30 Dec

EPIQ Partners' Word of the Year: Taper

Recently, the Chairman of the US Federal Reserve (Fed) spoke for the final time before his term ends in January. In our opinion, Ben Bernanke has done an admirable job leading, what is arguably the most important financial institution in the world, during a period of great stress.

After the Fed brought the overnight funds rate, the Fed's main tool for influencing economic activity, to 0% in 2009, they went on to engage in quantitative easing (QE) by purchasing longer dated government bonds and agency backed mortgages. This was done in an attempt to further stimulate the US economy from the depths of despair by pumping in mass amounts of liquidity into the economy. It seems to have worked so far. The recent spate of economic data indicates that the US economy is recovering at a measured pace. 

During the next chapter of the saga, we will see how well the Fed does (under new leadership) taking the 'punch bowl' away, or what has been termed "Tapering." When we first opined on the subject earlier in the year (http://www.epiqpartnersllc.com/blog/item/50-hold-on-change-is-likely-and-we-believe-it-is-good), the markets did not initially react well with the both the bond and stock markets selling off in a disjoined manner.

In May, we felt that it would take longer to unwind the extraordinary measures that had been undertaken then most anticipated at the time. The current plan communicated by the Fed is to reduce the amount of purchases by $10 billion each month, $5 billion in Treasuries and $5 billion in mortgage bonds. This will take most of 2014 to complete if left uninterrupted. The implied assumptions are that the 'numbers' on the economy remain solid and we continue to observe constructive expansion. If all goes as planned, the markets will take a big step closer toward what 'normal' looked like before QE. Moreover, investors should continue to expect nominal interest rates near 0% and a negative real interest rate, when inflation is considered, for some time...a strong incentive to put investment dollars to work somewhere with better risk/return expectations.

So what does this all mean?

We are encouraged by two facts:

  1. The Fed is confident that economy is strong enough to start the process of removing the extra stimulus.
  2. Investors in the stock and bond markets since the announcement was made have reacted positively to the Fed's news.

The markets, as a whole, do an effective job of discounting anticipated information 6 – 9 months into the future and we suspect this will continue to hold true. We know returns will not track in a straight line but anticipate continued positive returns for the period ahead. Whether your objectives are PRESERVATION, INCOME or APPRECIATION (or all of the above) we enjoy partnering with you to construct thoughtfully positioned portfolios including equity, fixed income and alternatives.


2013 was an affirming and enjoyable year at EPIQ Partners. Thank you for your support. We wish you and your family the happiest of New Year celebrations and look forward to 2014 with enthusiasm and gratitude.



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