Yanking the tablecloth slowly

Quantitative easing was bullish. On this, you have had the assurances of former Federal Reserve Chair Ben S. Bernanke as well as the ocular evidence of rising stock prices, falling commercial real-estate cap rates and tightening credit spreads. Now that the Federal Reserve is supposedly ready to begin to contemplate, even, perhaps, to implement, a plan for reducing the size of its bulging balance sheet, will quantitative tightening not be bearish?

The ocular evidence is still to come, but the official predictions are in. Quantitative tightening will not be bearish, Bernanke’s successors at the Fed insist. In May, Patrick Harker, president of the Federal Reserve Bank of Philadelphia, invoked the image of drying paint. Janet Yellen has approvingly repeated it.

Torsten Slok, chief international economist at Deutsche Bank, begs to challenge such glib assurances. How can it be, he asks, “that QE only has positive effects and reversing QE will have no negative effects?”

The bottom line, Slok goes on, “is that either QE policies have an impact or they don’t. You cannot have it both ways, where a policy only has effects when it is carried out but has no effects when it is removed; that’s like saying that you will only see an impact on the economy when you lower taxes, not when you raise taxes.”

Meanwhile, combined monthly asset purchases by the European Central Bank, the Bank of England and the Bank of Japan continue in the neighborhood of $175 billion, Slok points out. So the paint isn’t dry yet — the central bankers are still slathering it on — and the fight for yield continues.

Among the bemused and grateful bystanders to this central-bank-induced food fight is the single-B-rated government of Tajikistan, which expects to issue $500 million or more of 10-year debt at a cost of 7½% to 8% (down from a projected 7½% to 8½% in July), according to its lead underwriters, Raiffeisen Bank and Citicorp. The per capita GDP of the Afghanistan-facing nation tallies to $804.

When the central banks protest that, come time to remove the “stimulus,” you will hardly remember that it was ever there, we visualize someone attempting to pull a tablecloth out from under a setting of crystal. In accordance with the laws of inertia and friction, the knowing trickster pulls down and fast. The uncertain novice timidly will pull slowly, to the accompaniment of breaking glass.

We wonder if the central bankers, disingenuously protesting that quantitative tightening will prove a non-event and slow to begin the process of withdrawal, do not resemble the hesitant novice attempting his first yank of the cloth.