Unleash The Taper!
The Federal Reserve will unleash The Taper (Alt) in January: “the Fed will pare back its Treasury purchases by $5bn to $40bn a month, and its mortgage-backed securities purchases by %5bn to $35bn a month. The Fed also reinforced its forward guidance of low interest rates with a statement that interest rates are likely to stay close to zero ‘well past the time that the unemployment rate declines below 6.5 per cent’.” Some major takeaways: 1) The plan going forward is to increase The Taper in “measured steps” at future meetings, 2) The Fed is willing to change its mind on forward guidance (ie. unemployment 6.5%, inflation 2.0%), 3) Expect rates to be low for a long time and 4) GDP growth forecasts are about 3.0%. Probably the most interesting part of the decision to Taper was the market’s reaction. What we got was a “Goldilocks scenario” that was so bullish, not only did the stock market surge but yields went down, gold shot up (but is now back to a 6-month low) and crude oil went up. Not only that but emerging markets responded well, too (Alt). Which highlights a pretty interesting shift in the attitude towards QE and monetary stimulus…people seem to be forgetting why they hated QE after all. Also, Caroline Baum may be the only bear growling about slow growth and economic hangovers from the Great Recession. Bernanke also said it is “nice” to see a bipartisan budget deal in Congress, which was approved in the Senate sometime around the FOMC announcement and could be the first full budget agreement by a divided Congress since I was born in 1986.
China: Central Bank Provides Emergency Liquidity
“In a highly unusual move, the People’s Bank of China said it has conducted (Alt) a ‘short-term liquidity operation’ to provide credit to banks in need of money.” Earlier yesterday, Chinese money market rated surged to “levels last seen in late June when the country was hit by a liquidity squeeze…the seven-day bond repurchase rate, an important gauge of short-term liquidity, rose to nearly 10 percent as banks hoarded cash.” The central bank also extended the interbank market trading hours by 30 minutes so banks had extra time to get their balance sheets in order. With China’s debt somewhere around 200% GDP, the central bank “wants money market rates to remain relatively high in order to lower leverage and contain financial risks…but they won’t push rates so high that it would actually trigger defaults or bankruptcy.” Meanwhile, Gordon Brown, former Prime Minister of the UK, has a great Op-Ed in the NYTimes about financial reform and where we stand in terms of economic hazards and risks. I thought this was interesting: “While the internationalization of the renminbi is opening up new opportunities for global investment in China, it is also increasing the exposure of the global economy to any vulnerability in its banking sector.” And he doesn’t think China’s banking system is the most vulnerable in Asia. Also, the bitcoin evangelicals are pretty upset with the People’s Bank of China so they hacked the website or something stupid like that.
“Earnings from GE’s industrial divisions…will grow at a ‘double digit’ pace in 2014…Immelt has pledged to expand the share of GE’s profit coming from industrial businesses to 70 percent by 2015, compared with about 55 percent this year.”
“Decades-old financial companies have been charging their users $7 to $10 a trade to pay for their brick-and-mortar retail locations, army of employees, and big profit margins. Robinhood plans to replace all that with a mobile app and a lean engineering team…it wants to be the Amazon of stock trading.”
About 40 million of the Black Thanks-Purchase-Then-Giving crowd are going to reconsider door busters at Target next year.
Looks like America isn’t the only country with wage growth issues.
USA: Wastebook 2013
Senator Tom Coburn (R. OK) has published his Wastebook for 2013 and its pretty amazing. Some of the most eyebrow-raising expenditures: $125K 3D Pizza for NASA, $914K for Romance Novels (including Twilight), $17.5mn in tax exemptions for brothels and the list goes on.