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Wednesday, April 15, 2015 9:39 PM

Super Taper Tantrum? How About an UnTaper Tantrum?

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Generally, the IMF is wrong every which way about nearly everything.

Thus, one has to wonder if the correct response to ‘Super taper tantrum’ ahead, warns IMF is along the lines of "No Worries Mate".

José Viñals, the director of the IMF’s monetary and capital markets department, warned of a “super taper tantrum” and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. “This is going to take place in uncharted territory,” he said in an interview.

In its Global Financial Stability Report, released on Wednesday, the IMF argued that risks have not only risen worldwide, but that they have rotated to parts of the financial world that are harder to monitor — including to the non-bank sector.

Among the key worries are “severe challenges” brewing in the EU life insurance sector amid plunging interest rates in the region. Many policies are offering generous return guarantees that are “unsustainable” in a prolonged low-interest rate environment, the IMF warned, highlighting German and Swedish firms.

In the report, the IMF said a sudden rise of 100 basis points in 10-year Treasury yields was “quite conceivable” once the market wakes up to the possibility of the first rise in official rates in nearly a decade. “Shifts of this magnitude can generate negative shocks globally, especially in emerging market economies,” the IMF said.

Higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets.

Mr Viñals also laid out a scenario which he called a “Yellen conundrum” in which the central bank is forced to tighten policy more sharply than planned because longer-term interest rates do not respond to hikes in the Fed’s target range. “This exit is a lot more complex to figure out, and this is behind the uncertainty that there is in the markets,” he said.

“You don’t want to just be happy with the fact that borrowing costs are falling and that equity prices are rising and that the euro is depreciating, all of which is good for price stability and growth in the euro area. You also need to unblock the bank credit channel, and for that you need to decisively deal with non-performing loans,” he said.
IMF Chief Economist to the Rescue 

In many ways, that was one of the more sensible things the IMF has ever published. So what's up?

Not to worry, Olivier Blanchard, the IMF chief economist, came to the rescue with his rebuttal.

Releasing growth forecasts on Tuesday, Olivier Blanchard, the IMF chief economist, said: “I sense the macro risks are smaller than in October — there is no reason for doom and gloom.”

Taper Tantrum?

Well, what if the Fed doesn't hike?

How About an UnTaper Tantrum?

I am increasingly convinced the US is headed for recession. In fact, I think it is quite possible recession has already started.

So, can you have a taper tantrum based on hikes that do not occur (or do not occur at the rate that is priced in?)

While pondering that question, here's another: Is it possible the US economy is so weak we have an "UnTaper Tantrum" in the stock market when the Fed doesn't hike (or doesn't hike as much as everyone assumes they will)?

The "UnTaper Tantrum" thesis seems more reasonable to me.

Mike "Mish" Shedlock

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