Great Leap Forward


OK it had to happen. Over the past 5 years the Fed has lent and spent Quadrillions trying to prop up Wall Street’s crooked banks. At first it was eye-popping. But beyond some point, no one cares anymore.

“Oh yes, the Fed has bought all the financial assets on Earth, Mars, and Jupiter. Now it’s moving on to the distant planets and beyond. Its balance sheet now rivals some of the bigger black holes in terms of its ability to swallow assets.”


You knew the Fed had to do something or the talking heads on TV would have nothing to talk about. And a Talking Head with nothing to Talk About is a scary thing, indeed. You get Megyn Kelly arguing about whether Santa Claus is really a chubby white guy even though he came from Turkey.

But here was the fear. If the Fed starts tapering, Markets could take that as a Bad Signal. Of course, no one knew what the bad signal would be.

Would it be a signal that the Fed finally realized its multi-trillion dollar balance sheet would generate Zimbabwean hyperinflation, as all the goldbugs tell us?

Or would it be a signal that the Fed was going to hike interest rates and kill the incipient recovery?

You see, the Fed had reached what J.M. Keynes would call the “Nth Degree”, where “we devote our intellegences to anticipating what average opionion expects the average opinion to be. And there are some, I believe, who pratise the fourth, fifth and higher degrees”…. We reached the Nth Degree about 3 years ago.

The Fed actually promoted this nonsense, as it turned policy-making into managing the beliefs of Expectations Fairies. All monetary policy is now about trying to outguess what markets think the Fairies are thinking.

There really is no proactive monetary policy. It is all about trying to manage the Fairies and then doing what the Fairies want the Fed to do.

The Fairies wanted a taper. They whispered in the ear of Uncle Ben: Time for the Taper Games to Begin. Janet Yellen might have weak knees.

Now the die is cast. To downsize the Fed’s balance sheet, Aunt Janet will need to unload trillions of dollars of Treasuries and toxic MBSs.

But how would the Fairies react? Well, most of the money bet they’d all drop like lead—with little broken wings and splatting on the ground.

I thought there’d be a minor little hiccup in financial markets and then a recovery within 24 hours.

I was too pessimistic. The Fairies took the news and then headed skyward:

Stocks initially sold off but recovered, with the Dow logging a triple digit gain. The 10-year yield initially rose to 2.92 percent but fell back to its earlier level of 2.84 percent. It then moved higher, to the 2.88 percent area.

It seems the Fed had correctly calculated that a $10 billion reduction of QE per month was below what the “Nth degree” Fairies were expecting. Hence, relief all around. Time to blow those bubbles bigger.

A helluva lot bigger.

As Larry Summerian correctly said a couple of weeks ago, Bubbles-R-Us. It’s all we’ve got. The Fed has managed QE all the way up in a manner that would stoke our Bubbleonian Madness, and now it will manage the Taper all the way down with a view to stroking our Bubblicious economy.

Hang-on kids. Bumpy ride ahead.


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