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)
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “The Absurd Fed Minutes Ritual”
Most read in the last 20 days:
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...