The Mythical Taper: Why It Is Unlikely To Happen And Why It Is Not The Main Concern

Includes: DIA, SPY
by: Han Jun Low

The mythical Taper is a majestic beast that everyone has heard of, few have imagined and nobody has seen. Tapering is thus what I would consider a false conundrum; some analysts discuss the possible implications of what would occur post-taper as though the outcome were certain, speculation that is fueled by Ben Bernanke himself, when the fact remains that tapering itself is unlikely. Although I do not claim to know what goes on within that shiny dome of his, I would like to propose a contrarian's argument for why tapering is unlikely, an argument that is based on reason rather than "he says, she says".

Let us look at the reasons that pundits have given for tapering, and debunk them one by one:

The U.S. Economy Is In a Recovery

I find this point particularly amusing, seeing as the definition of recovery has been distorted to mean: lower labor participation rates, declining full-time workers, lower wages, lower hours worked, more part-time workers, U.S. retailers cutting revenue forecasts, higher consumer credit card debt( to make up for the wage shortfall, yet insufficient to boost retailer earnings) crashing treasury prices, GDP figures for the first quarter being continuously revised down and of course record levels of debt. Obviously these things are good for the economy ... By the way second quarter GDP is surprisingly high, until it gets revised down later by the "economists" ... Unemployment is down, but underemployment is starting to pick up steam ... Oh and CPI is low, despite rising fuel, food, commodities and gold.

Deficits are being reduced

It is true that deficits are slowly inching their way down; this would likely give a credible reason for the Fed to taper, seeing as deficit-reduction leads to less future debt, debt reduction being a key reason for QE in the first place. However, the loss of confidence on the part of debtors who had already moved out of the bond market due to QE will be difficult to win back. Already we observe higher yields on treasuries, before any tapering has even occurred. Tapering will cause the yield to skyrocket further, which would be a reason against tapering, a reason that is being officially discussed. I must add that I find it very ironic that the solution for a lack of confidence-driven demand should be solved by devaluing bonds even further via QE, which would probably drive confidence even lower in my opinion.

Ben Bernanke Said So!

Actually, what he had actually said was that tapering would possibly occur if unemployment heads to "around" 7% and the economy was doing well, and by "possibly" he explains that the plan was not set in stone and would likely end up wherever he felt it should go based on his gut. Also, the official projections are for 7.25% unemployment by year end, which may be "around" 7% or may not be "around" 7% and may in fact be "around" the right amount for a final burst of Super QE.

Besides, Bernanke appears to be on the way out and there really is no reason for him to stir the pot before leaving. Being blamed for economic collapse would be a fair deterrent, although some would claim that ...

The Markets Have Already Reacted, They Are Not Going To React Again!

Some analysts seem to believe that simply because markets had already reacted strongly to Bernanke's first assertion regarding tapering, they would not react similarly again since they have priced this taper into their decisions. I believe that the contrary is true; that investors had reacted so strongly to even the potential for tapering, and that Bernanke had to almost immediately reassure the markets that tapering was purely hypothetical is a sign that a reaction on a far larger scale is to be expected should tapering actually occur.

Then there is the other more controversial argument, that banks have agreed to speculate on the Fed's behalf in order to gain access to the money that had been generated by the Fed's purchases. In such a scenario, a collapse in the easy money supply would collapse these banks' ability to float the share market.

Regardless, the argument that the Fed would taper because no ill effects would occur, because everyone had already priced these risks into the market, is unsupported.

Taper in September? Yes, in 2014. Maybe.

The fact is that the Fed needs to at least appear to be considering tapering, because easy money simply cannot be sustained as a long-term economic policy, especially considering that the economy really has not improved much with all that QE. However it does not have any incentive to actually taper as to do so now would prove that QE had done absolutely nothing but inflate asset bubbles; hence the continuous discussions regarding what post-tapering would look like are irrelevant when the reality is that large-scale tapering was never considered as a real, likely, option.

I do not claim that there is no chance of tapering in September; however, I would say that there is certainly a low chance based on the evidence that has been bandied about so far. The main concerns should thus be what would happen if tapering were delayed for longer, the real reasons tapering would occur for and the real effects of a complete taper. Instead we have a consistent stream of explanations for why tapering will happen in September and how its impact will be painless or even initially beneficial for the economy. Although I believe a taper is an essential part toward healing the economy, it is an extremely painful process and its initial outcome would be more likely to be horrible rather than hopeful.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.