Markets Become Backward Looking

As we have previously argued, financial markets don't 'know' anything, especially close to major turning points. Conventional wisdom eventually almost always turns out to be dead wrong, and quite often the valuations that are accorded to securities strike one as absurd in hindsight, even if one only considers what was already known at the time when these prices were paid.

What has become especially notable in recent years is the extent to which financial markets have become dependent on central banks and have begun to mimic the methods employed by central bankers.

These methods consist by and large of looking at the data of the immediate past, pretending that these tell us anything about the future, and then deciding on monetary policy in knee-jerk, ad hoc fashion. That is basically the degree of 'planning' employed by our vaunted central planners. It would of course not help one bit if they were trying some different method, as central planning simply cannot work under any circumstances – i.e., it will always lead to outcomes that are less optimal than those that would have been achieved by an unhampered market (perhaps an improvement could be achieved by simply throwing dice). There are no ifs or buts in this context. Mises showed that economic calculation under socialism is impossible, and one can extend this theorem to special cases such as central banking in the context of a market economy. Essentially, central banks are socialist islands in a capitalist sea. To some extent they can take their cues from market prices, but their existence as such already distorts such prices, so the information they receive is tainted from the outset. They cannot possibly gauge the extent of the harm they inflict on the economy.


Anyway, financial markets are generally held to be forward looking. Quite often this has actually been true – but the more the market is subjected to interventionist policy, the less true it perforce becomes. This has never been more obvious than in recent years and months, when the markets were most of the time yanked this way or that way by something a central bank did or a central banker said. The markets have also begun to focus on lagging economic indicators like e.g. the payrolls data, simply because it is widely known that the central bank focuses on them as well. This makes no sense whatsoever, unless one concedes that market prices are by now extremely distorted and that future price trends therefore depend mainly on whether or not there will be more monetary pumping.


The Height of Absurdity

The most bizarre monthly ritual has become the breathless anticipation of the 'Fed minutes'. Not only do these minutes contain the useless backward looking analysis of the FOMC and its advisers (who have yet to recognize a major economic trend change ahead of time after a century of fruitless trying), they are a month old by the time they are released to boot!

One feels almost stupid participating in a market that reacts to such plainly useless information. And yet, that is precisely what happens. Today the financial press was full with articles describing the 'nervous anticipation' gripping the markets prior to the release, and the subsequent relief at the receiving what at this point can only be described as 'meaningless non-news'. Here is a brief excerpt of the what the minutes contained:


“Even as consensus built within the Federal Reserve in June about the likely need to begin pulling back on economic stimulus measures soon, many officials wanted more reassurance the employment recovery was on solid ground before a policy retreat.

Financial markets have largely converged on September as the probable start of a reduction in the pace of the U.S. central bank's $85 billion in monthly bond purchases, but minutes of the Fed's June meeting released on Wednesday suggested that might not be a sure bet.

"Several members judged that a reduction in asset purchases would likely soon be warranted," the minutes said. But they added that "many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases."

Global investors have recently recovered from a mild bout of panic that followed Fed Chairman Ben Bernanke's roadmap for an end to so-called quantitative easing, which he said would likely draw to a close by the middle of next year. Financial market fears have been allayed in part by a chorus of Fed officials who have sought to reassure traders that the end of asset buys will not lead to imminent interest rate hikes.

"Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate," the minutes said. Whether the markets have gotten the message is not fully clear; the yield on the 10-year U.S. Treasury note has risen a full percentage point in just two months and stands close to its highest levels since 2011. This has already slowed activity in the mortgage market, which had been key to the recent economic rebound.

At their June meeting, some Fed officials worried not only about the outlook for employment, but the pace of economic growth as well. Many economists believe the economy grew at less than a 1 percent annual rate in the second quarter, although most look for a pick-up in the second half of the year.

"Some (officials) added that they would … need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases," the minutes said.”

Of the Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done "to prevent the potential negative consequences of the program from exceeding its anticipated benefits.”


(emphasis added)

We would essentially term all of this vapid blather. It is the same stuff we read in every FOMC press release: if the vaunted 'data' show that things are getting better, then there will be less monetary pumping. If not, it will continue or may even be intensified. At this stage, how can anyone possibly be 'surprised' by the content of the minutes? Or for that matter, by anything the Fed does or says? Just watch a few aggregate economic statistics, and you will know what they'll do, since they always adjust their actions to the events of the recent past in order to influence a future they cannot possibly discern.

There is a single point that we find mildly interesting: only two regional Fed presidents are left to argue that 'QE' may have more drawbacks than 'anticipated benefits'.




FOMC: producing decisions that harm the economy in addition to a lot of meaningless blather, in a well appointed room.

(Photo credit: unknown author)




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5 Responses to “The Absurd Fed Minutes Ritual”

  • Did any of these people graduate from 6th grade? Economic recovery strengthening and 1% GDP growth aren’t even on the same Continent. Anyone who ever did a lot of drinking can look back and figure out they were drunk before they took the last 6 drinks. For what? I guess to make sure the hangover was bad.

    There is retail and wholesale in everything and there may be nowhere it is a bigger ripoff than the stock market. Those that control the wholesale side throw their peas on the wall when they want to spin something to double cross the retail customers into doing what they want them to do. What is coming out of this is a pile of crap, but they can sure make it look like filet mignon.

    How much is too much. We keep hearing about 1937 and the mistakes made. 1937 was a bubble. Check the historical stock data, if you don’t believe it. In fact, as for an entire year, 1932 wasn’t the bottom of the stock market for the 20th century, though the low month occurred there. 1921 was. The stock charts merely reveal the distortion the Fed and government policy have created in favor of a few in the markets. The real price of the market in 1937 was 3 times that of 1921, on a real basis. The historical 100 year growth rate in dividend returns in the stock market in real terms is roughly 1%. Historical lies persist because few ever look up the facts.

    Shiller produced a spreadsheet valuing the SPX or its equivalent for the past 140+ years. I believe it provides a world of information and basically shows the banker influenced bubbles over the years. In a non-credit money system, the price level should remain relatively constant, though the value should go up. If this isn’t the biggest bubble, interestingly the bubble in the early 1900’s was. Shiller’s data shows a sizable price inflation starting in the 1890’s and going until about 1920. This, despite there being a gold standard. I suspect this was because of capital inflows and improving markets for goods produced in the USA, especially agricultural products.

    Shiller uses a valuation method, known as PE/10. What it does is smooth out the ups and downs. It appears under 10 to 12 is cheap. Over 18 to 20 is expensive. For example, take January 1960’s PE/10 of 18.34. The CPI adjusted SPX price was 463 and the real dividend was 14.89. If you go forward 20 years, the real price was 333.22 and the real dividend 17.13. In 20 years, the real dividend had a growth of about 15%, somewhat equivalent to the population growth of the country. The loss in real price was was over 28%. But, the PE/10 was down to 8.85. The 1970’s were ugly, but they were a pretty good decade for growth, because the market was there for growth.

    The Fed efforts are nothing more than trying to make a purse from a sows ear. Unfortunately, the valuations I have used as an example, the model appears to have been destroyed. I seriously doubt it, as the truth is, the hangover hasn’t set in yet, because the example hasn’t quit drinking. The bubble has been sustained for 20 years now, with little interruption. Not only do I expect earnings to decline significantly in the not too distant future, prices should decline on a real basis to reflect reality. Bennie can only blow for so long, before the penalties come. Insolvent bank anyone?

  • Monty Capuletti:

    Vintage Ben….Every time USD tries to “break free”, he’s there to pull the chair out…Par for the course, and further confirmation that any semblance of market hysterics brings early visions of tapering to an abrupt end…What’s clear is that the “Real Bernank” is back, (as if he ever really left), deflation fighter, overly eager to feed the markets MOAR, having determined the punishment over the last 6 weeks was enough, and that he’s taken enough froth out of some of the bubblier areas of the market. (This should at least dispel any notions that the Fed “knows” anything about future econ activity or strength- as Pater highlights- but rather the genesis of the “tapering” talk was likely that Bubbliness)..Too bad- Responsible parenting doesn’t mean leaving the kids the keys to the car if they promise not to drive it when you’re gone..ITS TAKING THE F@#ING KEYS!!! I suspect an equity or bond market crash is not something he wants to preside over, in his last 6 mos in office, so STAND DOWN BOND VIGILANTES!!! It gets more surreal every time…

    • jimmyjames:

      Of the Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done “to prevent the potential negative consequences of the program from exceeding its anticipated benefits.”


      The two were scripted ie: their turn to be the “turds in the punch bowl” (stolen from Hank Paulson)

      Currency wars continue unabated- Ben won big today-

  • rodney:

    And … couple of hours later the bearded wonder says nothing of substance and EUR/USD gains 300 pips un a couple of hours … Talk about absurd!!!!

    • HitTheFan:

      Rodney, one thing he did say which delighted the markets was that if financial conditions tightened, as they have recently, threatening the Fed’s inflation and employment targets, they would do more easing.

      So,a renewal of the Bernanke put….markets will not be allowed to spoil the party.

      Madness of course, as they can’t control markets, but a sign that things are getting ever more surreal.

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