Ad Hoc Commentary – higher margins on CME suggests Fed taper will happen after welfare cuts
When our favorite S&P 500 opens later today, we will be waking up to higher margin requirements. In fact, all equity indices on the CME will be waking up to higher margin requirements:
The taper scare and now the higher margin requirements on equities suggest that the elites are very concerned of the buoyant stock market. In the past, we used to joke that the politicians are only concerned of falling stock markets because that affects their personal portfolios. Just read the book by Peter Schweizer and you will realize that Senators that trade are better traders than almost everyone except the best hedge fund managers: http://www.amazon.com/Throw-Them-All-Peter-Schweizer/dp/B00AK2Z2KQ.
However, the one market that rules-them-all is the bond market. The debt ceiling debacle is nothing but a fight on the self-imposed credit limit of 16.699 trillion. An individual that maxed out on his credit cards is usually obsessed by credit card debts. Similarly, a government that had maxed out on its debt ceiling is likely obsessed by sovereign debts. Thus, it is likely the elites had concluded that their personal investments in equities would have to take a back seat because the bond market warrants it.
In addition, the buoyant equity markets strains social cohesiveness by jealousy:
“…If the stock market continues to rally after a summer correction, then 2014 will be the year of resentment. Chances are the unemployed, especially the young unemployed, will be resentful of the booming stock market. Nobody likes to be ‘left behind’…”
But how does one temper capital flows from bond to equities? It was simple to temper the gold market – the gold market is small and relatively insignificant in the whole scheme of things. They can increase margins on gold, and stop forwards on gold. That did it and gold is slowly but surely trending towards our target of 1150. However, the equity markets are order of magnitudes larger than the gold market. Any live experiment went wrong will put us back into the path of crisis.
The American elites are perhaps stuck in the same quandary as the Singaporean elites, just in different markets. The Singaporean elites need to temper the property market that is buoyed by international capital inflows, while the American elites need to temper the equity market that is buoyed by bond to equity rotation flows. Strike the markets too hard, and we get a depression. Strike it too gently and we get resentment among the masses. It seems easier to err on being gentle to the markets, and manage the resentment.
Thus, yours truly believe the Fed will first cut welfare and then taper on bond purchases. The welfare cuts will be positive to the UST market while the taper will be negative to the UST market. They would likely calibrate to the size of the welfare cut and thus it should be largely neutral. The taper will have the added benefit of tempering the equity market, and ensuring that markets do not become immune to the Fed’s bond buying tool. You never know when you need to buy bonds again in the future. They would likely taper soon after welfare cuts and manage the resentment. The elites might decide that an opportune time to cut welfare is in late December and the accompanying Fed tapering in January?
Good luck in the markets.