What the Fed Taper Means for Markets and Your Money

[Editor's Note: This analysis of the Federal Reserve's decision to taper its monthly $85 billion bond buying was delivered to our Money Map Report subscribers moments after Ben Bernanke's Dec. 18 press conference. Go here to find out how you can receive Money Map Report updates when they're first released.]

I didn't think it would happen, but Fed Chairman Ben Bernanke up and did "it" a few minutes ago.

He announced the "Fed taper" - the Fed will cut its bond buying by $10 billion a month (to $75 billion) beginning in January.

I think there are a few points to consider about Bernanke's move. I want talk briefly about those, and then highlight what this news of a Fed taper means for your money.

  • Bernanke is basing his actions on new, lowered unemployment projections for 2014. The irony is killing me! For one thing, America is still roughly 1.5 million jobs below where it was in 2008. For another, so many people have dropped out of the workforce and stopped looking for jobs that the rate itself is being lowered, simply because there aren't as many people working. In other words, it's totally artificial.
  • The so-called Bernanke "put" is still in effect. Bernanke is not removing stimulus; in fact, statements indicate that the Fed will take future spending/buying on an as needed basis. This says to me that Janet Yellen has the flexibility to increase it in mid-2014 - something I still believe is going to happen. Good thing, considering Bernanke said purchases are "not on a preset" course.
  • The Fed left the target interest rate near zero and will leave it near zero as long as unemployment exceeds 6.5% and the inflationary outlook is no higher than 2.5%. That would be great... if it matched what consumers actually feel in their wallets. What they're feeling is between 7% and 9% inflation a year, according to the Real Price Index Project.

So why did the Fed taper come now?

Bernanke doesn't strike me as a "fall on his sword" kind of guy. I think what he's doing here is trying to clear the deck for Janet Yellen's tenure.

This makes sense when you think about it.

Deficits have been shrinking, which means the Fed has less maneuvering room because its purchases become disproportionately large.

At the same time, delivery risk is rising, because there is a growing shortage of Treasuries and Treasury-grade instruments. These serve as collateral for hundreds of billions of dollars in leveraged instruments, as well as more plain-vanilla margin accounts.

If the Fed keeps buying, for example, it runs the risk of forcing the markets to accept other instruments. Anecdotally, I've been hearing traders grumbling about this for weeks now. That, in turn, forces a global realignment as more people "short" already in short supply Treasuries. You can't rehypothecate what you don't have in the first place, especially if you don't have the underlying juice needed to collateralize the trade. This is really important, considering that the last data I saw suggested every dollar in the system was being rehypothecated up to 10 times.

And, finally, I've warned for a long time now that the single biggest danger to global financial markets is the Fed losing control. I think today's taper demonstrates that Bernanke feels he's at that point.

This, too, makes tremendous sense.

Almost every nation on the planet is fed up with the Fed and with U.S. monetary policy. Chief among them are our major trading partners and debt holders - like China, South Korea, and Japan. So the diplomatic pressure is likely intense.

At the same time, Wall Street and corporate America have made no bones about voicing their discontent. While the latter likes to think they're a big deal, it's the former - with their trillions of dollars in derivatives - that really is. Tapering right now potentially buys America some financial/economic capital that it desperately needs.

Here's what this means for your money...

What Happened After the Fed Taper

Traders reacted violently within minutes. The tape actually looks like an EKG gone haywire. Then a rally ensued.


My guts tell me that futures traders are trying to ignite a "short burn." This essentially forces the tremendous number of traders who were short going into Wednesday's announcement to capitulate.

So far they have succeeded... and our recommendations are going along for the ride, which is GREAT. Tomorrow may bring an entirely different story to the "tape," so to speak.

What the Fed Taper Means for Us

I want to you do three things right now under the circumstances:

  1. First, take the time to make sure you have your trailing stops in order. This should take you about five minutes using the most recent alert or any of the %-based or $-based tools your broker offers. If the rally fails or traders begin to concentrate on the underlying data, reality could return in a real hurry catching many taper-optimists by surprise.
  2. Second, get ready to buy. Sharp, quick moves like this one have a nasty habit of creating short-term pullbacks that often wind up being great buying opportunities. This will be especially true if the rally is to have legs as I continue to believe that it will - albeit for entirely different reasons, which I outlined recently when I noted that a Fed-induced rally could see the Dow hit 18,000 in 2014. (You can watch that here.) Which brings me to my third point.
  3. Never, ever make decisions based on technical moves like this one. Three critical variables - price, risk, and potential - are dramatically out of whack when traders are forced into reactionary mode, like they are at the moment. Let the computers duke it out. It's far better to let the dust settle and then take a good look around and buy where and when it makes sense for you. Not for them.

None of the issues Bernanke has theoretically addressed have gone away, which means Fed's reality distortion field is stronger than ever. Our economy still has a long way to go.

For more from Keith Fitz-Gerald on the best investments in today's market, read his new analysis An Easy Way to Start Making 20% More Money (Immediately)

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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