{"id":20667,"date":"2013-06-11T16:42:27","date_gmt":"2013-06-11T20:42:27","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=20667"},"modified":"2013-06-11T16:43:04","modified_gmt":"2013-06-11T20:43:04","slug":"qe-taper-to-t-bond-carry-trade","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2013\/06\/qe-taper-to-t-bond-carry-trade\/","title":{"rendered":"QE 'Taper' to T Bond 'Carry Trade'"},"content":{"rendered":"<p>The following is the opening segment to this week\u2019s <a href=\"http:\/\/biiwii.com\/wordpress\/about-nftrh\/\">premium letter<\/a>, NFTRH 242.\u00a0 The balance of #242 went on to discuss the technical status of US and global stock markets, key commodities, the current status of \u2018inflation expectations\u2019, precious metals and currencies; all in detail.<\/p>\n<p><strong>Taper to Carry<\/strong><\/p>\n<p>Last week we introduced the theoretical 'taper to carry' scenario whereby the Federal Reserve would indeed 'have the balls' to begin the end of traditional QE and transition the inflation via a new set of mechanics.\u00a0 Mind you, we still get inflation under this scenario, but it would be less stealth and more honest and obvious to the public.\u00a0 Here are the theoretical components of the play\u2026<!--more--><\/p>\n<ul>\n<li>Simultaneous ZIRP &amp; QE have served to liquefy banks and maintain tepid economic growth while capping inflationary pressure, as banks hold significant reserves \u2018in house\u2019 until conditions are 'right' (read: profitable).<\/li>\n<\/ul>\n<ul>\n<li>There would be much public hand wringing about rising interest rates, which could undo the debt-leveraged economy.\u00a0 There would be a lot of noise in the perma-bear and gold bug camps that the Fed would not dare to taper QE.<\/li>\n<\/ul>\n<ul>\n<li>Yet taper they do, with the knowledge that the next 'fix' is already in.\u00a0 The rising long-term interest rates that would result from such action (tapering of bond purchase program, AKA QE) would immediately benefit the banks as they \u2018carry\u2019 the free money received from the Fed on the short end and roll it into profits by lending at higher interest rates on the long end.<\/li>\n<\/ul>\n<ul>\n<li>This process can be regulated as policy makers see fit.\u00a0 It is a \"taper\" after all!<\/li>\n<\/ul>\n<p>All of the above imagines what could be an actual plan being promoted behind the scenes by entities far removed from this simple newsletter writer and his thoughts about what they will or maybe even should do.\u00a0 But I have yet to come up with (or be advised about) reasons why this scenario should be disqualified as a valid and rational 'next step' in the ongoing and systematic inflation attempt currently in progress.<\/p>\n<p>I think that the last bullet point above is very important.\u00a0 Think about it; the smart man running the Federal Reserve has even introduced a word (taper) <em>[edit: whether Ben Bernanke has actually used this word is irrelevant; its implication is front and center]<\/em> that implies the process of transitioning the inflation from one form to another would be regulated as needed.\u00a0 He may be attempting control the pace of transition so things do not get too hot or too cold at any given time.\u00a0 Genius!\u00a0 If it works.<\/p>\n<p>I think there may be recognition on the part of officials that the game of printing money out of old, bloated and un-payable debt while hammering gold (the early warning inflation barometer) is getting long in the tooth.\u00a0 Of course, this is not out of any sympathy for the gold bugs but rather a realization that a \u2018lukewarm and rudderless\u2019 economy against a systematic backdrop of debt monetization and money creation is not going remain politically expedient.<\/p>\n<p>Enter our friends the Pigs (AKA the main players in the last doomed inflation and subsequent liquidation, the banks).\u00a0 This is simply the Greenspan playbook warmed over.\u00a0 Greenspan used different mechanics to create his credit bubble but the play was to get the banks to profitably 'carry' the spread and lend out into the economy.\u00a0 There is nothing new under the sun today if our 'taper and carry' thesis is viable and likely.<\/p>\n<div class=\"wp-caption alignnone\" id=\"attachment_11053\" style=\"width: 470px;\"><a href=\"http:\/\/i2.wp.com\/biiwii.com\/wordpress\/wp-content\/uploads\/2013\/06\/bkx.spx_1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-11053\" alt=\"bkx.spx.tnx\" src=\"\/\/i2.wp.com\/biiwii.com\/wordpress\/wp-content\/uploads\/2013\/06\/bkx.spx_1.png?resize=460%2C284\" width=\"460\" height=\"284\" \/><\/a><\/p>\n<p class=\"wp-caption-text\">BKX-SPX Ratio (candlesticks) w\/ TNX (blue line)<\/p>\n<\/div>\n<p>Last week the BKX ratio to the S&amp;P 500 (candlesticks) took a hit but remained above the breakout line and this should remain a barometer to a confirmation of our would-be 'carry' play or a negation of it.\u00a0 So far so good.\u00a0 Long-term interest rates (blue line) also got through another week in breakout territory.<\/p>\n<p>Against this backdrop let's remember that the Fed is only jawboning a QE taper, not an end to inflationary ZIRP.\u00a0 This looks like a well-scripted plan by intellectual inflators that are much more sophisticated than the great Maestro of the previous inflationary era.\u00a0 But then they have to be sophisticated because things are so much more leveraged in rising debt with the cost of failure a likely unwinding of the current system.<\/p>\n<p><strong>Bottom Line<\/strong><\/p>\n<p>'All or nothing' is the play and these players are winning (duh).\u00a0 Gold bugs and their quaint notions of honest money are losing (for now).\u00a0 Stock market bears \u2013 outside of an expected summer correction (which could play well into the script outlined above as inflation is best promoted against a worried public) may lose as well, at least for however long a new inflation cycle lasts.<\/p>\n<p>If and when the banks become incentivized to get the inflated funds 'out there', asset prices are going to go up.\u00a0 This is what being bullish means in the current era, basically taking advantage policy designed to prop asset prices; i.e. inflationary policy.<\/p>\n<p>Bear in mind that all the above is where a letter writer's logical thought process has taken him.\u00a0 But here is the thing, I sit down each weekend to write a letter, not make policy.\u00a0 I observe financial markets with an attitude of trying to find the honest answers as to what is going on in a very complex macro financial world.\u00a0 But I do not have the answers.\u00a0 I only have my own logic, which could prove to be wrong.<\/p>\n<p>But for another week at least, the theory lives on.\u00a0 What would be even better for the theory is if in the days or weeks ahead the Fed jawbones continue to promote a 'taper' to QE, T bonds continue to drop (rates up) financial markets correct on this noise and the banks out perform the S&amp;P 500, indicating the next inflationary solution.\u00a0 It\u2019s a tall order, but I\u2019d rather have a game plan that can be revised or discredited than to be flying blind.<\/p>\n<p><a href=\"http:\/\/www.biiwii.com\">Biiwii.com<\/a>, <a href=\"http:\/\/biiwii.com\/wordpress\/about-nftrh\/\">Notes From the Rabbit Hole<\/a>, <a href=\"https:\/\/twitter.com\/intent\/follow?original_referer=http%3A%2F%2Fplatform.twitter.com%2Fwidgets%2Ffollow_button.1370380126.html&amp;region=follow_link&amp;screen_name=BiiwiiNFTRH&amp;tw_p=followbutton&amp;variant=2.0\">Twitter<\/a>, <a href=\"http:\/\/biiwii.com\/wordpress\/free-eletter\/\">Free eLetter<\/a><\/p>\n<p>&nbsp;<\/p>\n<!-- AddThis Advanced Settings generic via filter on the_content --><!-- AddThis Share Buttons generic via filter on the_content -->","protected":false},"excerpt":{"rendered":"<p>The following is the opening segment to this week\u2019s premium letter, NFTRH 242.\u00a0 The balance of #242 went on to discuss the technical status of US and global stock markets, key commodities, the current status of \u2018inflation expectations\u2019, precious metals and currencies; all in detail. Taper to Carry Last week we introduced the theoretical 'taper [&hellip;]<!-- AddThis Advanced Settings generic via filter on get_the_excerpt --><!-- AddThis Share Buttons generic via filter on get_the_excerpt --><\/p>\n","protected":false},"author":41,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[1247,1840,5218,511,4273,349,4785,5216,5217,4975],"class_list":["post-20667","post","type-post","status-publish","format-standard","hentry","category-general","tag-ben-bernanke","tag-biiwiicom","tag-carry-trade","tag-federal-reserve","tag-gary-tanashian","tag-guest-blogger","tag-notes-from-the-rabbit-hole","tag-t-bond","tag-taper","tag-the-federal-reverse"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v23.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>QE &#039;Taper&#039; to T Bond &#039;Carry Trade&#039; - INO.com Trader&#039;s Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2013\/06\/qe-taper-to-t-bond-carry-trade\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"QE &#039;Taper&#039; to T Bond &#039;Carry Trade&#039; - INO.com Trader&#039;s Blog\" \/>\n<meta property=\"og:description\" content=\"The following is the opening segment to this week\u2019s premium letter, NFTRH 242.\u00a0 The balance of #242 went on to discuss the technical status of US and global stock markets, key commodities, the current status of \u2018inflation expectations\u2019, precious metals and currencies; all in detail. 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