Kumbaya

Most of us understand that things as they exist today are the product of tinkering, the product of politics; that at the Fed (and the administration) the notion to simply refrain from further damage did not/does not register. Most of us understand further that a simple set of rules – Volker-style – would have had us on a smooth recovery long ago.

Kumbaya is not a market-crowd favorite. This crowd, like any other, understands only blunt trauma, applied force. Anything less telegraphs timidity; the market crowd reserves only scorn and rejection for Bernanke’s effort to apply a great big hug. This crowd is in need of the likes of a Ulysses S. Grant at Vicksburg or Ft Donelson and until it gets that is will continue to behave irrationally, violently.

When as a central banker you try to be a pal to the market, when you try to communicate as a friend, you get knifed.  For example, we know for a fact that Bernanke still cannot fathom the market’s reaction to his recent announcement. We can sympathize. It is tough to reason with a crowd (so don’t try it!). We recall at one point during Greenspan’s tenure when he was literally despondent, even near tears regarding the FI market’s reaction to a policy change  - a lift of 25bp’s, FF’s - that the market crowd judged an  act of timidity, not force, and then did exactly the opposite of what Greenspan intended it to do.

Some policy makers never seem to get it. To be effective, the Fed chair must remain aloof and detached. He must remember to set rules and to report to Congress twice a year on progress or lack of. But he must not tinker. He sets the rules of conduct (nominal GDP for example), then steps aside. Resources will find their proper home without his help.


Robert Craven
 

You're Not Alone Stan

We, along with the BIS and some others understand that market disciplines must be allowed to “discipline,” to operate in free form. Our caution to Bernanke (and Obama) in 2010 to please refrain from further intervention was ignored; that is a shame. We now have a rigged system; for example, Q1 GDP is revised considerably lower and equities erupt.  Too much.

The most generous thing that could be said about Bernanke is that he gave us borrowed time, but a time that has been mostly squandered.

The Fed acted appropriately, even splendidly early on. We were one of the first to say so. But this went to their head.  That is the problem.

No one individual, no planner can effectively direct resources in a modern economy. Picking winners is a loser’s game.  And so, we are now at a point where the end of this particular game may prove to be so corrosive, so disruptive, that we surrender all that we have tucked under our belt, so far this “recovery.”

At this center we generally convert economic insight to FI price change, and reveal a bit of that in this blog.  That has gone well past years but went very poorly the past month.

A friend forwarded this statement from Stan Druckenmiller (Stan – one of the best in the business): "It has become harder for me, because the importance of my skills is receding. Part of my advantage is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left.”

Well Stan, we’ll join you at the sidelines; just for now.


Robert Craven

Child's Play

Following April NFP, May/3, and that day’s debt sell off, our advice was to look to own US debt (after the dust settled) as we predicted that key releases just ahead would disappoint.  We also predicted that Fed commentary just ahead would not support the view for an early withdrawal.  Holy cow folks! Pickett’s charge comes to mind; we feel Lee’s pain just after.

But then we should have known better – the rules have changed. This is crazy-making; it is nonsense – the worse the economy looks for example, or may look, the better equities perform. Witness this headline in today’s financial press – “US stocks advance on stimulus bets ahead of payroll report….,” the story elaborating on what may be a weak report and extended Fed generosity.

Or is it “generosity” at all? By misdirecting resources; that is, by individuals directing resources at their whim, a rotten under-core begins to form in any economy once anchored by a rule-of-conduct. 

A freely functioning auction market has been replaced by a government sponsored institution.  Blockages form and eruptions result.  That is market violence – great for some street types but corrosive for the rest of us.

This is child’s play but the kids are armed and dangerous.


Robert Craven