FOMC Minutes - Theater of the Absurd

Today’s minutes:  It is bad enough to give up policy deliberations when as a policy maker, you follow some rule.  It is quite another to give up policy deliberations when you are making things up as you go along – the Yellen Fed.

Over the many years we have followed the Fed never once have we ever witnessed such a lapse in judgment; it was almost childish this mish mash called “minutes.”

We’ve disagreed, even to the point for example of triggering change at the Greenspan Fed (with the help of a few others).  But we have never ever looked at any of the membership, no matter what their point of view, as clowns.

This is painful to see and it represents the acceleration of a process - the shredding of the US central bank’s authority and dignity.


Robert Craven

 

Lesson Never Learned

Milton Friedman and Anna Schwartz demonstrated beyond a doubt, in A Monetary History of the United States, 1867-1960, that what was indeed a difficult situation in 1930, 31 was converted into an economic disaster by planners at the Fed.  “Mistakes…cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality,” Friedman concluded. (Bernanke admitted in front on Congress – “We did it.”)

Yet here we go again.

In the 60’s and 70’s Friedman felt that targeting the money stock was as good as any known tool at that time, to take the discretion away from Fed planners because to paraphrase Clemenceau – money is much too serious a matter to be left to the Central Bankers.

As it turned out, the aggregates were not the best target but then Friedman himself noted that we would improve as we moved along. “I do not regard my particular proposal as a be-all end-all of monetary management..,” he wrote in Capitalism and Freedom.  Our personal preference is a simple price target but whatever it may be We Need One Now.

Yellen and others like her are a threat to all of us.  We need a rule; we don’t need their opinion. 

Friedman: “Such a rule seems to me the only feasible device currently available for converting monetary policy into a pillar of a free society rather than a threat to its foundations.”


Robert Craven

UK - Full Speed Ahead

A Deloitte survey of CFO’s released today indicated that the risk appetite among UK financial types, Q1, 2014 was the highest since 2007 (survey period, 3/6 – 24).  Some 81% expect businesses to add staff, 80% predict higher capital expenditures and 95% expect more M & A.

Surprise? Nope. Not to our clients who had the UK “miracle” in hand when most looked for a double-dip.

In the UK we have an enlightened administration and a central bank which, although it has strayed in recent months, is still far more anchored than its counterpart in the US.

If these CFO types do moderate their plans it will not be due to domestic concerns but a perceived slowing in the US and resultant contagion from that event.


Robert Craven

US Economy Just Ahead

There will be disappointment just ahead.

We noted in an earlier post (Mar/5) that the weather provided camouflage.  Think about it – the awful weather was not a secret; naturally it provided a brake and so the weather was factored into economists’ predictions. You just slot it in. Easy. Still, the consensus missed weakness by a long shot during this period. “Must be the weather,” was the typical response. No, this was not the weather.  This was simply a miss of a genuine economic wilt, Dec, Jan, February, divorced from the weather. Hint: Private-service employment was weaker in each of the last 4 months than it was in the 9 months before that, yet these jobs are less impacted by bad weather than goods-producing jobs (goods-producing jobs added 25M in March, down from Feb).

Releases just ahead will conform to our view, and why not? The administration continues to provide hindrances to any real take off: Obamacare (see Apr/2 post), American corporate 35% marginal tax rate, higher minimum wage, EPA regulations; these and many more scare the pants off employers and risk takers alike.

Finally, we have a Fed which, after the high it received from its discretionary activity in ‘08 (some of which was needed) has now become thoroughly addicted to such behavior, refusing offers of rehab, let alone showing the courage to go cold turkey.


Robert Craven
 

What Fun

Today’s world market crowd reaction to the Mar NFP print is telling.  Under normal conditions, since observers know Fed policy up front (because it is rule-based) they can set up accordingly given real sector results. Just as there is a rule of law in this country governing personal conduct, there was, until it was just recently surrendered, a rule of law governing US monetary policy. But now observers must first guess the reaction of a handful of central planners to a key release and next guess just which sectors these planners will decide to favor this time.  Too much.

Marx, Engels and Bakunin would be greatly cheered.

Robert Craven

Regulatory Impact in Real Time

We often refer to the administration’s regulatory meddling as a retardant, a primary reason we linger. One need only glance at Obamacare and its impact to understand this point.

Since Sep/2013 health care service spending has increased on the order of 0.7% monthly (source – BEA) and most of the increase is due to rising out-of-pocket medical spending and higher premiums. A conservative estimate is that Obamacare has triggered a $250bl shift in household budgets so that medical services as a percent of consumer spending are now at a 24 year high, or 24.3%.  Last year that stood at 23.5%, a 4 year low.

This is likely the reason real consumption in Q1 is moving along at a meager 1.5% annual growth rate, the weakest in years.  From our friends at FTN Financial we see that some 80% of the increase in spending is going to health and insurance; consumption of the rest is growing by only 0.3%.

Retailers are paying the price for Obamacare. This is one reason that in past sketches we have debunked the weather excuse from the get go.


Robert Craven

Lost

Members of the FOMC are mortals, just like most of the rest of us (sorry Alan). No one says the job is an easy one. We don’t judge them on that. But members like it or not and for better or worse are anointed by the world markets; this is reality. Thus anointed, they should act appropriately.  That means - don’t give away too much of the decision-making process. When you do that as a central banker you learn the old rule all over again, and you learn it the hard way – familiarity breeds contempt. Volker knew this, Greenspan perhaps, but the rest – not a chance.

Yellen has so far proven to be everything we felt she would be – a failure. In a few short weeks she has taken the Fed out into the desert and she/it will wander there, lost, for perhaps years to come. 

The job at the FOMC is tough, yes, but then to undertake new endeavors for which one is thoroughly untrained is simply foolhardy. When academics attempt to reason with the market crowd, they are 100% asking for trouble. They never get it right.  And then when after their first stumble they try again and over-correct, they make a mess.

Ah, so many lessons unlearned by these elites, it boggles the mind.

I could go back home tomorrow to the family ranch/homestead in the California Central Valley, and throw a dart and hit a neighboring rancher, any rancher, then take that rancher and sit him down at the Fed and that rancher would put us on a trajectory to economic health because that rancher, like most of his kind, knows when to hold still and when to shut up.

Yellen tried to communicate with the crowd; she got a response she did not expect and so yesterday she tried to set the record straight. After scaring the pants off the herd on her first attempt, Ms. Yellen yesterday promised to keep rates low for a long time. She even trotted out individual stories in good ‘ol Queen for a Day https://www.youtube.com/watch?v=0YW-uv3Ibm8  fashion. There was one Jermaine Brownlee, part time plumber now full time body lotion person. There was a Doreen Poole and finally a Vicki Lira, a printing plant worker who lost her job when the plant was closed (What? A plant closed?).

None of these experiences were unique to a free society where things do change, nor were they at all instructive.  Two of the stories however were entertaining as it turns out Brownlee was convicted recently of heroin possession and Poole was convicted of felony theft.  I see.  Maybe that’s why employers are not all over them.

First, Yellen makes the mistake of trying to embrace and appease the market crowd. Then to prove to all non-believers that she has done her homework, she throws up criminals as examples of victims of the US economic machine. 

We are lost.


Robert Craven