For Now

We return to the wisdom of Clemenceau: money is much too serious a matter to be left to the central bankers; meaning of course - the act of putting all at risk by relying on what Milton Friedman called “accidents of personality.”

What John Taylor said so well, most of us who do not live under a rock understand to be true: “The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself – i.e., the Fed determines the interest rate by declaring what it will pay on bank deposits at the Fed without regard for the supply and demand for money.  By replacing large decentralized markets with centralized control by a few…officials, the Fed is distorting incentives and interfering with price discovery with unintended consequences throughout the economy.”  Amen.

In this blog we have long called for a return to the single goal of price stability (the dual mandate is magnificently redundant) and a requirement that the Fed disclose their rule or strategy for meeting that goal, with regular checkups in front of Congress.  Others have provided perhaps even better anchors: see Woodhill from Forbes http://www.forbes.com/sites/louiswoodhill/2014/05/27/we-need-a-boring-monetary-policy/.

And close to home, Stanford’s Hoover Institution recently hosted a conference to discuss recommendations from over a dozen observers for a change to rule-based policy, and legislation that may well be needed to bring these reforms about.

But until that time, we’re stuck with this bunch of planners and their helter-skelter ways.

So, there will be no recovery, at least not of the variety most understand the word to mean.  By the simple act of sitting on their hands – our directive of two years ago (and one totally ignored) – the Fed and administration could have claimed a victory of sorts; now they are both guilty as co-conspirators in the tanking of the mightiest economy on the face of the earth and both, if the world was at all a fair place, would now be taking their meals through a slot (along with Paulson, BofA, Citi types and others of that ilk). That little that the US economy has accomplished is in spite of this bunch.


Robert Craven
 

US - Review, and Just Ahead

Key is to be prepared for the economic topography just ahead. Clients (and later, readers) understood that the nasty weather, Q1, provided camouflage, cover for a genuine wilt. Yesterday’s Q1 GDP revision (-2.9%) was then no surprise; we did not have the exact print naturally, but the risk of release.  Also yesterday through the Durables print, we saw that business investment has been flat, first two months of Q2.  From January readers have known that corporate risk takers would quail, and why.

We’re traveling, but frankly couldn’t help but crow a bit, hence this piece. Humility is not a handicap around this shop (but then flip side is that we also owe up immediately to what might turn out to be flaws in judgment).

Observers pretty much ignored the US Q1 tanking – ancient history. Well, sometimes such a mantra can work.  Not this time. Consumption was up 1% in Q1. Consumption will be lucky to break 1% in Q2, our view. No way Q2 GDP will break 2%.

The general flaw, the default in judging US activity for H1 remains the same as that we established for Q1 – any major surprises to be to the side of weakness, not vigor; or, to put that in a relative light – exactly the opposite of the anchor that has served so well regarding UK activity. Or to put it even another way:  everything about conventional wisdom right now, regarding the US, is ass-backwards.

We are off on a hike, down here in lovely Alabama, and no doubt we will encounter gators, water moccasin and snapping turtles along the way (and forgot rattlesnakes).


Robert Craven

 

Do Your Own Homework

The IMF and Lagarde - recently pilloried for a major miss on the UK.  That’s from the cheap seats.  Economists are not trained to forecast, so our advice is to leave her and the IMF alone; there is no room for complaints.

In the case of the UK, readers know very well what she and 99% of the rest left out – attitude.  We praised an “enlightened administration” a year back; this fetched a rash of cancellations from our leaf-leaning readers, and with some nasty emails to boot.

Well, it’s just too darn bad for this bunch - the willfully blind. 

One of the major reasons almost all missed UK vigor, and we did not – predicting the same repeatedly – is that they overlooked the obvious:  That would be expanding confidence, consumer and risk-taker alike.  From Lagarde: “We got it wrong. Clearly the confidence building that has resulted from the economic policies adopted by the government has surprised many of us.”  (The phrase “many of us” is generally added to punctuate the point that the forecaster had company, not the only fool on the block. That’s ok. Forgive this bunch.)

If there’s a lesson from this experience - one for us that represented a major highlight in our career - it is this: do your own homework.


Robert Craven