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Fed Speak & the WSJ
It doesn’t seem so long ago that every Thursday at 4 pm I would be
strapped in seat hoping for the best and fearing for the worst. Thursday
afternoon was when the money supply numbers used to come out. The
numbers moved prices, big. Think of how the market reacts to monthly
Non-Farm Payroll number today. Days both pre and post 1st Friday it
influences talk and markets. It was the same back then with the Ms.
In many ways if was even worse than the NFPs. The Ms came out 4 times a
months instead of just one. And the tape crossed on this exactly at 4pm.
There is no market to move size after 4. You had to dump something in
Asia or Europe. Often you had to wait to the following morning in NY to
find liquidity.
People made/lost fortunes on this. An outfit called Salomon Brothers had
a guy named Henry Kaufman. He was good with numbers, and had a real
handle on calling the headline. “Henry the K” would whisper in someone's
ear and the Brothers made a bundle playing both sides of the casino.
It got so out of hand that they changed the rules. They moved the
numbers to a Friday 4pm release. This of course was the worst possible
choice for guys like me. You had to wait the whole weekend to see how
things would work out. I lost a few weekends worrying about Monday.
Here’s the joke. These numbers mean next to nothing today.
They actually stopped keeping track of M3. Money supply is still
discussed, but the weekly numbers are a ho-mummer. Think of what a stupid fixation the market had at that time. We might do it again.
I bring this up because I do not believe in coincidences. Here is an example of a “coincidence” that should not be trusted. The first piece is that the Fed is releasing a statement at 2:15 Wednesday. The second is that Jon Hilsenrath wrote (another) article that give a very clear insight into the current thinking of Mr. Bernanke.
The bottom line on the Hilsenrath story is that Bernanke is pushing to
change monetary policy so that it goes on autopilot when inflation
exceeds or falls below clearly defined bands.
Bernanke is an academic. He wants a computer to define when to tighten
and when to loosen policy. That view fits in with his orderly view of
the world. Oh, that it were orderly.
Ben also wants to introduce this new policy as a defensive move. He
knows he is headed for a ton of criticism over QE. Both domestically and
internationally. To blunt that he will introduce Inflation Targeting (“IT”). It removes him as a decision maker, so no one can blame him for the consequences. Very convenient. Not unlike the new rules that make it impossible for the Fed to incur a loss.
The Fed statement should be, well, a ho-hummer. No changes to anything. But read through the language and I think you will find:
If you play poker you look for “tells”. Something that gives you a
better “read” on the other guy’s hand. Should we see some language from
the FOMC that confirms they are going forward with IT there will be two
tells. The first is that it confirms the cozy link between Bernanke and the WSJ. It will also confirm that Bernanke is calling all of the shots. Everyone else is just saying “yes”. (Look for no dissenters Wednesday. New Board = Yes Ben)
US monetary policy can’t be run by a robot. A pragmatic approach is required. Bernanke is shunning the Fed’s responsibilities. He doesn’t want the Fed to be accountable. Very convenient.
IT won’t work of course. It will drive the market nuts with every blip
up and down with every measure of inflation out there. Because the Fed
has set visible targets they will be forced to act. Failure to do so
would be very damaging to their credibility. But they will inevitably be
forced to act at precisely the wrong time and in the wrong fashion.
Just like they have done in the past.
The funny thing? 20 years from now someone will write about this and
point to the new street bandits that made a killing and conclude, “what a stupid fixation the market had”.
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so BK, is it a bet?
http://www.zerohedge.com/article/how-will-they-will-prop-stocks-after-qe...
Bruce, you are a magician! Great article--I love reading your stuff.
Just curious about poker. It seems like you could determine the probabilities mathematically of all the major hands, such as a flush, 2 of a kind with 3 of a kind, etc. Then you just play the probabilities and forget about trying to read faces. You could even program a computer to do that. Any poker players out there?
Last I heard, Shameful was working on a poker-playing algo. Talk to him.
:D
Thanks for both of replies, Orly.
Who is Ben Bernanke? A prophet? Is there anything he predicted, that really happen? Why anybody should listen to him?
Instead, take a look of what is he doing!
You have been listening every breath, every fart from Alan Greenspan FOR 19 YEARS. Did it help?
Auto pilot enables the flight crew to bail--and if the plan crashes, well, they weren't on board, in fact they are in their bunkers somewhere in South America, and that is all that matters.
Brilliant essay, thank you!!!
Bruce was it just me, or were you making some references to the book "Liar's Poker" in this one?
High Frequency Open Market Operations.
(d)
Perhaps his goal is to give himself and his compatriots time to "get out of Dodge" while the new sheriff in town, Algo, keeps an eye on things?
Switching metaphors - so the plan is now that the accelerator (infinite QE sessions to maintain liquidity) is nailed to the floor, we'll put a refurbished VIC-20 examining data in the rear view mirror to decide when to tap the brakes?
If you hold very still, you can here the sinister crackling laughter of the co-located HFT machines as their waldoes scan this headline.
barliman
Benlinology.
IT misses the point. They want a computer to 'set' the rate. And it's a foregone conclusion that Ben will keep the over-ride button by his desk. This is simply price-fixing by another means. They will ultimately create a system that reacts as they would have. If they don't like the results, they will find a reason to fix the price anyway.
The marketplace should fix the rate. Nobody needs Ben, nobody needs Fannie or Freddie, nobody needs Farmer Mac, Sallie Mae, etc etc.
"This is simply price-fixing by another means."
Oh, and another thing!
Just because you're running an algo doesn't make it infallible. Remember my old buddy GIGO? If the Fed were to input its bogus inflation numbers into the system, it wouldn't work anyway. That's not to say the robot doesn't work, though.
In that way, the Fed could also skirt around to getting any number it wanted simply by biasing the inputs. Of course, that's fraud...
/:
It's hard for me not to laugh at the idea. I mean, honestly ... if the decision making process is turned into an algorithm, when it produces poor results, then you naturally blame the creator of the algorithm. The idea that this would be very different (beyond the idea that the process then becomes rigid, inflexible, and unable to adapt to a complicated and ever changing set of conditions) from how things are now is kinda funny.
But I can see the attraction from the point of view from someone who thinks the 'economic science' behind such an algorithm would be absolute and infallible. This would be a kind of codification of the Fed's misperception of how things work, and their hubris.
"...unable to adapt to a complicated and ever changing set of conditions..."
That's most of the problem now, isn't it, that there are simply too many moving parts, too many cooks in the kitchen and too much outside influence? Take emotions and political pressure completely out of it.
They are talking about setting a trading range, so your rigidity and inflexibility idea just doesn't add up. It would be sort of like how you would put your hands beside the cricket to keep her from jumping away. Contained, not controlled.
Addo:
Besides, would it truly be hubris to admit that one doesn't have all the answers?
Would the computer set the trading range? I'm probably not understanding the basic idea, but I have the impression that BB would decide the secret trading range and then let the computer generate the loosening and tightening from that. But perhaps the idea is to create a virtual simulacrum of the Bernank, then BB could extend his arm across the void and touch the similacrum's finger tip to start the machine.
No, the formula is based on real GDP and its divergence from potential GDP. Economic potential GDP is a fixed idea, whereas real GDP is the variable. Insert both into the formula to get the proper interest rate setting.
If you were the FED and you KNEW that things were to become very unstable and unpredictable, wouldn't you start planning for it now?
Only 47% of Working Age Americans Have Full Time Jobs"The bottom line on the Hilsenrath story is that Bernanke is pushing to change monetary policy so that it goes on autopilot when inflation exceeds or falls below clearly defined bands."
So just have a robot run monetary policy? Why not? It's not like they can't override the decisions if they really had to.
In an article the other day, none other than ZeroHedge espoused the same concept, while calling Stanford's John Talyor the Fed's Rightful Chairman.
http://www.zerohedge.com/article/john-taylor-feds-rightful-chairman
The article quotes:
"Taylor's advice to GOP lawmakers: take away the Fed's discretion to set rates and make it follow a Taylor Rule, or similar recipe."
From WikiPedia:
"In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the U.S. economist John B. Taylor in 1993.
Hmmmm. Sounds like great minds think alike? Also sounds like this is a done deal...
okay Bernanke believes in inflation targets, he said so years ago. Now, suppose he gets behind the curve, under-inflating as it were? Does that mean that he has to over-inflate to revert his target to the mean?
No, it would be a simple if/then algo. Whenever the plan were implemented, the algo would adjust rates automatically. But just like running a robot on a trade, it does take more guts to allow the robot to run than to just do it yourself.
Perhaps the fear of losing control to a "machine" is the point Bruce is making about how it would never work. It would work, if everyone would just step off.
Think of it: no more political shenanigans the summer before the election; no more worries about Dr. Paul calling you out about monetary policy; no more FOMC "votes" on rates; nothing in the Fed minutes to ramp or tank the market in regard to rates; no more gueeswork.
Stick a robot on it and let it roll, I say.
:D
The problem is we'd be using similar data as that of the Global Warming, ahem, Climate Change, enthusiasts/acolites.
Start Menu --> Control Panel -->System-->
Option:
Crash Now
Crash Later
If IT, as you suggest, is true, will there be any question any longer that the Ben Bernank is the worst central banker ever?
Thanks for that Bruce. I don't really have any theory of the inside baseball involved, but the way markets are acting they are expecting rates to be moved up.
http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.J.Res45: