China is growing. The ‘Dreaded Taper’ is growing. Several emerging market currencies are sinking and the media finally has things to obsess on after a very dull fourth quarter, where most of the popular indices (save the NASDAQ) have made new all-time highs.
One of the key points that has developed out of this bearish bill-of-particulars is today’s Fed decision to take an additional $10 billion per month from the Quantitative Easing program. In February, the Fed will only be buying $65 billion worth of Treasuries and agency mortgage backed securities (vs. $85 billion in December).
Now, common wisdom, pre-taper, was: ‘If you do this, rates will rise’. This clip from CNBC’s “Closing Bell” gives a taste of that point of view from two of my favorite (NOT) purveyors, Peter Schiff and “bad news bearer”, Jeff Cox. Incidentally, both claimed today’s taper action was not going to happen because the ‘economy was too weak’. I am not sure, based on their track records, why either gets any air time.
What’s wrong with tapering?
According to the bears, rates will go up, not only hurting our economy; but it would really be bad for emerging countries, weakening their currencies as our higher rates would draw funds to the dollar. Ergo, these countries would have to raise rates to counter our increase, thus weakening their economies. Voila! A world-wide downward spiral begins. Well, tapering is not tightening.
Low and behold, rates did not rise!!
The U.S. Treasury 10-year note closed at a 2.69% yield Wednesday, January 29, down from 2.88% December 18, 2013. Although I am certain that rates will go up over time, the taper of QE just may not be the trigger.
Having made this case, the market still went down today, and that downturn carried over to Asia, where the actual Chinese PMI was reported this evening at 49.5 (below 50 is considered a negative number). My take on this is that you should not allow the media’s read on these events to press your “Panic Button.” This may just be the normal correction that we have all been waiting for, not he end of the world.
Polite dinner conversation
I was out to dinner this weekend with friends. My friend Allen asked: “When will they stop talking about ‘the taper’?” My answer: “I don’t know.” It is hard to say because, even with rates down since the first (and now second) installment, they are still obsessing about it.
What do you think?
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