Federal Open Yawn Committee puts Kremlinologists all over the World to Sleep …

The Fed’s monetary policy statement delivered on Wednesday was the non-surprise/yawn-inducer of the year. Readers can take a look at the trusty WSJ statement tracker, which reveals that apart from a few minor and unimportant changes, the statement was basically a carbon copy of the last one.

Not a single dissent mars this bland exercise in bureaucratese, so there isn’t even anything to report on that front. If you have trouble sleeping, reading this statement might be a very good alternative to Valium.

So did anything noteworthy happen? Well, yes. Apparently market participants believe they have to react to the forecasts of a bunch of bureaucrats who are quite likely among the worst economic forecasters in the world – and that’s really saying something.

 augursAugurs in ancient Rome, observing the behavior of hens.

 

The High Priests of Augury

It is widely assumed that it is the job of economists to “make predictions”. This is actually not the case. The job of making predictions is that of augurs and soothsayers. In fact, modern-day economists strike us as today’s equivalent of the caste of augurs in ancient Rome.

As Wikipedia informs us:

 

“The augur was a priest and official in the classical world, especially ancient Rome and Etruria. His main role was the practice of augury, interpreting the will of the gods by studying the flight of birds: whether they are flying in groups or alone, what noises they make as they fly, direction of flight and what kind of birds they are. This was known as “taking the auspices.” The ceremony and function of the augur was central to any major undertaking in Roman society—public or private—including matters of war, commerce, and religion.”

 

(emphasis added)

Instead of studying the entrails of freshly slaughtered animals or the flight patterns of birds, today’s augurs are poring over statistics in order to “take the auspices” – but the success rate of their predictions is depressingly similar to that of the ancient birdwatchers. If the members of the FOMC board, the high priests of this caste in modern times, were to retire tomorrow and never again utter a forecast, the global economic soothsaying hit rate would likely improve considerably.

It is all the more astonishing that in light of the evidence to date – the chance that an economic forecast by the Fed actually pans out is approximately 0.0% (give or take a zero behind the decimal point) – market participants are actually paying attention to nonsense like the infamous “dot plot”.

 

dot plot june 2015The bizarre “dot plot” which indicates the estimates of FOMC members regarding the “future path of monetary policy”. Might as well throw darts, click to enlarge.

 

The Fed is actually not really “planning” anything – it is just reacting, mainly to data that have become meaningless by the time it reacts, as they simply describe the past. It is an organization that is driving forward with its eyes firmly fixed on the rear-view mirror. Meanwhile, any estimates of future economic trends provided by its members have historically proved to be an exercise in futility. Charts like the one above aren’t revealing any earth-shattering insights.

This brings us to the market reaction to the FOMC statement. So far we have seen both immediate and delayed reactions, which seemed largely based on the dots on the above “dot plot” dropping a bit compared to last time. These reactions have included a sharp pullback in the US dollar, a noteworthy jump in the gold price, and quelle surprise, a sizable rally in the stock market. Evidently the idea is that the most extensively pre-announced rate hike in all of history might be postponed even further.

This is quite funny, because it should make little to no difference to the economy whether or not the Federal Funds target rate corridor is set a handful of basis points higher. It might make a difference to a few carry trades, but any dollar carry trades that existed (using the dollar as a funding currency) have likely been blown out of the water long ago.

 

Does it Make Sense to Buy Gold Based on Dot Plot Fluctuations?

 

August gold, COMEX- 20 minutesA 20 minute candlestick chart of the August gold contract over the past three trading days click to enlarge.

 

As you can see above, traders have apparently also bought gold based on the premise that a Fed rate hike might happen somewhat later. It should be noted that gold was actually quite oversold going into the FOMC meeting, so it may well have bounced no matter what. Assuming though that the “dot plot” was the trigger, the question is: Does this make any sense?

Apart from the fact that the “dot plot” has actually no predictive value, there are other grounds for believing that this reasoning may be flawed. Don’t get us wrong – we have nothing against gold going higher. We believe its current price doesn’t adequately reflect extant systemic risk, although we must also concede that the current fundamental backdrop isn’t unequivocally bullish (as to why, see our list of fundamental drivers of the gold price). However, it appears that there is enough “insurance buying” of gold combined with fairly strong reservation demand from current gold holders to lend strong support to the price near current levels.

Normally rising interest rates are bearish for gold, ceteris paribus (if nominal rates were to rise, while inflation expectations rise even faster, the ceteris would of course no longer be paribus). The low interest rate backdrop and the still brisk growth rate of the US money supply (and the even brisker growth rate of the euro area money supply), which would normally be bullish for gold, are currently mainly supportive of the bubble in assorted risk assets. As long as the bubble in risk continues to expand, market participants won’t have much interest in gold.

As a result of this, gold bulls should probably root for a rate hike. In the very short term, the gold market would likely react negatively to a rate hike. But the gold market traditionally has a tendency to be extremely forward looking. This is probably why gold didn’t rally when “QE3” was launched (apart from losing its euro area crisis premium). Gold market participants intuited correctly that QE3 would be followed by a tightening of monetary policy, which has indeed happened via “tapering” and the cessation of QE3. Any move by the Fed that endangers the bubble in risk should therefore be bullish for gold. The gold market would soon look beyond the tightening of monetary policy and begin to discount its inevitable loosening in the future.

A rate hike delay might turn out to be unequivocally bullish for gold if it eventually becomes apparent that there will never be a rate hike, i.e., if the QE spigot is reopened without an intervening rate hike. This possibility cannot be dismissed out of hand, in spite of Mrs. Yellen’s seeming determination to get at least one rate hike in before the year ends. We cannot dismiss it, because we don’t know what exactly will prick the bubble. Eventually there will be a reversal of the credit expansion-induced distortions in relative prices in the economy and a bust will begin. While this normally requires rising rates and a sharp slowdown in money supply growth, the current situation is highly unusual and things may not play out in line with the traditional script.

 

Conclusion

Government intervention in the economy is actually the main reason why economists are bothering to make predictions about a multitude of statistics nowadays. Most of their usually quite inaccurate macro-economic forecasts would be of little use in an unhampered market economy, and their market value would accordingly be very low. Given its record, it seems especially odd that people are taking actions in the markets based on the forecasts released by the FOMC.

With respect to the gold market, what is actually medium to long term bullish or bearish is often not as obvious as is generally believed. One must keep in mind that the gold market tends to discount future developments far in advance; because of this, superficially bullish or bearish developments may ultimately turn out to have a different effect than expected.

 

Charts by: Federal Reserve board, BarChart

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Janet Yellen's 78-Month Plan for the National Monetary Policy of the United States
      Past the Point of No Return Adventures in depravity are nearly always confronted with the unpleasant reality that stopping the degeneracy is much more difficult than starting it.  This realization, and the unsettling feeling that comes with it, usually surfaces just after passing the point of no return.  That's when the cucumber has pickled over and the prospect of turning back is no longer an option.   Depravity and bedlam through the ages. The blue barge of perdition in the...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com