Ben Bernanke and the $10 Billion Taper: He Means Well, but He Knows Better

On Wednesday, Ben Bernanke announced the beginning of his long-awaited "taper." Henceforth, the Federal Reserve will buy "only" $75 billion worth of mortgage-backed bonds each month, instead of $85 billion.

So ... good news? Bad news?

According to commonly accepted wisdom, Bernanke's "taper reflects the perception that the recovery is taking hold." This is supported by the fact  that the Bureau of Economic Analysis just upped its estimate for third-quarter GDP growth in the U.S. by more than half a percentage point -- to 4.12% annualized. That's huge growth for an economy that's been slogging through years of subpar growth.

It's so huge, that it made market commentator Consumer Metrics Institute exclaim in surprise: "the new headline growth rate of 4.12% ... places the U.S. among the fastest growing developed countries!" In fact, according to CMI, "a growth rate above 4% would argue for far more than a modest $10 billion per month taper." The number suggests what the Fed should really be doing is moving the U.S. briskly back to "more historically normal interest rates." Instead, the Fed says it's still targeting 0% interest.

Why?

Housing market showing slack
Well, there are a couple of possible answers to that question. For one thing, we still see signs that not all is well with the economy. For example, just this past Thursday, homebuilder KB Home reported a staggering $0.14-per-share "miss" on its Q4 earnings. Although the $0.31 that KB did earn was much better profit than last year, this number still fell more than 30% shy of expectations -- and revenues missed, too. Meanwhile, home "deliveries" grew only 4% in the quarter, with net new home orders flat against the year-ago quarter and backlog declining.

Not all homebuilders are faring as poorly, of course. At Lennar (NYSE: LEN  ) , for example, new orders just jumped 14%, and the stock reported a significant earnings "beat" Thursday. But could KB be the canary in the coalmine?

Inventories getting stacked
Elsewhere in the economy, CMI worries that consumer spending (nearly 70% of GDP) is growing at not 4.1%, but less than 1.4%. And with consumers reluctant to spend, inventories appear to be piling up. CMI points out, for example, that "40% of the headline [GDP] number came from growing inventories" of unbought goods.

This echoes a concern recently raised by analysts at Janney Capital Markets, who, when searching for a winner in the consumer retail space earlier this month, fretted over evidence of "sectorwide excess dollar inventory" at American Eagle Outfitters (NYSE: AEO  ) , Aeropostale (NYSE: ARO  ) , and Abercrombie & Fitch (NYSE: ANF  ) . Janney entertained hopes that things might work themselves out in 2014 -- but until that actually happens, it ... hasn't happened.

Meanwhile, at last report, AE's sales were down 6% in the most recent quarter, but inventories rose 8%. Aeropostale's 5% decline in inventories failed to keep up with a 15% slide in sales. And Abercrombie's 12% decline in sales didn't prevent the company from stacking its inventories ... 43% higher! 

Foolish takeaway
Now combine these anecdotal data points from industry with the fact that America's unemployment rate, while falling, is doing so largely because of "a major deformation of the work force -- with fewer people choosing to look for work and more being forced to accept multiple part-time jobs." Add the fact that real per capita disposable income is down 0.85% year-to-date.

What you get is a strong, sneaking suspicion that this week's report of "4.12% GDP growth" isn't all it's cracked up to be. Yet even so, Bernanke must start tapering his bond buying eventually. We can't go on printing money forever, without ruining the currency. So even though a taper is sure to inflict pain down the road, when this week's news of "4.1% GDP growth" gave him an excuse to at least begin the tapering process, Bernanke jumped at the chance.

Put another way, Bernanke knows better than to think that 4.1% growth rate is sustainable -- but at least he means well.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2013, at 6:28 AM, MrRand wrote:

    Rich, well written piece. I commend you for not drinking the kool aid that the mainstream financial media is drinking. All is not well. The Fed has been very effective at managing confidence....for now. Sooner or later, America/Americans will realize this.

  • Report this Comment On December 22, 2013, at 12:51 PM, ferdiefor wrote:

    European economies for the last 30 years have been running on similar metrics... higher permanent structural unemployment, slow growth, miniscule job creation and growth.

    It may be the USA is going to have to accept a fits and starts economy for many years to come and we will have 2% GDP growth quarters and 4% quarters and maybe occasionally sub 2% growth.

    No doubt we will have higher permanent structural unemployment because the cost of labor has just gone through the roof as a result of Obamacare. Employers will find every way possible to use labor-saving technologies because they will refuse to overpay for low-skilled labor and will not be compelled to over-employ now that health insurance is mandated for every employee.

    The saving grace for the US is in spite of Obamacare we have a much more flexible labor force than Europe and you can still fire, dismiss, layoff employees a lot easier than you can in Europe which creates a host of problems for Europe we do not have here.

    We also have an energy self-sufficiency revolution going on that will in time create hundreds of thousands of new jobs in fossil fuels and we now see fertilizer, plastics, textile companies coming back to the US because of lower costs.

    Fortunes are being made by savvy investors who saw these trends in early 2009. In other words the economy may function under a newer set of rules that limits growth but you can still find investment opportunities to make back lost fortunes or make new fortunes from yourself.

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