Savings & Investment, Smart Spending

Stealth Tapering By The Fed? Why You Should (Mostly) Care.

Ah, Wall Street and their nomenclature. Stealth tapering by the fed refers to the latest worry on Wall Street. Namely that the Fed will begin to taper off on their binge buying of U.S. debt known loosely under the umbrella of quantitative easing (QE). Now don’t be too concerned about the nitty gritty details of the QE program because at its heart it is very simple. The federal government basically buys every bit of its own debt that it can get its hands on to keep the banks (and theoretically in turn, bank loans) afloat and the economy from a face plant. How does a government ask to borrow money by floating bonds and then simultaneously “buy” the bonds to lend the money to themselves? See, this is precisely the kind of detail I was warning you not to be too concerned about!

Wall Street certainly isn’t. In fact, they love the easing program with all of their precious little hearts. And asking why the Fed is playing make believe, err…I mean stop working so diligently for the greater good, is considered to be in poor taste. What is not in poor taste is when they will do this “tapering”. And Wall Street has come down firmly on the side of, well, Wall Street. They want ample notice, preferably measured in years, of when this bubble will burst. And burst is what they believe will happen. While politicians debate on the proper degree of fantastic the economic “recovery” is, Wall Street credit’s the stock market rise on one thing and one thing only: quantitative easing. So, it is more than disconcerting to them to hear that it may quietly have begun already.

So is this net change in Fed flow, in a world in which Fed flow is all that matters (sorry “Stock” purists: 2009 called, they want their discredited ideas back) an indication of stealth Fed tapering?

Not what the gurus want to hear (or think about for that matter) and it has more than a few concerned that the Fed may have the audacity to begin without a polite heads up. And you can hardly blame them. If you thought that the only reason to buy stocks was the QE program, then it is logical that you would like a warning bell when the party was ending.

But the point here is certainly not my empathy for our Wall Street friends. As I have consistently preached on these pages, it is best to be prepared for everything. Yes, be positioned to make money in bull markets, but just as importantly be prepared for the bear market. Will QE tapering be the (short-term) end of the bull market? More than likely, I suppose. But maybe it will end up being something not really on the radar at the moment. For example, have you heard much about Europe lately? Wall Street used to talk about that continent as a coming Armageddon about 12 to 18 months ago. And what about China’s economic slowdown? That used to be a hot topic.

So, Yes, I guess that you should indeed care if the Fed has begun “tapering”. But then that is just one potential catalyst of many, and it is impossible to know what will be end up being a tipping point that shoots markets in one direction or the other. Being concerned is fine, being prepared is better.