In the software business, a product that is oft-promised and over-hyped – a popular computer game sequel, say – but fails ever to make it out of development hell, is known as ‘vapour ware’.
Last night, markets were treated to the ‘vapour taper’.
Investors have been fretting since May about the prospect of Ben Bernanke printing a little less money than before. Whole economies – India’s in particular – have quailed before the threat that the Fed might print $75bn a month instead of $85bn.
And just as they were getting used to the idea, he goes and bottles out at the last minute.
What on earth is going on?
What Bernanke wants to leave behind
I’ll admit, I was as surprised as anyone by last night’s Fed stunt.
I thought the taper was overhyped. I suspected that markets had already priced it in. And I suspected the Fed would be much less aggressive than everyone feared. That’s why I spent most of the last couple of weeks suggesting you don’t do anything rash, like cash in your entire portfolio and huddle under a rock waiting for the sky to fall.
However, I did think they would do at least something. I mean, the market has had so much time to get used to this idea. Emerging markets had taken a pummelling, sure – but since when did the Fed care about them? And even they’d started to bounce. (I hope you managed to take advantage of the recent panic, because they’ve bounced a lot higher now).
So if the Fed actually ever intends to stop printing money, now looked a good time to make a nod in that direction. Even a nominal reduction of $5bn would have kept markets happy, while acclimatising them to the idea of less quantitative easing (QE).
But no. Even with US stock markets at a record high, $5bn was too much for Blackhawk Ben. The Fed will keep printing $85bn a month. And there’s no obvious prospect of this changing before the end of the year.
You’d think that, having written about the man this long, I’d have realised by now. Never bet against Ben’s propensity to be more dovish than you could ever imagine.
Markets were stunned and cheered. More free money! Gold soared. Bond yields fell (as prices rose). Emerging markets have jumped, developed markets too. Pretty much everything jumped except the US dollar.
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The Fed issued a few excuses for its caution. It doesn’t like the fact that bond yields had jumped so quickly in recent months. It’s worried about the impact that’s having on the housing recovery. And there’s also the threat of another big debate over government spending, as the debt ceiling approaches.
As Paul Ashworth of Capital Economics pointed out, the Fed is probably “also increasingly concerned… that Congress could trigger a Federal shutdown within the next month.”
But if Ben’s really worried about the politicians not getting the finger out to try and agree on something, then he should stop giving them the cushion of less QE. As Heidi Moore noted in The Guardian yesterday, he should “force the economy, the markets and Congress to think for themselves.”
So it’s all a lot of shabby excuses. The truth is that if last night proves anything, it’s that Ben Bernanke doesn’t want to be remembered as the man who pulled the plug on the recovery too early, plunging the US into the Great Depression of the 2010s.
He’d much rather be remembered as the guy who acted too late to prevent the Epic Inflationary Collapse of the 2020s.
What the Fed’s move means for your portfolio
Anyway, what does this all mean for your money? You probably know what I’m going to say.
Hold the course. If you were happy with what you were doing before the taper, you should be pretty pleased this morning – almost everything you own has gone up in value. The emerging markets and cheap eurozone stocks we’ve tipped recently still look good, Japan can still do the business, and of course, you should hang on to your gold, specifically for surprises like this one.
But I wouldn’t necessarily expect an easy ride in the coming months. Once the euphoria of ‘QE forever’ wears off, there are going to be a lot of confused investors out there. As Eric Green at TD Securities told the FT: “The Fed had the market precisely where it needed to be.” This delay “ultimately makes that first step [in the tapering process] harder to achieve.”
It also puts a lot of pressure on our own Mark Carney. On the one hand, the Bank of England guv’nor will be pleased. The Fed’s failure to taper might take some of the pressure off global interest rates in the short term. On the other hand, the slump in the dollar has pushed sterling higher. He won’t be happy about that.
And if the Fed is keeping monetary policy loose for no apparent reason, it gives the Bank of England an out if it decides more QE is needed. So I wouldn’t be surprised to see Carney get even more dovish, rather than more aggressive, before the next election. In turn, that’s likely to mean a weaker pound and higher inflation.
In the meantime, if you’re looking for a potential quick turn based on the cheap money rally, then in the next issue of MoneyWeek magazine, out tomorrow, our Roundtable experts pick their favourite recovery stocks to play the rally. If you’re not already a subscriber, you can get your first three issues free here.
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