I believe the collateral squeeze is an important reason behind the taper talk. The Fed has pushed itself into a paradox with ever larger QE. They try to help banks and get the money flowing by buying up treasuries; but this instead hampers banks by sucking the collateral pool dry. The first two factors imply that taper talk is not about tapering at all. But this one means the Fed may have to either find a way to reduce treasury purchase or somehow persuade Congress to borrow more debt. With almost all of agency bonds already going into QE3, to where can the Fed divert the treasury purchase, stocks and junk bonds? Hey, here's an idea!
Desperation is often disguised as heroism. I'm not ruling anything out, including negative interest rates.
In summary, all the taper talk is nothing but talk, the Fed's effort in trying to limit damage without taking the actions that are necessary but they don't have the political courage to take. In fact, I think the frothy equities and junk bond markets are indeed calling the taper talk bluffing, as opposed to the mirage of "sustained recovery" as presented by the mainstream media. After all, if the market actually believes tapering is coming, it would've started selling.
If you're in the market, there's no need to panic right now. Let your winners run and enjoy the ride, perhaps with gradual tapering -- and there's the only sensible tapering I see. Just try not to be the last one out when it turns. And shorting it here is of course very risky. But the risk/reward calculation now hardly justifies any significant increase in risk exposure. Sitting on cash may burn a hole in your back pocket. But at least you still have your cash, which is not bad before inflation takes off.
At the time of publication the author is long GLD.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.