistical aberration. Indeed, the entire labor market is anemic, whilst the much vaunted recovery in real estate proves, on closer examination, to be merely another Wall Steet scam, in which the big firms set up multibillion dollar funds to buy up homes at giveaway prices in order to rent them out to the growing number of families that have given up on buying their own home (or have lost the one they had). At the same time, the banks are preventing the huge overhang of repossessed homes on their books from coming to market and depressing prices.

In short, it is possible that the market sees through the happy hype that the economy is recovering and is beginning to prepare itself for the inevitable return to reality that awaits the opium smokers.

The other possibility is that the theme pursued here in recent weeks, namely the desperate Japanese gamble to save the Japanese economy by exporting their deflationary sickness to the rest of the world, is the key driving force in the global economy and markets. Just this week alone, Prime Minister Abe made a long-awaited speech about the structural reforms his government is planning, but the content was so vague and uninspiring that the sell off on the Tokyo stock exchange resumed with redoubled vigour, whilst the Japanese yen rose back through the 100 yen/ dollar level. In other words, the much-ballyhooed ‘Ábenomics’ has lost its luster and there is growing concern that it could prove a total dud. In that event, the Japanese economy would be in even worse straits than it was before this dangerous adventure was attempted.

Add to this the beginnings of open trade conflicts between the EU and China and it transpires that there are plenty of real reasons for serious concern, even without taper capers.



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