Notes From Underground: Does The Unemployment Data Allow The Fed to Taper?? (Yra Says 90% Possibility in December)

Friday’s U.S. jobs report was stronger than pre-ADP consensus, only because of several pundits pushing the idea of 250,000 non farm payrolls (the whisper number seemed to be around 225,000). Thus, the 203,000 NFP was well within the range of prediction. The falling rate to 7.0% was a stronger sign of growth, especially when coupled with a rise in the participation rate and a fall in the U-6 rate. Average hours worked gained and wages increased by 0.2% per hour. All in all, it was the most positive data in many months. Manufacturing was a pleasant surprise as 27,000 jobs were added along with 17,000 jobs in the construction sector.

Supporting the gain in U.S. manufacturing jobs was the employment data from Canada. The Canadian report was not as robust as the U.S. but manufacturing jobs in Canada increased by a healthy 24,900 though construction jobs up North fell by 17,000. The fall in Canadian construction jobs is a good thing as the government is trying to reduce the housing boom through macro prudential tools (reducing the amount of bank loans to the housing sector). The positive data provides Chairman Bernanke with enough cover to begin the tapering of the QE program. Here is why the Bernank should begin tapering:

  1. All of the Fed research now questions the impact of continued bond purchases on the economy. Governor Jeremy Stein and others have questioned the positive impact of ongoing QE and provide academic proof that the FED has helped to create a misplacing in term risk of the debt markets;
  2. There are rising concerns about how to contract the Fed’s balance sheet once the economy begins to gain traction (as addressed last week by Simon Potter, the head of the Fed’s trading desk and System Open Market Account (SOMA)). The Fed is worried about the massive reserves leaving the Fed account and making their way into the general economy. The Fed wants the markets to believe it can control the reserves through reverse repos, but the present tests are in small amounts;
  3. Chairman Bernanke has been touting the role of FORWARD GUIDANCE as a more powerful tool than QE at the present level of the zero-based and a massive balance sheet;
  4. The declining Federal budget deficit means that the Fed is buying too much of the Treasury debt and is keeping the needed asset classes from the pension funds and insurance companies who need the highly rated government securities to meet their needs. Even if the Fed lowered its monthly buys to $50 BILLION, it would still be adding $600 BILLION a year to its balance sheet, depriving the banking market of needed high quality collateral; and
  5. Beginning the tapering before Janet Yellen becomes Chairman will mean that the “difficult and unpopular decision” will have been taken by the departing Chairman. Bernanke can seize the moment and proclaim that the QE program is ending because of its great success in preventing a massive liquidation of U.S. assets and ultimately aiding the economy in return to a more robust growth path. Declare victory Ben and remove a difficult decision from the incoming Yellen administration.
 It is for these reasons that I believe the FED will move to TAPER at the December meeting. More important will be the effect on markets and from Friday’s price actions it appears that markets are becoming comfortable with an actual tapering. The bigger question will be how large a tapering and the Fed’s rationale for embarking on an end to QE. If Janet Yellen is not in favor of tapering she will always have the ability to push for a lower unemployment threshold (5.5%) and provide the power of forward guidance to keep the Fed’s pedal to the metal.

Now I am predicting that the FED will announce a TAPERING AT THE DECEMBER MEETING and I am assigning a 90% probability to my prediction for I do not adhere to Keynes’ tongue in cheek admonition, “WORLDLY WISDOM TEACHES THAT IT IS BETTER FOR REPUTATION TO FAIL CONVENTIONALLY THEN TO SUCCEED UNCONVENTIONALLY.” 2+2=5 demands that we succeed unconventionally.

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11 Responses to “Notes From Underground: Does The Unemployment Data Allow The Fed to Taper?? (Yra Says 90% Possibility in December)”

  1. silverbug2155 Says:

    The TIC report has gone negative 2 months in a row. Dec 16 is the next one. A third dissapointing TIC which the FED probably already know whats going on will not bode well for a Taper. The employment numbers we all know are bogus. Does the BLS count the same person holding 3 jobs as still 3 jobs created I wonder? What about all the Govt workers returning? Taper talk seems to have been used to deflate the bubbles they have created. We shall see.

  2. Joe Says:

    Bogus or not, this is NFP’s largest drop at 3/10% since, ’08? My first thought was to think that would give ‘copter Ben as good excuse as any to go forward with at least a partial taper, and throw his “hard money-hawk wing” a bone. I believe a 90% likelihood of at least a partial taper to a 50 billion/month buy is a pretty sound call. Might result in more year end profit selling, for IRA’s and managers, and create buying opportunities in the new year, with the Bernanke betting equity bulls will be more than willing to refuel the Portfolio Balance Channel. And if the world economy has that good of an outlook, I can’t think of one reason why silver and the other white metals should continue trading at present levels. If anyone has a gold strategy, I’d love to hear it. I sure don’t have a clue, not for the remainder of the year.

    • silverbug2155 Says:

      First of all it is now a Tier I asset to be held on the banks books as collaterral against loans. See the Fed report dated 11/16 on their site. Also it’s part of the Basel III.So who is fooling who? Would not a re-pricing of Gold from the ridiculous price of $42 by the UST be wise and in favor of the banks? If they are supposedly holding down Gold ,could they now allow it to rise? Offering two year mine supply at 2 am in the morning with no one around, dominating over 50% in the futures market,and regulators simply looking the other way ,seems like manipulation to me.

  3. Nate Says:


    What does this mean for GOLD if they taper?

  4. yra Says:

    Nate—I return to my view that the announcement of the taper and hoe Gold reacts over the following 24 hour period will be very telling but I will cover this more as we get closer to the Fed meeting

  5. Dustin L. Says:

    It will be interesting to watch how the DJIA/GOLD ratio acts going forward. It may be more important than just the reaction of the gold price itself. Still lots of room for the ratio to march higher. But it is a key gauge especially during tapering IMHO.

  6. Dustin L. Says:

    Bold call BTW Yra!

  7. Chicken Says:

    The FED certainly telegraphed it well.

  8. Shocked to Find Gambling Says:

    Yra, all good points, particularly #5.

    My view is that the FED doesn’t know what to do. They missed the 2007 housing/CDO bust, which was almost impossible to miss. They responded by panicking into QE, and I don’t think they know what that has done for the real economy. Now they are going to star dismantling it, and have no idea what the effect of that will be.

    They have countered the fallout of the 2000 and 2007 bubbles by synthetically creating another bubble. Doesn’t make any sense, to me.

  9. yra Says:

    Shocked—good points and the need to keep reformulating bubbles is why I am convinced that the fed models are good aggregators of data but the people who use the models for policy are very flawed indeed.The bubbles of course result in demand continuing brought forward keeping a lid on capital investment.

  10. GBC Says:

    All great points.

    Steven Drobny: “if you could put on only one trade for the next 10 years, what would it be? 100% of your money, and you cannot risk manage the trade or check on it.”

    Kyle Bass founder/principal of hedge fund Hayman Capital Management: “Actually, the answer to this one is easy – I would buy gold in yen.”

    Yra Harris: …

    All best

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