10 Jul 2014

Fed Announces (Tentative) End to Bond Purchases in October

Banking, Federal Reserve 50 Comments

The recently released Fed minutes contain the following information on their plans to fully complete the so-called taper:

[P]articipants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.

Right now (July) the Fed is buying $35 billion of new bonds per month. (In other words, it is reinvesting the proceeds to maintain its holdings as existing Treasury and mortgage-backed securities mature, and then on top of that, the Fed is buying an additional $35 billion per month–$20 billion in Treasuries and $15 billion in MBS, or at least that was the official target; they bought $1 billion more in Treasuries last month and so are only buying $19 billion this month.) The current plan is that–so long as the economy doesn’t crash–the Fed will taper to $25 billion in August, then $15 billion in September, and then wipe out the remaining $15 billion in October. At that point, the current plan is that the Fed would hold pat, reinvesting the proceeds from maturing securities to maintain a fixed total of assets.

Just to remind everyone, here’s a chart showing the behavior of the S&P500 versus the monetary base (which has exploded since late 2008 because of the Fed’s policies):

As the chart shows, it used to be the case that the stock market bounced around with little relation to the Fed’s asset purchases. But since early 2009 and the introduction of “quantitative easing” programs, the stock market and the Fed’s bond buying have moved in virtual lockstep.

Let me ask you this: Do you think the S&P should be hitting all-time highs because of how great the underlying economic fundamentals have been the last few years?

50 Responses to “Fed Announces (Tentative) End to Bond Purchases in October”

  1. Cosmo Kramer says:

    No. But don’t you love the redistribution of wealth to the top 1%? All this whining and moaning about income equality and our overlords can’t help but to stimulate the net worth of the already wealthy.

    But, after the next 5-10 percent correction, look for Dow 20000 in a few years. (Sorry Harry Dent)

    • Scott H. says:

      You may not have meant it this way, but there is a danger of confusing the concepts of wealth creation and wealth redistribution in your post.

      • Tel says:

        Printing money always results in wealth redistribution.

        Wealth creation can only come out of some physical process that improves people’s life.

  2. Scott H. says:

    Let me ask you this: Do you think the S&P should be hitting all-time highs because of how great the underlying economic fundamentals have been the last few years?

    Answer: Yes.

  3. Transformer says:

    When inflation is taken into account the S&P is not at an all time high but just at the levels from the start of last decade.

    Seen that way – its hardly a bubble.

    • Matt M says:

      Came here to say this.

      The “stock market at all time highs!” nonsense is just hyperbole being spouted by CNBC and other such people.

    • Dan says:

      Are you saying it is at the same levels if we adjust for inflation that we saw right before the tech bubble burst?

    • Major.Freedom says:

      Transformer, bubbles aren’t bubbles because of how high they were relative to the start of the prior decade.

      For you would be omitting the possibility that it was a bubble then AND a (somewhat larger) bubble now.

      • Transformer says:

        good point. well made.

  4. somebody says:

    For the record, it tracks M2 quite well also.

    Transformer, that’s not even close to true.

    • Transformer says:

      See Cosmos’ link above (http://www.multpl.com/s-p-500-price/). Its very close to being true. The market now and the market in 2000 are very close in value in real terms.

      But as Dan points out, the index crashed just after that, somewhat undermining my point.

      • Anonymous says:

        Yea, I was talking about your conclusion. Margin Debt is at all time highs. This means the new money has been flowing into the stock market. What happens to the sectors that see the most money flow into them while rates are artificially suppressed when the stimulus stops? They recede. Whether or not the stock market is at all time highs is largely irrelevant.

      • Matt M says:

        Wait a minute though.

        Despite all the money-printing shenanigans, is it not reasonable to assume that Americans as a whole have more (and better) assets at their disposal today than they did 12 years ago?

        Putting aside market valuations, in terms of raw physical goods, we are wealthier now than we were in either 1999 (pre-tech collapse) or 2002 (post-collapse), right?

        So, shouldn’t the expectation be that the US stock market WOULD be higher than it was at those times? There might very well still be a bubble in the sense that assets are over-valued. But overall, shouldn’t we *expect* the stock market to be at record highs? Assuming it’s a semi-accurate reflection of national wealth.

        And if it’s not (a completely reasonable position to take), then what do we care whether it’s high or low anyway?

        • Anonymous says:

          How many times have you heard someone say the stock market will continue rising because people can’t earn a decent return on bonds? Not to mention all the share buybacks.

          It’s awesome when those same people say ABCT is crap. Hah.

  5. Major.Freedom says:

    “Do you think the S&P should be hitting all-time highs because of how great the underlying economic fundamentals have been the last few years?”

    Money printing boosts spending and profits. Higher profits improves “economic fundamentals” as is commonly measured. Economic “fundamentals” as determining factor of stock prices, is consistent with the data.

    Should stock prices be hitting these high levels relative to other prices? I say no, but not because of fundamentals, but because if we had a free market stock prices would not be this high relative to other prices.

    The BIS, “the central bank’s central bank”, has recently urged national central banks, especially the Fed, to start abandoning QE:


    “The risk of normalising too late and too gradually should not be underestimated… The trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on .”

    As Roddis has oft stated: “We’ve won the debate”.

  6. Scott H. says:

    We’ve got a bubble of money stuck in our national mattress. Stock prices (and other asset prices) will go up when rising interest rates give banks the incentive to remove money from the mattress and help folks start to buy things.

    • Cosmo Kramer says:

      You’re implying that QE is the cause of the inflated mattress, no?

      • Scott H. says:

        Yes. I am also implying that stopping QE will be expansionary for the economy and the stock market, despite what Bob’s graph would lead us to believe.

        • guest says:

          Ask an Austrian Economist

          I never understood, however, why interest rate increases in our situation should lead to bank failures. Why would this be so?

          The answer:

          Rising interest rates will collapse the capital value (i.e., the market price) of assets banks hold. If they have existing T-bonds at 3% and interest rates on newly issued T-bonds rise to 6%, the price that investors will be willing to pay for the 3% bonds collapses. When that happens, banks become insolvent.

        • Cosmo Kramer says:

          That’s why I see a small correction first. So, I basically agree.

    • guest says:

      OK, but then when those stock prices subsequently crash (because the money used to buy stocks will be coming through the banks from the printing press), don’t go blaming Capitalists for “growing too fast”.

      Those will be inflated stock prices.

      • guest says:

        Actually, stock prices are inflated right now.

  7. Philippe says:

    If it’s a bubble, why aren’t investors getting out now?

    Genuine question. If I had millions of dollars on the line I would want to be sure that I wasn’t walking straight into a trap, and I would do as much research as I possibly could to make sure that wasn’t the case.

    • Cosmo Kramer says:

      Standard theory is that the general population has the wrong information at hand when doing said research. I.E. (if it is a bubble) no one thinks its a bubble.

      • Philippe says:

        right, but if some small group of people do consistently have the right information, then shouldn’t everyone be placing their money with them?

        • Cosmo Kramer says:


          From personal experience, it took me losing my life savings 2x before I thought along those lines.

        • Major.Freedom says:

          Only the market process can reveal who the group of correct people are when it comes to when a bubble bursts. Remember, stock prices are determined by investors. Guessing future stock prices is guessing what other investors will think and do.

          • Philippe says:

            “Guessing future stock prices is guessing what other investors will think and do”

            you sound like Keynes:

            “We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be”


            “Keynes believed that similar behavior was at work within the stock market. This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value to be.”

            • Major.Freedom says:

              I sound like a lot of people from all manner of schools of thought with that comment.

              It takes at least two parties for an exchange of money for a share of equity and hence stock prices to take place. Thus, if one person is to guess what the future price of their stock will be, he won’t be able to do so without there being a different person to buy that stock to create a price.

              Guessing the future price of one’s stock really is guessing what another person or group of people will think and do vis a vis that stock.

    • skylien says:

      If investors would know a bubble as soon as there is one, then there could never be a bubble in the first place.

      Also you just cannot make sure that it isn’t a bubble, no matter how much research you do. And it is even harder if you are blindsided by CB/government caused distortions in the market, who intentionally play with your thoughts to “stimulate” you in whatever way they feel is good for yourself.

    • Tel says:

      Good question.

      Let’s look at the various options:
      * go to cash leaves you vulnerable to inflation
      * buying real estate leaves you open to what recently happened in Florida and also probably will soon happen in Chicago.
      * buying paper gold leaves you open to a scammer who vanishes overnight;
      * buying gold bars leaves the possibility of FDR style confistaction (it happened once, it can happen again).

      Beyond that, there are many people investing in stupid stuff because they have no choice. Social Secuirty for example obviously is NOT an investment that a sensible person would choose, but since it is compulsory and they take the money as tax, people keep “investing” in it.

      Then thereĹ› pension funds which are regulated, and thus the fund managers choose what they think will be a safe career move (i.e. gives the best excuse when things go pear shaped).

      If you want to go and study Eric Falkenstein, he had yet another theory (that probably is right in some cases) about the disconnect between fund managers and people providing the money. In order to be successful, fund managers need only convince a lot of people to trust them with their money, so this type of fund manager will go for investment options that make spectacular gains and thus suitable for advertising material.

      Finally, Tom Woods pointed out that the system is somewhat insideous and self fulfilling. Suppose you were an economic supra-genius (i.e. Austrian economist) and you could know for sure that the bubble will pop in precisely two years and three months. Logically, would you avoid the bubble and stand off to one side? Hell no! The best investment strategy would be to ride that bubble for all it’s worth and buy buy in now then jump out at the last possible minute in two years and two months. Thus, even people who know the whole exercise is dumb, still end up deciding that since the Fed is the only game in town we play that one.

    • Ken P says:

      Timing is everything. I think there is a bubble but am extremely stock heavy because I don’t expect it to crash immediately. A lot of the triggers for the last meltdown occurred in 2006 and 2007. It’s basically a game of hot potato.

  8. MR says:

    Can someone tell me if i got this right? Im a 2nd year college econ college student and trying to make sure ive got it all straight in my head. It’s not that i don’t necessarily understand the ACBT in a general sense. Its just that im curious about how its being malinvested. What is it in stocks that are being malinvested in, and who is taking on debt that will hurt them in the future. So tell me if i got this right or not.

    So the Fed increases the money supply driving interest rates near zero. Banks find it more profitable to speculate on stock prices/bonds/treasuries than lend to the real economy thus driving stocks and bonds higher and yields down, creating a viscous cycle. The stock holders and wall street see the value of their company go up and pay dividends which stock holders use to consume (buy yachts) instead of invest in the real economy. Meanwhile other investors enter the market taking on debt from banks in order to speculate on the stock market in hopes that they to will reap the benefits of the stock/bond/bubble and the consumption and wealth associated with it. Inflation will come in the real economy because of consumption and mal investment on wall street, and either the Fed will scale back bond purchases, inflation premiums will force interest rates to rise, and or interest rates remain at zero and we are stuck in a lost decade like japan with 0% interest rates fueling consumption instead of real investment.

    If im wrong about the dividends that what are corporations mal investing in, and are people entering the market taking on debt or is it just the banks speculating.


    • Mike says:

      Inflation is the increase in the supply of money and credit. The Fed has driven rates to zero which spurs the malinvestment, because the low rates get people to take on leverage. Rates should only be low when savings (actual foregone consumption stored away) are high; they’re not right now. So the low rates gives the perception that a lot of capital is available for investment when in fact the only ‘capital’ is just more paper fiat, which is not actual machines, raw materials, etc.

      The buildup of homes and all this other stuff such as stadiums, malls, etc. epitomizes the malinvestment, as these undertakings were not warranted, as there is not purchasing power/wealth to merit them. People do not have the purchasing power to buy them with real goods (demand has to be legitimate; can’t just be that ‘demanders’ have only newly printed fiat that is diluting at a rapid pace). Say’s Law says that people pay for goods and services with G and S. If one party to the trade can only supply fiat paper, which is growing rapidly in supply and thus taking more and more of to buy actual items, the entity who has something of value will balk.

      At the end of the day, what happens overall is that the businessmen liquidate their investments when they realize that there is not sufficient purchasing power to warrant these projects. This happens slowly then all at once, seemingly, and the huge dislocation occurs and those who took on the leverage foolishly get nailed, maybe having locked in a low rate (usually an ARM anyway) but paying it for longer and on an ‘asset’ they were counting on as an ATM like housing has become for many that now is priced a lot lower since liquidation of the glut of housing is occurring, and prices are at fire sale level (as they should be rather than trying to prop up valuations like the Fed and other CBs do).

      As far as corporations, there are still some doing the prudent thing, staying liquid, and with exposure to economies around the globe that have actual growth/purchasing power prospects, and earning money in commodity currencies. There are good INDIVIDUAL stories out there, with American companies, and it is good to see they are not malinvesting in the CAPEX every MSM pundit is desperate for. They should be putting more of their cash holdings in gold and silver, though, and at least out of the USD.

      But leverage is up there, too, stock of debt continues to accumulate as the flow still is that of deficits as far as books not being balanced, and a lot of corporations’ boards seem to be doing stock buybacks funded with zero interest funds which is for the short term. And a lot of peoples’ worldview is completely contingent on the petrodollar status that the US has benefitted from for so long, and which is diminishing as can be seen with Russia, China, etc diversifying into bilateral trade excluding USD and into gold, and with US provoking things abroad in foreign policy as usual.

      • Mike says:

        and the liquidation of malinvestment that was into the wrong sectors is a painful (but necessary) step, because contrary to keynesian/mainstream econ theory, there is not some homogeneous capital stock ‘K’. I.E., think about undoing a bridge project financed by cheap credit that is clearly worthless and no ROI (no shock there when .govt allocates capital) when that capital, land, labor should have gone to say some up and coming company. The capital can’t just reallocate at the snap of a finger. And think of that general idea occurring with numerous other projects that were only done due to government picking winners and losers and cheap credit.

  9. laugh says:

    more garbage analysis. The S&P 500 is up 3.9%/year since Oct 2008. According to Peter Schiff, the rate of inflation has been 6%/year during that time so adjusted for inflation, the S&P 500 is down 12% since the Fed adopted ZIRP.

    Oooooooooooooops. Maybe Schiff is wrong. Maybe Murphy is wrong. Maybe? Obviously they are both wrong. You guys are clowns.

    • Andrew says:

      I’m no math wiz, but I’m pretty sure your 3.9%/year figure is completely wrong. A quick calc shows the S&P is up ~10% per year in that time, and about ~15% per year if you start from the bottom of the market (March 2009).

      • skylien says:

        It’s quite hard to do math while you are laughing…

        • integral says:

          I thought it was an invitation.

      • Scott D says:

        CAGR is about 14% if you assume a beginning index of 900 in October 2008 and an ending of of 1900 in 5.75 years, so yeah, you are pretty close.

    • Scott D says:

      That is some spectacularly bad math there. Going from the low 900s to over 1900 at 3.9% growth per year would take over 20 years. When I first saw that, I thought maybe he just took the total change and erroneously divided it by the time period, rather than compounding year over year. That’s a newbie mistake, but at least understandable.

      I hope he doesn’t hurt himself.

      • Major.Freedom says:

        Clown math, it seems.

    • Cosmo Kramer says:

      Dumbest mistake..

      Take the highest S&P price of October 2008, then (with that calculator thingy) multiply by 1.039, continue multiplying the result by 1.039.

      NOT EVEN CLOSE, Laugh…….. Maybe laugh thinks the S&P is still in the 1300’s? Maybe laugh thinks the S&P was at 1500 in October 2008? Well that’s what he would have to believe.

      Andrew however is a math wiz, lol. When one can’t even get basic facts right, how can one be expected to make reasoned analysis.

      Should a guy named “Laugh” be calling people clowns? Oh the irony.

      Further he ignores that I posted this in this very post.

      (avert your eyes, no shadow stats figures involved!!!)

  10. Gamble says:

    With steep tax rates 15-39%, you could earn 0% in the market and still come out way ahead than if you claimed the income.

    • Kitch says:

      You’re talking about the advantage of deferring taxes investing through a –e.g., 401(k) …?

  11. Neil says:

    So they end QE in October, but rates are still at zero, therefore policy is still inflationary. Better to be in gold and silver at this time than stocks and bonds.

  12. tadchem says:

    I am not an economist. I am a chemist/physicist and an expert in making highly accurate measurements. One absolute necessity in making measurement that will provide useful numbers is a “Standard” – a precisely known and unvarying reference against which the object being measured may be directly compared. We have not seen that in economic since the dollar was defined as the value of 1/35th of a Troy ounce of pure gold.
    When the authority charged with controlling the monetary policy is free to produce as much money as deemed necessary, there is no standard. everything compared to the money becomes mutable. It is like measuring distance with a rubber ruler.

  13. guest says:

    Hey, Bob Murphy,

    This blog post was mentioned over at JunkScience.com:

    Fed hints at stopping the inflationary manipulation

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