Thinkpad: Taper Is Coming...

Happy Sunday.

The long-feared fed taper is coming closer. It has almost taken on mythical Godzilla-like proportions. Each hint of the U.S. Federal Reserve slowing its bond purchases leads to the ground shaking.

This week we got the clearest signal that the Fed is gaining confidence in the recovery and hence moving closer to some sort of an exit. The minutes of the last Federal Open Market Committee meet showed that "most members" believed that they could begin slowing bond purchases this year. Although "several" others believed that a reduction in asset purchases would be more appropriate next year.

According to the BoA Securities Fund Managers' Survey, 84% expect the Fed to signal taper by year-end. But 65% continue to see inflation as "transitory". The survey also showed lower growth expectations. Confused? So is everyone else. Including the Fed, perhaps.

For now, the TINA factor means that the extreme "long stocks-short bonds" positioning is intact. What could change this? "TINA turners", as BoA calls it, could come from a Fed error, a failure of U.S. fiscal policy, China or if the U.S. consumer hits a wall.

Chris Wood of Jefferies had a series of interesting thoughts on monetary policy in the latest edition of GREED & fear.

First, he believes that central banks are becoming less important in the G7 world because the political reality is that they will not be able to tighten meaningfully even if inflation proves to be less transitory than still assumed by the Federal Reserve and others.

Second, Wood argues that the Fed’s so-called “hawks” will quickly turn silent if a risk-off grips the market.

Third, even if inflation pressures prove to be entrenched, political pressures may still lead to a "practical severing of the link between interest rates and inflation in the G7 world, via the introduction of a more formalised regime of financial repression, be it via yield curve control or some other mechanism".

For the emerging world, the prevailing view is that a repeat of 2013 is unlikely. Wood remains bullish on India but acknowledges that India may underperform in any global risk-off move triggered by tapering scares.

BoA Securities, too, sees the current rally tiring out and expects the benchmark Nifty to correct about 9% in the near term. Taper talk, potentially higher U.S. yields and dollar, alongside muted IPO gains could be negative triggers.

Before we move on, put this conversation between former RBI governor Raghuram Rajan and Raghav Bahl on your watch list. He speaks on inequality, forced formalisation in India and the opportunity for India in China's tech crackdown.

Elsewhere, Afghanistan dominated conversation.

Thinkpad is no an expert but we'd like to flag some interesting reads.

Can the U.S. recover from the bungled Afghanistan exit, asks this Bloomberg editorial. This piece paints a picture of how billions of dollars were wasted in fighting the Afghanistan war. And this one explains why Afghanistan is a bigger problem.

And then there was this surreal Twitter thread from the Afghanistan central bank chief, who, after fleeing, had to take to twitter to explain that reserves accumulated over the years weren't actually lying under the proverbial mattress and the Taliban shouldn't go on the hunt for them.

Now, we've had our share of crazies on the issue of central bank reserves, but let's thank our lot that it never came to this.

Till next week.