This is a very well-known punch line to a joke often told in academic circles in the 1970s: Three professors are stuck in a precarious situation in a post-nuclear catastrophe and need to open the cans of food that are provided in a case of disaster. In their desire to open the cans the three academics realize there is no tool to open the cans. The first professor, a physicist, suggests hooking up some type of pulley to enable the lid to be pried off. The second professor, a chemist, opines on using an acid to burn the lid off (each suggestion is dismissed fearing contamination from the food falling to the ground or being chemically soiled). The third professor is an economist and suggests, “let’s assume we have a can opener.” The gist of the joke is that economists make many assumptions on their way to searching for provable outcomes.
My effort at gallows humor is to set the stage for ASSUMING THE FED TAPERS. What outcomes should we search for in the trading hours following whatever path the Bernanke Fed chooses. I will ASSUME A TWENTY BILLION FED TAPERING FOR THAT WAS THE AMOUNT THAT CHAIRMAN BERNANKE MENTIONED on June 19 at the post-FOMC press conference. According to Wikipedia, “Specifically, he [Bernanke] said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.” In preparation for ASSUMING a $20 billion taper it is important to review the markets from the June 19 so we get perspective on where the markets are since that day. For example, the S&P FUTURES closed at 1629.50 while six months later we are currently trading at 1776.00. The U.S. equity market has risen almost 10 percent since the first mention of a $20 billion tapering. My point is that Chairman Bernanke has been given a substantial cushion in the financial markets so as to initiate a tapering.
I have raised the issue of the GOLD trade as being a place to monitor in the 24-hour period following a tapering. Currently, GOLD is trading at the June 30 close of $1234.80 so the failure to taper has not had any major effect on the precious metals during the past six months. My point has been if GOLD closes higher in the days following the ASSUMED TAPERING, it would be a signal that the FED‘s intentions had already been priced into the market. Over the next few days I will continue to provide perspective on the IMPACT OF A POSSIBLE TAPERING. Preparation is critical for traders and investors cannot assume a “can opener.”
Tags: Ben Bernanke, can opener, Fed, FOMC, Gold, QE, S&P, taper
December 16, 2013 at 9:49 am |
As a conspiracy theorist, my take- (my assumption is market intervention as there is in many markets) – Regardless of the amount of tapering, stock market first reaction will be up. Gold first reaction will be down. After a day or number of days market will begin to reflect realities.
December 16, 2013 at 10:42 am |
Fade the initial reaction, I guess.
December 16, 2013 at 12:17 pm |
Yra, in addition to Gold, I would watch Silver (should go “Monetary” and gain on Gold if the Taper will hit the Economy) and the spread between Treasuries and Junk Bonds (Treasuries should outperform if the Taper will hit the Economy). I don’t think anyone knows if the Economy and Stock market can stand on their own without massive FED support (especially me).
December 16, 2013 at 1:21 pm |
Shocked–good point ,especially as the Gold/Silver ratio is lower today then the June 30th levels –that I looked at in Gold.I would argue that the $85 billion a month is an arbitrary number and who is to say that $50 a month isn’t a massive amount–especially when you equate it to the shrinking deficit
December 16, 2013 at 1:29 pm |
The only missing taper criteria is the Fed’s commitment to keeping inflation on target. Tomorrow’s CPI will be key.
December 16, 2013 at 8:50 pm |
Alex F—don’t be fooled by the fed’s inflation targets because they will resort to a moving average type data release and they have already said 2.5% would not be a problem for a short period