The Fallible Fed: 50+ years of policy "wrongness"
Tuesday, July 04, 2017 //
Those "experts"at the Fed are no better than "Joe Sixpack" at forecasting - but they are more powerful. What follows are 50 years of policy mistakes. How to preserve your capital based on the Fed's consistent "wrongness".
- "The pretense of knowledge". As some of you will recall, this is the Nobel prize speech of one of my erstwhile professors, Friedrich von Hayek. In it, he rails against forecasting, instead advising pattern predictions. Step in my Economic Clock®. But it does not seem like the "experts"at the Fed ever have bothered to read von Hayek's brilliant simplicity, instead sticking to the arrogance of ignorance, i.e. forecasting numerical values by driving with a rear-view mirror.
- Appalling policy track record. In the Financial Times of 3rd July, p. 8, Distinguished Senior Fellow of the R Institute in Washington D.C. (DC =. "Dysfunctional Capital", your author) , Alex J Pollock, recapitulated the Fed's policy mistakes since 1966 succinctly as follows: "Considering only the last half century, the Fed created the Credit Crunch of 1966, the Credit Crunch of 1969, and then the massively destructive Great Inflation of the 1970s, which led directly to the financial crises of the 1980s. Based on the 1990s, which included the dotcom bubble, in the 2000s, the Fed announced with pride that it was presiding over the Great Moderation, which turned out to be the Great Leveraging. After the collapse of the dotcom market, the Fed decided it needed to promote a 'wealth effect' by promoting a housing boom. It got the boom, which turned into the Great Housing Bubble. The Fed utterly failed to understand the dangers of this bubble, failed to forecast the crisis and failed to forecast the ensuing deep recession. It did indeed carry out the lender of last resort function assigned to it since 1913, but has gone far past this to purse more wealth effects by imposing negative real interest rates for the eight years since the crisis ended, thus expropriating savings and inducing new asset price inflations in houses and securities. Nobody knows where these will end, including the Fed."
- Investment implication. The biggest prize is that the Fed has been wrong consistently, which creates a track record of sorts. This "consistent 'wrongness' " suggests that the Fed will stick with its dogged adherence to the fallacious trade-off between tight labour markets and inflation (the "Philips Curve") and thus raise rates far too much, leading to a marked worsening of the Economic Time® come 1H18. The market will discount this by inducing a crash in 3Q17. Caveat emptor! Stick with the safety of short-dated government bonds as well as the stocks of consumer staples with a consistent dividend payout.