A Junkie
The Fed is a junkie. Like most junkies, this one tells us he is our friend, that he harbors only good intent and that he’s got the stuff to make us happy. This junkie explains his behavior through the exercise of “forward guidance.”
The Fed has made addicts out of banks, out of equity investors and of course, the US government-as-a-borrower; and while we’re at it, it’s made addicts out of S Africa, Brazil, India and other such credits.
This combination of dealer and addict can come to no good.
Background: The Founders understood the rule of law and how that concept should be imprinted over their Grand Document so that American citizens would freely function and prosper, without imperiling the rights of others. Everybody knows the rules. It worked. Now the world’s most powerful and most influential sovereign has ditched that same concept when applied to money and banking. No one knows what to expect next from government and Fed planners. There are no rules.
So the banks simply sit on their hands. Why not? As addicts they rake in a nice spread playing couch potatoes, doing nothing because 0.25% on their excess reserves seems just dandy.
Others take the next step and reject caution entirely. That means buying stock for your 95 yr old grandmother when you know darn well, or should, that she has no business in anything but TBills. But a 0.15% return does not excite, so discard discipline and look to the junkie.
And job creators? There has been no return to normal. My daughter’s family just moved to the South, so for fun we took a look at that market. The Atlanta Fed tells us that small-business job creation in its district is still 5% - 7% off the pre-recession level. Why? Uncertainty. Firms in that region reported there is more uncertainty now than when last canvassed in April, 2013. As a result, their 1) hiring plans and 2) ability to make business decisions are both restricted. And not just Fed-bred uncertainty we might add, but that spawned by our administration.
Now what for strategy?
In the broadest sense, look for “surprising” US weakness over the intermediate term, not surprising vigor. This will be within the US, and it will be vs other credits such as the UK and Germany. We may have a bit of both, but “weakness” will trump.
This is a crude guide to be sure, but still useful. And why will this be so? Because most world observers, the majority of analysts still expect a conventional US recovery; they look for an acceleration ignoring those key factors that have so far prevented it. “We’ll hit escape velocity pretty quickly now,” notes one analyst. No we won’t. We could, but we won’t. The issue of substance abuse encouraged by the Fed is one reason why.
Those most handicapped in understanding US economic reality, whether on Wall Street or the corridors of Washington, are those who lack scholarship; those who ignore lessons of history and economics; those suffering of Hayek’s “fatal conceit” – the conviction that planners, the anointed, are capable of driving the US economic machine. They are driving the machine alright, but it will be over a cliff.
Robert Craven
The Fed is a junkie. Like most junkies, this one tells us he is our friend, that he harbors only good intent and that he’s got the stuff to make us happy. This junkie explains his behavior through the exercise of “forward guidance.”
The Fed has made addicts out of banks, out of equity investors and of course, the US government-as-a-borrower; and while we’re at it, it’s made addicts out of S Africa, Brazil, India and other such credits.
This combination of dealer and addict can come to no good.
Background: The Founders understood the rule of law and how that concept should be imprinted over their Grand Document so that American citizens would freely function and prosper, without imperiling the rights of others. Everybody knows the rules. It worked. Now the world’s most powerful and most influential sovereign has ditched that same concept when applied to money and banking. No one knows what to expect next from government and Fed planners. There are no rules.
So the banks simply sit on their hands. Why not? As addicts they rake in a nice spread playing couch potatoes, doing nothing because 0.25% on their excess reserves seems just dandy.
Others take the next step and reject caution entirely. That means buying stock for your 95 yr old grandmother when you know darn well, or should, that she has no business in anything but TBills. But a 0.15% return does not excite, so discard discipline and look to the junkie.
And job creators? There has been no return to normal. My daughter’s family just moved to the South, so for fun we took a look at that market. The Atlanta Fed tells us that small-business job creation in its district is still 5% - 7% off the pre-recession level. Why? Uncertainty. Firms in that region reported there is more uncertainty now than when last canvassed in April, 2013. As a result, their 1) hiring plans and 2) ability to make business decisions are both restricted. And not just Fed-bred uncertainty we might add, but that spawned by our administration.
Now what for strategy?
In the broadest sense, look for “surprising” US weakness over the intermediate term, not surprising vigor. This will be within the US, and it will be vs other credits such as the UK and Germany. We may have a bit of both, but “weakness” will trump.
This is a crude guide to be sure, but still useful. And why will this be so? Because most world observers, the majority of analysts still expect a conventional US recovery; they look for an acceleration ignoring those key factors that have so far prevented it. “We’ll hit escape velocity pretty quickly now,” notes one analyst. No we won’t. We could, but we won’t. The issue of substance abuse encouraged by the Fed is one reason why.
Those most handicapped in understanding US economic reality, whether on Wall Street or the corridors of Washington, are those who lack scholarship; those who ignore lessons of history and economics; those suffering of Hayek’s “fatal conceit” – the conviction that planners, the anointed, are capable of driving the US economic machine. They are driving the machine alright, but it will be over a cliff.
Robert Craven
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