We can argue forever about how the Fed should do its job. And we can also argue forever about whether governments should control the money supply: If Not Ben, Who? If Not the Fed, What?
I find the latter most tedious because—debate it however much you like—that system ain’t changing anytime soon.
How about, instead, we stop thinking that the Fed has much or any ability to control the economy at all? Particularly in a globally interconnected system like now, why on earth do folks believe an institution like the Fed—ostensibly created to oversee and control commercial banking—would have the tools or ability to direct the larger economy? Because, if you do think that, then you have to ask yourself what kinds of tools the Fed actually has at its disposal to make the economy do what it wants. QE? Low short-term interest rates? Paying for deposits on reserve? These are great tools to control the fractional banking system, which admittedly plays a large role in the economy. But such things at best only obliquely address the wider economy.
We constantly read “is the Fed out of bullets?” It’s the wrong question—the Fed doesn’t even have the right kind of ammo in the first place and never has.
I’ve long argued in this space, on MarketMinder, and in my books, that markets and economies are CEAS (complex emergent adaptive systems). The recognition of this fact over and above the reductive mathematics of modern economics means also realizing the best way over time to create a stable, prosperous system is to allow it to form of its own volition. The Fed and its very small set of tools, and it’s very narrow mandate (stable prices and employment) are a poor place to look for savior or oracle. Certainly, metrics like the yield curve—its steepness and overall level—matter greatly to the economy. But I’ve always considered those things a function of whether the Fed was making a mistake in monetary policy rather than “making the economy grow”. The Fed can’t make the economy do anything, it can only set a few fairly narrow conditions (same is more or less true for the government). The rest is up to the economy itself (read: individuals acting of their own self interest).
But it’s also true that, though folks think of the Fed as an “institution”, and therefore generally unchanging and stodgy, it’s been one of the most dynamic and evolutionary financial entities of the last century. Particularly in the last 30 years, the Fed went from barely noted to holding press conferences on the economy and having its chairman show up on 60 Minutes (as noted here: Bernanke: Ready for His Close Up on 4/27.)
So, the public at large will keep looking to the Fed for messianic solutions, and the Fed will continue to evolve, particularly as a political entity. But don’t let that hype confuse you about what the Fed truly can and can’t do.
One of the things I’ve always found interesting is that, when folks attempt to describe investing history, they describe the “this time it’s different” investors as a priori, dyed in the wool optimists. That is, so much speculative folly resides in convincing oneself asset prices can’t go down for some newfangled reason.
That’s true! Investors do this in cycles pretty often. But few figure to ever contemplate the other side: pessimists constantly proclaim “this time is different” too—figuring out ways to convince themselves that valuations can’t go higher, it’s a new world of flat and falling prices, forever and ever, amen.
Right now, the pessimist “this timers” are prevalent: This Time, Our Economy Really Is Different
The Fed’s plan to “twist” its balance sheet toward longer maturity bonds is, to be sure, ill advised. To effectively flatten the yield curve in the name of keeping (ostensibly) mortgage rates low is bizarre. That’s because it’s more important to have a steep yield curve for general economic growth featuring at least somewhat non-distorted interest rates than it is to artificially try and prop up mortgages, as if that were the end all of the economy (it’s not).
Fortunately though, the twist isn’t the kind of negative that should derail the economy or the stock market. Much like QE2, the twist probably won’t have much effect, isn’t necessary, and raises the risk of problems like inflation down the road. But outside that, it should also prove similarly ineffectual as a negative. Those who view the Fed as Messiah will be disappointed, as will those who want to see this as necessarily bearish. One thing the twist might signal, though, is that the Fed is no longer willing to take huge new measures to be more accommodative—its balance sheet won’t grow, just shift, this time around.
Wow! Check these out:
- Obama Is Looking for Jobs In All the Wrong Places
- Not Taxes or Deficit, It’s a Lack of Lending
- Class Warfare Explains Obama’s Bizarre Tax Attack
- Why, and How to Tax the Super-Rich
- The Buffett Tax Is a Blast To An Ugly Past
- Buffett’s Fastball On the Buffett Tax
This is just from yesterday morning’s press. There is clearly a lot of bluster about the newest Obama plan. But forget your ideology for a moment and think like a rational investor who cares less about who’s in office and more about asset prices. On that basis, there’s not much reason to fret about the Obama plan—it is probably a lifeless corpse on arrival. Maybe some small pieces will make it into the final deficit cutting commission’s plan come November, but otherwise the plan will likely get zero support in the chambers of Congress. The part that’s hard to figure is Obama’s current political gambit—it doesn’t seem this plan (even its mere proposal) is likely to win him many centrist voters in battleground swing states. Then again, the election is still more than a year away, and much can happen in between.
For those interested in global energy, Daniel Yergin is a perpetual must read. His books have won numerous awards (with a new one due soon), and his latest essay from the weekend’s WSJ is also a worthwhile read.
For decades, advocates of ‘peak oil’ have been predicting a crisis in energy supplies. They’ve been wrong at every turn
According to the indisputable Wikipedia:
Reflexivity refers to circular relationships between cause and effect. A reflexive relationship is bidirectional with both the cause and the effect affecting one another in a situation that does not render both functions causes and effects. In sociology, reflexivity therefore comes to mean an act of self-reference where examination or action “bends back on”, refers to, and affects the entity instigating the action or examination. In this sense, it usually refers to the capacity of an individual agent to recognize forces of socialization and alter her or his place in the social structure.
This has long been George Soros’s way of viewing capital markets: a reflexive relationship between prices set on markets and the economy. He details all of this in his 1987 book—now considered a classic—the Alchemy of Finance. And, let me tell you, reflexologists seem to be everywhere now:
- Climate Of Fear Restrains Growth - John L. Chapman, Alhambra Partners
- Euro Banking Fear Feeds On Itself - Thomas and Schwartz , New York Times
- Obama’s Last Best Chance to Stop Downward Spiral - Tom DeFrank, NYDN
And this is just a smattering of what’s out there in the financial press currently. This is fine insofar as it goes: it’s logical and natural that both markets and the broader economy look to each other for signals. And it’s even a useful way of thinking about how certain trends can go on longer than most folks believe they should. But like all fine theoretical ideas, they can become overwrought.
The stretched out end logic of the reflexivity idea is what’s being bandied about today: that market signals are going to lead the economy into an inevitable, inexorable, death spiral.
Not only is this not true, it never has been. The stock market has pretty much always been a leading indicator for the economy, and basically never vice versa. Moreover, at some point or another every correction and every bull or bear market have reversed course, with the bulls winning over time in magnitude—that is, the death spiral notion is simply a figment of hyper-pessimistic views about the world right now.
I’ve always believed meteorology has been a good way to think about economic forecasting models. Simply, economists can, via statistical analysis, have some visibility on what might happen next, but the system (be it ecological or economical) is so vast and complex we just don’t have the models to know with precision what will happen, even in the immediate future. So, after the Irene panic over the weekend, we instead get headlines like ‘People assume we can predict everything’…; NYT: Experts Misjudged Structure and Next Move…; IRENE: A PERFECT STORM OF HYPE…, and so on. It’s not that the meteorologists did a bad job—they’re just limited in what they can do, and in a situation where lives are on the line they will err on the side of caution.
This is basically—almost precisely—how to think about economic forecasts. Are we headed for another recession? Maybe. My sense is probably not. But recent weak economic data don’t guarantee anything either way. Quarterly and monthly data especially is lumpy, and never moves in a straight line. So, you get a headline like this that surprised a lot of folks this week:
Statistical economic analysis in forecasting, even just a month ahead, is at this point a lot like meteorology—the system is too complex to predict with perfect accuracy.
Call me Pollyanna, but I’m more sanguine on the global economy than most right now. Here’s a grab bag of positives our team at Fisher Investments came up with that aren’t being widely considered in my view:
U.S. Census Bureau – RETAIL SALES INCLUDING FOOD SERVICES
U.S. Bureau of Labor Statistics (BLS)
U.S. Bureau of Labor Statistics (BLS)
The Conference Board, Inc
U.S. Department of the Treasury
U.S. Department of the TreasuryFederal Reserve, United States
U.S. Bureau of Economic Analysis (BEA)
These two headlines from Bloomberg, of course, are being mostly hailed this week as bearish indicators:
- European Economic Confidence Falls Most Since December 2008
- Consumer Confidence in U.S. Falls to Lowest Since April 2009
The irony! The 12 month periods after December ’08 and especially April ’09 marked one of the best times in stock market history to be invested. Simply, and this has pretty much always been true, sentiment numbers of all stripes tend to be at best coincident indicators, but are usually slightly lagging. That is, they have virtually no forward predictive power for the economy or stock market.
Readers of this blog know I have a long-standing beef with folks who believe we’ve been through an “era of deregulation” starting with Reagan/Thatcher, and ending ostensibly with George W. Bush’s presidency. I find this unfathomable, and earlier this year asked if there are any studies that proved such a statement.
Well, we have some evidence. Todd Bliman (a consistently excellent columnist over at Fisher Investments Marketminder.com) told me about this study: Susan Dudley and Melinda Warren from The George Washington University and Washington University in St. Louis recently published a report on US Regulators’ budgets. The simple reality is that, just about any which way you slice it, regulation has been increasing over the decades. In fact, from 1980 to 2012 regulation spending has more than doubled.
Check out the full report here.