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Betting With Bill Gross on the Fed's QE Taper

June 5 (Bloomberg) -- On today's "Insight & Action," Adam Johnson looks at the weak U.S. Economic data on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Taper: "Anything that gradually diminishes in size towards one extremity" -- Oxford English Dictionary

Extremity indeed. We've all become data hawks and Fed watchers, waiting to pounce on the latest indication whether the Fed will "taper" its $85 billion bond-buying program, or keep supplying liquidity ad infinitum.

Today's data provides ammunition for the no-taper crowd who would keep the Fed's money coming:

Insight & Action

However, one day doesn't make a trend. So here's chart #2, the Citigroup Economic Surprise Index. It's a running tally of whether daily data points are better or worse than estimated, and the trend since March is clearly worse.

Insight & Action

While the data spells out quite clearly that the economy is worsening, bond traders have chosen instead to fixate on the possibility of so-called tapering by the Fed. Specifically, bond traders have taken rates higher over the past several weeks -- a move inconsistent with the data and at odds with the trend.

Insight & Action

Fed Chairman Ben Bernanke hasn't said he will taper, but rather that he will consider tapering as the economy improves. Bottom Line: The economy is not there yet and bond traders have gotten ahead of themselves.

Blog readers: We offer recent tweets from Pimco's Bill Gross, who runs the world's largest bond fund. We like betting with Bill.

1. "We like 5-10 year treasuries. Economy growing 1.7%, NO tapering for now"

2. "Slow global growth, currency wars. Put risk assets in your rear-view mirror"

3. "We're sticking with bonds as long as the Fed does."

Q.E.D.

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