NAI500 BIZ TALK - Tapering Or Just Bluffing?

Samson Li's picture

About the Author: Samson Li has ten years of investment experience. He acted as Chief Analyst at Centaline Wealth Management Ltd, a subsidiary of Centaline Group, managing a fund specializing in natural resources and commodities. With an in-depth knowledge of mining, energy and commodities as well as unique analysis of global economic trend, he is often interviewed by NOW TV, TVB, Metro Radio, Hong Kong Daily News, AM730, Economic Digest, China Gold News and various other media. Besides, he is a columnist for Capital CEO, Quam and Away from the Flock on Centaline Group's website.



To the surprise of the market, the Fed decided to remain the quantity of monthly purchase of US 850 billion monthly bond purchase. I wasn’t one of the few being surprised, thanks to my more simple logic of mind. Ben Bernanke mentioned in order to start tapering,

1) The unemployment rate has to be 6.5% or lower;
2) The U.S. economic growth should remain on uptrend on a more stabilized and consistent basis

We all know that the unemployment rate remains above that target, so we do not need to waste any more time on this topic. For the second point, do you really believe the U.S. is on a strong foundation of economic growth? The Q113 growth was merely 1.1% p.a., while the Q213 growth was 2.5% p.a., which looks like on a much stronger uptrend, it is to be seen whether this uptrend is sustainable, especially the original reported Q1 growth was 1.8% p.a., only being revised down to the now reported 1.1% p.a., so I can assume some of the supposed ‘growth’ happened in Q1 was deferred to Q2 to materialize. So my prediction that the Fed would not start to taper in Sept was based on simple mathematics, while the market relied on rumor they heard instead of their own math.

As mentioned above the average growth rate for the U.S. 1H13 was 1.8% p.a., while the Fed’s initial prediction on growth for the country in 2013 was 2.3% - 2.8% p.a.. Thus it requires the U.S. to grow at 2.8% p.a. in the 2H13, so that the overall economic growth could meet the lower end of the Fed’s estimate. Unfortunately given the most recent economic data, a 2.8% p.a. in the 2H13 seems unlikely. Therefore it was logical to believe the Fed has to lower their economic growth guidance for the country sooner or later. The worst case scenario will be for the Fed to announce lower economic guidance and to start tapering at the same time, as this will send a more alarming message to the market, suggesting something devastating might be looming behind the scene.

Gold price has been quite volatile, with a US $60/oz uptick on the day that the Fed announced no tapering, only to giving up US$40/oz the day after as another Fed member suggesting tapering could start in Oct. The current market is now in a ‘loser mentality’ mindset, keep on guessing when the Fed will actually start to taper. If it does not happen in Oct, it could happen in Dec, if it does not happen in Dec it could happen in March and so on….with the brilliant performance of the U.S. equity market, it is very easy to create an illusion to the market that the U.S. economy is on a strong foothold, and thus a strong equity market. However, sometimes the performance of investment market is merely a reflection of capital flow.

The soon-to-be announced Q313 GDP growth will be a useful guide on when the tapering could start. If the data is relatively weak, then we can all expect the tapering could be further deferred. Personally I think the chance the Fed to take the current US$ 850 billion monthly bond repurchase program to a further extent in 2014, is no smaller than the chance they would actually taper.

Even if the Fed increases the total monthly purchase for bonds in 2014, it could still be beneficial to gold but may not be the determining factor. Alas, the market right now believes stock equities is the best hedge against QE programs (whether this belief is correct or wrong), it might due to the reason that there are far more fund managers/investors who know stock equities more than those who understand gold. Companies’ profit reporting might outperform market expectations and the global economy growth by a wide margin through aggressive cost cutting, however cost cutting is more a-few-times events rather than able to sustain for a long period of time. Thus sooner or later, the wishy-washy global economy shall eventually catch up with corporate earnings, unless there is a fundamental change in supply/demand of that particular sector. With all these considerations, gold and precious metals should be part of everyone’s portfolios.