New Leadership Paradigm – Kicking The Can, Starting With The Fed

The Fed’s balance sheets have swelled over 1 trillion USD in the past year to exceed USD 4 trillion which is causing some angst amongst lawmakers despite an oblivious President.

We know people do not typically like to discuss things that cause them discomfort and it is only right that the senators and congressmen worry because these are the people running in the next elections when Obama will be retiring in glory, leaving the problems to the next President. But the congressmen and senators will remain.

Bernanke is leaving next month, Obama is leaving in 2016, CEOs are changing daily – Microsoft, GM, Lloyds as CEO departures become a new fad for driving markets higher inspired by Yahoo’s turnaround story.

It is the same for elections, no matter the result, judging by the Malaysian story with the KLCI running to a record yesterday. The deficit does not matter, the political strife does not matter, that election promises are broken does not matter, because it is just a pretty good reason to rally. It happened with India too in their recent state elections for the INR to rebound before their national elections next year. Indonesia will have to wait her turn in her Presidential elections only mid next year.

There is little for leaders to lose these days if they leave quickly and even if they do not, there will be a scapegoat found like in the case of JP Morgan. In fact, the only instance of prosecution we have witnessed against a leader would be in the case of Iceland where their prime minister was found guilty of negligence in failing to hold an emergency cabinet meeting when the economy went on a downward spiral. Still, he managed to avoid jail.

Thus we have the Fed’s balance sheets up a trillion  but the S&P 500 has run up about USD 3.5 trillion, along with real estate and art. Obama is not batting an eyelash in the process, Yellen will bring in new year cheer and Microsoft will rally in January when they select their new CEO.

My dilemma. If the Fed’s balance sheets start tapering, how much will the S&P stand to lose ? Or is the bark of the taper worse than its bite when it does happen as the market preps for it ?

Economists are most optimistic about the taper tonight. Investor polls show the expectation is for next year and rightly so. There is nothing to lose by kicking the can. They can blame Bernanke in the future but he will not be there. It looks like a win win situation to me.


Taper Summaries (courtesy of futures broker)

: US OUTLOOK/OPINION: Most recent taper expectations:

TD: Jan taper announcement, Citi: Dec taper 40%
BNP: no Dec taper, Mar is baseline.
Barclays: Mar taper, tho NFP increased Dec odds.
Goldman: 7.0% unemp Fed suggested would stop QE. Tapering in March.
Nomura: Expects first taper to occur at Jan meeting.
HFE: Nov NFP adds fuel to the fire for the pro-taper camp.
MS: odds more towards a Jan start relative to our March base case.
Credit Suisse: increased Dec odds, but look for Jan taper.
Pierpont: no Dec taper. DBank: Dec taper, $10B Tsys.
Jefferies: $5B Dec taper. CRT: no boost to odds of a Dec taper.
BMO: lifts Dec tapering odds, but still lean toward a January shift.
JPM: Dec taper close call, but Fed will hold off till Jan.
BOA/ML: 15% chance taper Dec, 30% Jan, 35% March, 20% later.
RBS: Core view for no taper in December.
SG: Thinks January is more likely.