Previewing Tomorrow's Fed Announcement From A Game Theory Perspective

Tyler Durden's picture

From Ben Hunt of Epsilon Theory

Whatever It Takes

A few observations on what to look for in the language of the FOMC announcement tomorrow from a game theoretic perspective…

Ever since Mario Draghi ad-libbed the lines “whatever it takes” in his July 2012 speech in London, a speech that together with the equally fabulistic OMT program rescued Europe and the Euro from the clutches of Spanish and Italian sovereign debt woes, this has been the go-to phrase for any politician or central banker seeking to imply unlimited resolve in bringing the firepower of the State down on an unruly market. Angela Merkel and Nicolas Sarkozy immediately seized on Draghi’s line once they saw what a salutary influence it had … Barack Obama now uses the phrase in the context of everything from budget fights to immigration reform to community college funding … Ben Bernanke is much more reticent to use the phrase directly (he’s smart enough to see it as the psychological weapon that it is, a weapon that diminishes from overuse), but his words are constantly interpreted by the media as implying a "whatever it takes” stance. In fact, I’m hard-pressed to come up with a more prevalent  — or powerful — policy language meme than “whatever it takes.”

Why is it so popular? Because it works like a charm in the Common Knowledge game. Underpinning the CK game is a vast array of forward looking expected utility calculations that each and every one of us makes regarding our expectation of everyone else’s expectations of everyone else’s expectations. I know that’s a mouthful, and for some background on the mechanics of the CK game and Fed communications you can look here and here and here in prior Epsilon Theory notes, but essentially you’re playing what Keynes called the Newspaper Beauty Contest. The drivers of the CK game are public statements by famous people like Mario Draghi, and the expected utility calculations we unconsciously make in our heads are based on Who and What … Who is making the statement and how likely is it that he or she will deliver on the statement, and What is the likely impact of the policy if it comes to pass.

The power of “whatever it takes” is in the What. Expected utility calculations cannot handle an unlimited result, and there’s a little piece of our brain that goes on tilt when it tries to process that phrase, particularly if it’s being said by a powerful Who. That little piece of our brain returns a Does Not Compute result when it hears “whatever it takes” in a policy context, which leaves the rest of our brain floundering. Luckily for us, we have no shortage of media messengers who are only too happy to tell us what it means and repeat the message ad infinitum, because it makes those media messengers relevant and useful. And if they’re more relevant they can sell more newspapers or ads or whatever. Everyone wins!

So what does this have to do with the FOMC announcement tomorrow? There’s a lot of chatter out there that the Fed will hold off on a taper announcement, but will put some sort of limit on the overall size of this latest round of QE launched in September 2012. In other words, monthly purchases will continue at the current rate, but this will no longer be a QE-forever program. From a CK game perspective, placing a limit on the QE program is a more market-negative statement than a taper. This is what I’m going to be watching for tomorrow, along with whatever dovish (market-positive) language is inserted around forward guidance on rates. And then the battle for meaning and interpretation will be joined …

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TheFourthStooge-ing's picture

Whatever it takes... to drop it in the lap of Mr. Yellen.

flacon's picture

When should I buy SPY calls? Today or tomorrow?

idea_hamster's picture

So let me get this straight:

The Fed has not only "taken itself hostage" but now faces a "prisoners' dilemma"?

How many ferkakta personalities are we dealing with here?!  

This is worse than Blazing Saddles.

insanelysane's picture

The game ends when the sheeple decide that they need to do whatever it takes to stop it.

Stuck on Zero's picture

This is what everyone is hoping the Fed will say:

If you like your QE then you can keep it.


12ToothAssassin's picture

The problem with applying game theory is you think you know what constitutes 'winning' for the other party...

flacon's picture

> "The game ends when the sheeple decide that they need to do whatever it takes to stop it."

The insidious thing about this "game" is that the sheeple depend on the game NOT stopping, and the politicians and bankers also depend on it NOT stopping. The only people who want this game to end are those who are getting raped (ie, those who actually WORK for a living) and that category is getting smaller and smaller every day. 

It's a perfect perpetual system of evil. The only thing we can do is to QUIT OUR JOBS and stop paying taxes. But even then....  

Ban KKiller's picture

Quit SALARY jobs. Go straight commission on the sales of your product. Too honest for most folks. Pay only the taxes you have to tax for example. Gasoline tax is another. Buy less....

And, for those that study history, keep buying silver all the way down! There will be a reset...someday. 

HoofHearted's picture

Going underground is about the closest I can get to going Galt now. But I'm working my way in that direction...

Oracle of Kypseli's picture


They are gonna be watching the futures and the options and act accordingly. It's a bloody and deadly game of deceit, scizophrenia, ego, greed and hate. They will drive the country to ruins than accept defeat. THEY ARE CHECK MATED! 

ZH Snob's picture

the word taper, like drone and depression are to be avoided at all costs.  people have associated too much truth to them to be of use to the framers of our reality.

LawsofPhysics's picture

More true than ever -->  when fraud is the status quo, possession is the law.

Hedge accordingly...

idea_hamster's picture

"... possession is the law"

So like Mabus-style possession?  Long holy water?

LawsofPhysics's picture

more like physical assets of real value and a dependable, well armed, tribe...

Headbanger's picture

I agree on an individual basis but a "dependable, well armed, tribe..." also needs good leadership which is woefully lacking these days.

StychoKiller's picture

Remember the Golden Rule...

cora's picture

Records amounts in buybacks followed by a taper/limit? Sounds about right.

SmittyinLA's picture

they will head fake taper then not and front run their own strategy and keep the profits offshore

fijisailor's picture

Taper propaganda will work until it doesn't.

csmith's picture

"...placing a limit on the QE program is a more market-negative statement than a taper."


What? All "limits" are self-imposed and made to be broken/retracted anyway. As the great Rosanne Rosannadnna put it, when it comes to limits: "Nevermind".

funthea's picture

+1 for the Rosanne Rosannadnna reference!

Cognitive Dissonance's picture

The game theory is simple. Heads I win, tails you lose.

<"What's not to like?" - The 1%.>

disabledvet's picture

Ukraine (see below) is all about "something other than war" as a way for power (and dare i say authority?) to change hands. and of course CD you're spot on....all Game Theory trends to selfishness. "and that's all there is to Game Theory." It ain't like the media is HQ'ed in Fort Benning. We're so far gone playing our part in our Vanity Fair in la-la land it's almost astounding empathy even exists as word anymore. nay...veerily "the Manichean Struggle must be broadcast as live and permanent!" when did just saying "hi, how ya doing?" let alone "can you watch my stuff while I'm away?" become "the ultimate sign of weakness and betrayal to the cause"?

Kirk2NCC1701's picture

Actually, TPTB like to use the game theory models and algos of Prof. BBdM (Bruce Bueno de Mesquita), which has been used by the CIA, State Dept  and conservative (Neocon?) think tanks.

They call him a Latter Day Nostradamus, given his rate of correct forecasts in the area of Political Science.  What probably makes him and his algos better than those of others, is that he avoids the GIGO effect, by being a much better interviewer/listener of the people who make decisions and who have influence on decision makers (stake holders).

It makes me wonder if he and his algos are also being used for the Ukraine situation.

H2 had a 2 hr. episode on him recently (last night), but you can research him on the usual places, e.g. Amazon, Wiki, YouTube.   And you might actually learn something (in another case of learning more from the Comments than from the Article).

icanhasbailout's picture

heads - BTFATH

tails - prearrange with big banks who will dump stocks onto pension and 401(k) sucker plans milliseconds beforehand in enormous volume that there will be "surprisingly" hawkish sentiment expressed, perhaps with an actual nominal taper of a billion or three, only to give those same banks the ability to buy everything back at lower prices for a week or so, at which point they dial everything back the other way again full tilt, resetting the pieces for another round of wealth-stripping

buzzsaw99's picture

the only way to win is not to play /wopr

dragoneyes74's picture

I figured out what will happen at FOMC tomorrow!


The dollar will either go up, will go down. 


I've been working on my communication strategies lately, so I hope that's clear.

If you feel it's a little vague, how about I give some guidance on the forward:

Respect the trends, but beware of Reversals!



Now that I've cleared that up, I'd like to use my special clearance to the press conference to ask Bernanke one question:

"Sir, Chairstan, sir, my 4-year-old niece recently said she, quote, sees bubbles everywhere, unquote.  I told her Priceline was trading at nearly $1200 and she fell on the floor laughing.  Since the Fed has a long track record of spotting and preventing bubbles before they mature, I was wondering, on this 100 year celebration of the stellar performance of your institution in its quest to raise the price of being alive, especially squashing the last pennies of discretionary income from the evaporating middle class in the face of structural employment problems caused by our inability to compete with China due to goverment imposed restrictiions on employment and unfavorable tax laws, and amid the collapsing mountain of debt in a well thought-out scheme of credit creation...what percentage of the US bond market are you comfortable extracting from the private sector before you feel the lack of high quality collateral could create potentially systemic risk and instability?  50%?  75%?  Being that you're a divine being with a magic chalkboard of all-knowing possible futures, I'm sure a Black Swan event could be spotted well in advance, so there will never be a need for collateral in a wave of interconnected bankruptcies as the reach for yield becomes a reach for assets, so...please, Sir, excuse my silly "theoretical" concerns and carry on with the flawless execution of your real-world plans.  I'm sure everything will work out like you expect it to."

"Oh, and...bravo, Sir. (saracastic golf clap)  Job well done.  Enjoy your retirement.  If the beach doesn't suit you, maybe a return to the classroom is in order.  I'm sure the students will appreciate your explanation of how you saved the world from economic collapse.  Or MAYBE you and Greenspan can write a book together and go on a magical mystery tour to a land of fairies and unicorns where free will doesn't exist and central bank interventions make sense."

ArrestBobRubin's picture

"Limits" on the QE program? Sure, sure, that'll last... I mean how's that whole Debt Ceiling Limit workin for us?

forwardho's picture

The Fed, Can. Not. Taper.

Taper = the Christmas crash of 2013.

No taper = The majical fantasy continues.

We live in a fed fueled illusion, they will not allow that illusion to waver.

Hindenburg...Oh Man's picture

I'll be watching Gold futures right before the release again. They've consistently (recently) reflected the "news" 7-10 seconds before anyone else. Keep an eye on /GC at 13:50:51



TheRideNeverEnds's picture

It doesn't matter what they actually say or the implications, the market will go substantially and dramatically higher so quickly that if you blink you would totally miss the move and even if you have your eyes open and trained on the screen your brain would not process what is happening till it is over.   Hell your screen couldnt render it before its over even if you were plugged directly into the exchange and standing on the floor.  


One thing is for sure, we are closing the year above 1800.  You just have to close your eyes and buy em here.  

chaartist's picture

Maybe they will announce new virtual currency and creation of millions of new jobs delivering electricity where power grid fails to finalize grocery store transaction in old fiat.

Clowns on Acid's picture

End of Year liquidity issues will mean that the Fed cannot taper in DEC. Will probably taper in JAN. PMs get bid as no taper in Dec and Draghi no limit / no sterilzation of revenues fro bond auctions begin to trelease the inflation Krakken.

TWSceptic's picture

To get to the truth you have to ignore what the fed says and look at what they do. Their job is not to explain with clarity what's to be expected, it's exactly the opposite. It's astonishing how many people keep struggling with this.

Kirk2NCC1701's picture

The "brains" at the Fed do not remind me of any PhDs I know.

Rather, they remind me of Jr. High students, using linear equations like PV=nRT from physics & chemistry.  Except that in their case, they use...

[1] MV = PQ


   M = Money Supply (QE games)

   V = VoM (Vel. of Money, i.e. Vel. of CURRENCY, dammit!)

   P  = Price Index (Inflation)

   Q = GNP Growth

The Fed seems to play with M and give it to Wall St and the Top 5%, in the hopes of a Trickle-Down effect they might create with their VoM games, until it hopefully increases the VoM of the masses and thus lead to an increase in GNP Growth.

Well, that seems to be their theory and the level of their 'calculus'.  Given their reduction of complexity and dynamics of the Real World, to such an over-simplified and interventionist state, should not surprise us to the outcomes we see: 

Moar Trickle ON than Trickle Down.


Withdrawn Sanction's picture

You seem to have fallen into a trap.  The trap is the implicit assumption the Fed wants to increase GNP growth. 

They do not, and more complex formulae will not help them achieve a goal they do not seek. I realise they SAY this is what they want, but watch what they DO, not what they say.

auntiesocial's picture

two scoops of bullshit and no taper please. hold the QE.

kchrisc's picture


Can we just stop referring to the FedRes' actions as a "game?" It's theft folks. Plain and simple theft.

Stealing peoples' deposits and counterfeiting "loan" money is theft.


"The FedRes works. The current condition of the US and the American people proves it.

evernewecon's picture



I like the counterfeiting loan money 

part cause it makes the bankers the

new (old) South.

It'll either work out for them and 

we'll keep planning our lives knowing

our good decisions are their good 

decisions when they need it.

Or, what's worse, it won't work out

for them, and though in the Civil

War brothers fought against each 

other, this time all brothers and sisters

will lose.

A fusion:


is a different path.  The latter two already

have a party and Warren has a large following.


 Had the likes of the attendees of

Woodstock been the deciders since

that event, Educ/Health Comparisons And An

Economy Not Dependent On Destroying

Its Own Habitat Would Have Been

Far Better/Existing By Now.  Saving For Retirement

And Making Good Decisions Would Not

Live At Sufference Of Privatized Policy.

Live Your Own Aims Fairly And Let Others

Yet Not Swayed See Your Happier State.


It may be more like a "game" though.

Cause the banks are the house.


Now the gold cos' stocks are in intensive



But I notice one prominent takeover 

attempt recently--Brigus Gold (BRD's.)


I can imagine someone in resources

and banking flooding the market with

his own product and then calling in loans

and/or buying his own competitors who

were enabled by his own loans to his own



And so I can imagine bankers following

that model of somehow sinking gold

so as to consolidate it.



Kirk2NCC1701's picture

I've borrowed from James Rickards in my above post 4254629 of MV=PQ.

The model that I like to use, has two opposing directions of flow of wealth and currency: 

Bottom Up flow of Wealth (real-world work, services and assets), and Top Down flow of Currency (fiat world of paper ‘assets’/confetti).  The masses transfer wealth up the food chain, and the elite/chose few send paper down the food chain.

If we represent these graphically, we get two triangles that demonstrate this effect:  The ‘normal’ triangle of Wealth (base at the bottom and peak at the top), and the Inverted triangle of Currency/Paper. à Triangle + Inverted Triangle.

But, since all Paper Currency these days is backed by… DEBT (i.e., the “PROMISE OF LABOR”**), an ever increasing amount of Debt corresponds to an ever-increasing amount of “Promises of Labor”.  IOW:  Paper Currency (from Club Fed & Friends) leads to a kind of Latter Day Bondage/Bond-age and perpetual Servitude.  Which means that we no longer have an organic Republic, but a paper Empire: a Government By, For and Of the Few, the Chosen.

Sustainable?  We shall see.  We shall see which we will get first:  American Spring (guillotines) or Agenda 21 being rolled out.  Plan, hedge and allocate accordingly.

** from Chris Martensen’s Crash Course

evernewecon's picture




The yield curve HAS steepened a little.

Who's leading whom, and if the market, 

how far ahead is it?


We could see a routing in mortgage

originations as happened in May,

making the early venturers happy; or,

the market may not flop, in which 

case, the longer buyers will be 

looking at possible upcoming loss of



That would yield the latest batch of

victims in the controlled monetary

market--not for anything a progressive

ever said.


I've known people who sold their homes

at the top of the market who bought

Icelandic Krone before they realized

those were high yielding from sales

of the bubble they just sold.  Some

have lost a lot in the stock market

despite the averages.


I personally think the real estate

market as a lot of downside still.

The aforementioned persons will have

spent some of the safe money that

flowed from their homes. 


In essence, it's: we have free reserves.

But now, you get a taste of a little

more income.


Nominal rates leave the banks themselves

little to buy but the adversity 

they created.  When will they exit

the latest bubbles, what's next

for them?


Short the bubbles?


That's what they did with the one

that created the financial crisis.





Definition Of A Market Top:

More People, With More Conviction,

With More Money Going In Than

Ever Was The Case In The Prior

Recent History, Are

Bullish.     And They're Wrong.

Definition Of A Market Bottom

More People, With More Conviction,

With More Money Coming Out Than

Ever Was The Case In The Prior

Recent History, Are Bearish.

And, They're All Wrong.






Now here's one.


Suppose they no longer need free

reserves.  We bought their inflated

mortgage securities.


If a rate rise doesn't hold, then

we're supposed to keep engineering

some new commerce till it does.


That is, keep coming

back for more, with both making good

decisions and saving for retirement 

held at sufferance for the next

time the banks need a liquidity trap.



Those who SOLD the bubble could have

cleared the market long ago, with 

borrowers enjoying non-recourse.

(Many could only rightly suffer

mortgage releases.)



Investing more in education/health/

higher ed scholarships/environmental

repair, and rationalizing the marijuana

distribution chain (can have oversight

of THC concentrations consumed along

time with flexible intrusiveness) 

instead of spending $100B's 

incarcerating instead of educating,

when there're many worse vices, if

that's a vice (it's a cultural item

in parts of the world,) would sell

more cars and houses by way of 



It would grow a peacetime economy

and a healthier population and landscape.


If the U.S. zips toward renewables, 

the Russians and Canadians can chart

destroying the Arctic, but we won't 

need the oil.




To First Nations:


You understand equality is sameness

of opportunity.  Birthright.

Respect for Earth shared.

That does not deny ambition or


I call it economy as safe amusement

park (the line is longer at the

roller coaster than at the bungee

jump.)  So that's competition but

without the oneupsmanship.

The latter cares less for what 

we share and is why our economies

are dependent on self destructive 



This, of course, is offered by myself

as only additive to European 


(Obviously the leadership would be

gender equal today.)