The Most Frightening Takeaway From The Historic Fed Decision

Today one of the most highly respected fund managers in Singapore spoke with King World News about the most frightening takeaway from yesterday’s historic Fed decision.  Grant Williams, who is portfolio manager of the Vulpes Precious Metals Fund, also discussed the impact of the Fed’s decision on major markets such as gold.  Below is what the the acclaimed fund manager had to say in this fascinating interview.

Eric King:  “Grant, I wanted to get your thoughts on the Fed’s decision not to taper yesterday.  I think it shocked a lot of people around the world.”

Williams:  “Yes it did, Eric.  I’m not sure it should have, but it’s a question of degree.  People were shocked the Fed was not going to taper $10-$15 billion per month, which would still have left them with $70-$75 billion of QE each month, and this is still an awful lot of money to be printing out of thin air.

But the fact that the Fed didn’t taper sends all kinds of terrible messages about the state of things, and I suspect it will take the markets a couple of days to digest that reality.

“So far we have seen a little bit of short covering and muted euphoria in the markets, but I think that once participants realize that the Fed is not tapering, it will cast a terrible pall over what they see as the state of the economy, and I think we could see a fall in the markets.

If that fall in the markets happens I think it’s a problem.  It’s clear the Fed hasn’t tapered because they are concerned about a bunch of things, but primarily the possibility of a 3% yield on the 10-Year Treasury.  If we have dropped ourselves into some ‘twilight world,’ where 3% on the 10-Year is a problem, then I think that’s the clearest sign of the trouble we are now facing.”

Eric King:  “Bill Fleckenstein said to KWN yesterday that if there is a perception that the Fed is going to lose control of the bond market, ‘All hell could break loose.’  You were just talking about a 3% yield, and the U.S. being unable to handle that, but it was almost like the Fed panicked and thought, ‘We can’t even do any kind of tapering.  We just need to keep this rolling.’  Michael Pento then told KWN that historically the average on the 10-Year Note has been 7%, and asked:  Why can’t we handle even 3% without the Fed panicking and walking away entirely from tapering?  Your thoughts, Grant?”

Williams:  “At some point, by doing what they are doing, the Fed is going to lose control of the bond market.  It’s pretty clear right now that the Fed has certainly lost control of their monetary policy.  The Fed can’t taper because rates are going to rise, and any recovery they are seeing is going to get strangled.

So the Fed has really backed itself into a corner and it has put itself into a position where it can’t do anything except for more of the same in the future.  Bernanke is waffling and changing his stance on what happens.  This sort of stuff is unprecedented, particularly with an outgoing Fed chairman who is essentially a lame duck.

Bernanke is now essentially setting policy for the incoming Fed chairman, and these are historic things which have never been tried before.  But, ultimately, if you are relying on a policy that rates are going to be at zero percent until 2016 to keep the party going, I don’t know how many people are foolish enough out there to believe that promise can’t be broken at some point.  If we get into 2014 and they need to raise rates, they are going to raise rates.  The promise won’t mean a thing.