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 :
“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.”
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)
Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.
Thank you for your support!Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “The Absurd Fed Minutes Ritual”
Most read in the last 20 days:
- The Stock Market in Trouble - How Bad Can it Get?
A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
- Gold Stocks at an Interesting Juncture
A Fascinating Parallel We have recently discussed the sentiment and positioning backdrop in gold on two separate occasion, as it has once again reached rarely encountered extremes (see “Gold Panic” and “Gold and the Grave Dancers” for details). Image via bullionstreet.com Not much has changed on that front, except for the fact that small speculators have increased their net short position in COMEX gold futures to the highest level in nearly three decades last...
- Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday. Image credit: dreamstime.com Interestingly, for the first time in many months, there were three up days in a row prior to the...
- A new Multi-Year High in Buying by Gold Sector Insiders
Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years. Image source: bidness etc The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%: INK's gold insider sentiment...
- The Trump Phenomenon
Surprising Success We were wondering a while if there was anything we could say about the highly entertaining real estate mogul who has successfully hijacked the Republican nomination process – apart from the fact that he is sporting a haircut that looks a bit like a helicopter landing pad, endowing him with instant recognizability: Teflon-Donald Trump, the unlikely front-runner with the interesting haircut Photo credit: Dominick Reuter / Reuters Of course...
- Is Crude Oil Close to a Low?
Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing. Photo credit: Alamy Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
- The Stock Market's Panic Potential
The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
- The Donald and China, or The Fallacy of Protectionism
Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
- The Economy is in Liquidation Mode
Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business? The birthplace of roller disco turned out to be edible, sort of Photo via...
- Monetary Metals Supply and Demand Report 9 August, 2015
Withdrawing the Gold Bid Last week, we left off with this: “Something is happening with gold…” It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit, which currently has nontrivial value. A dollar is worth 28.4mg gold. To understand the second, let’s look at how markets work at the mechanical level. An assortment of well-known bullion coins and bars from all...