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Peter Schiff: The Embarrasment Of Fed Transparency

Tyler Durden's picture




 

Submitted by Peter Schiff via Euro Pacific Capital,

Over the past decade or so, "transparency" has become one of the buzzwords that has guided the Federal Reserve's culture. The word was meant to convey the belief that central banking was best done for all to see in the full light of day, not in the murky back rooms of Washington and New York. The Fed seems to be on a mission to prove that its operations are benevolent, fair, predictable, and equitable. Part of that transparency movement took shape in 2007 when the Fed began publicizing its Gross Domestic Product (GDP) forecasts, which previously (to the frustration of investors) had been kept under wraps. Most of the Fed's policy moves are tied to how strong, or how weak, it believes the economy will be in the coming year. As a result, its GDP forecast is perhaps the single most important estimate it makes.

So the good news for investors is that the Fed now tells us where it thinks the economy is headed. The bad news is it has been consistently, and sometimes spectacularly, wrong. Talk about the blind leading the blind.

In the eight years that the Fed has issued GDP forecasts in the prior Fall, only once, in 2010, did the actual economic performance come in the range of its expectations (referred to as its "central tendency.") And even in that year, Fed forecasters did not manage to put the ball through the goal posts. Instead it just hit the upright (the low end of its range: 2.5% in actual growth vs. a central tendency of 2.5% to 3.5%). In all other years the Fed missed the mark completely on the downside. The tale of the tape tells the story:

The biggest misses clearly came during the recession years of 2008 and 2009. The Fed clearly had no idea that trouble was brewing, or that the trouble would last once it started. In 2008 the actual growth came in 2.1% below the low end of its forecast range and 2.5% below the midpoint of its estimates. In 2009 it was 2.6% below the low end and 3.2% below the midpoint. 2011 wasn't much better, with the Fed missing by 1.4% and 1.7% for the same criteria. The rest of the years had more pedestrian misses of less than a percentage point. But it never really hit the mark, and it consistently overbid by a significant margin.

And while we are only a few months into 2015, it doesn't look like they will be on target this year either.

With first quarter growth at just a scant .2% annualized, the remaining three quarters of the year would have to average 3.4% annualized just to get to 2.6% for the full year (the low end of the Fed's range). Furthermore, the latest data, such as the spectacular increase of the trade deficit in March (to $51.4 billion, the largest month over month growth on record and the biggest monthly gap since the crisis month of October 2008), and today’s report showing the largest consecutive quarterly decline in productivity in more than 20 years, will likely force a downward revision to Q1 GDP. With April data looking even weaker than what was seen in February and March, a strong second quarter rebound, like the one seen in 2014, seems increasingly unlikely. In other words, good luck getting to 2.6%. But even if we do get there, it is no cause for celebration. 2.6% growth would be indicative of a struggling economy (recall that for the 20th Century, annual growth averaged well north of 3%).

In the seven full years since the Fed brought rates to zero, and at times showered the markets with trillions of dollars of QE cash, GDP growth has averaged just 1.1%. Even stripping out the recession years of 2008 and 2009, to focus only on the five "recovery" years of 2010-2014, gives us an average GDP of 2.2%, a rate that has been below the central tendency every year. 

So what do we make of this? Are Fed economists just horrible forecasters? And if so, why not hire others who more competent? Or is something more troubling going on? The most benign explanation is that they simply failed to anticipate a string of unfortunate events that have supposedly prevented a real recovery from taking hold. First it was the European debt crisis, then it was the high energy prices, then it was Syria, then Ukraine, then the Polar Vortex, then it was the low energy prices, then it was the European recession, the strong dollar, and then another bad winter. Apparently, unbeknown to Fed forecasters, the world is a tricky place fraught with economic, political and meteorological crises. But hasn't that always been the case?

A more troubling possibility is that the Fed simply doesn't understand how its policy tools really impact the economy. It expects that zero percent interest rates and quantitative easing will stimulate aggregate demand, encourage consumers to spend and businesses to hire, thereby initiating a virtuous cycle that will propel the economy back to healthy growth. Since it believes its medicine will cure the patient, it builds a favorable outcome into its forecasts, which biases those forecasts in an upward direction. Based on that assumption, it's a bit of a headscratcher to the Fed as to why the economy has failed to deliver as expected. So cue the long litany of excuses.

But what if that's not the way it works?  What if, as I have argued many times, that stimulus in the form of zero percent interest rates and QE bond purchases, act more like economic sedatives than stimulants? What if, as I have argued, that these crutches prevent an economy from finding the solid footing needed to build a real recovery? This would explain why we have failed to recover after seven years of policies expressly designed to spur recovery.

A more sinister possibility is that the Fed is not really forecasting at all but cheerleading. The fact that all its forecasts have missed on the high side reveals that its misses may not be random. If the Fed were just wrong, one would expect some of its forecasts to be too low. An obvious explanation is that the Fed may be using its "forecast" to talk up the economy. By forecasting strong growth, the Fed may be hoping to engender optimism, with more spending and hiring hopefully to follow. Kind of like a field of dreams recovery -- if the Fed forecasts it; it will come. Plus the Fed may be hesitant to issue a somber assessment of future growth even if it expects it, fearful that its forecasts become self-fulfilling as businesses and consumers cut back to reflect that forecast. If so, its economics "forecasts" would be in actuality just another policy arrow in its quiver, and should never be taken seriously.

Another inconvenient fact that needs to be ignored in the string of GDP reports is the consistently low inflation numbers that the Fed uses. Remember, to get a sense of real growth, the bean counters need to subtract inflation from the nominal figures. Now I have always argued that the CPI itself has consistently underreported inflation, but I have also explained how the Fed's preferred gauge of inflation used in the GDP report, called the GDP deflator, is consistently lower than the CPI (a trend that goes back to 1977). But the GDP report for First Quarter 2015 really kicks that trend into another dimension.

To arrive at the .2% annualized GDP estimate, the Fed assumed inflation was running at minus .1% annually (Bureau of Economic Analysis). With the exception of two quarters during the depths of the Great Recession (2nd and 3rd Quarters of 2009), we have to go all the way back to the First Quarter of 1952 to find a negative deflator (BEA). If positive inflation data had been used, growth in Q1 would have come in negative.

Based on what we have seen thus far in the year, fantasies about a 2015 recovery should be evaporating. But, as of March 18, the Fed continues to hold to 2.5%-3.0% GDP forecasts and tangential assumptions that rate hikes will begin the second half of this year and will continue throughout next year. (A February 12th survey of economists by the Wall Street Journal shows a consensus 2.2% Fed Funds rate by year end 2016). With these assumptions baked into portfolio dispositions investors risk being caught wrong footed when the ugly truth is finally accepted.

 

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Wed, 05/06/2015 - 21:10 | 6067671 Creepy A. Cracker
Creepy A. Cracker's picture

Peter Schiff is correct. 

Wed, 05/06/2015 - 21:19 | 6067696 XqWretch
XqWretch's picture

Yep, batting 1000 as usual

Wed, 05/06/2015 - 21:25 | 6067714 mvsjcl
mvsjcl's picture

"The Fed clearly had no idea that trouble was brewing..."

 

Not correct about that. To think that the Fed "doesn't know" is laughable.

Wed, 05/06/2015 - 21:28 | 6067725 MarketAnarchist
MarketAnarchist's picture

The fed is an abstraction and thus can't know anything.  There are many hundreds of people who work for the fed and know varying amounts of things.

 

all groups are made of individuals, remember...

Wed, 05/06/2015 - 21:45 | 6067781 stocker84
stocker84's picture

Peter Schiff... talk about the pot calling the kettle black. The only one worse than the fed with market forecast the last 7 years is Schiff.

 

Market antichrist err anarchist whatever... Remember what? What the F?

All groups are made of individuals?

 

Effin brilliant!

Effin brilliant, I say... Not your post, but your ability to post while inebriated. Brilliant!!  The best part is you insist that we remember.  how can we forget such brilliance.

 

Wed, 05/06/2015 - 21:56 | 6067805 mvsjcl
mvsjcl's picture

Yeah, I was going to retort, but... whatever.

Wed, 05/06/2015 - 22:46 | 6067937 gwiss
gwiss's picture

So who is "The Fed?"

Thu, 05/07/2015 - 06:11 | 6068434 MarketAnarchist
MarketAnarchist's picture

Peter Schiff accurately predicted the tech bubble and the subprime crash, and he will be proven right this time as well.

 

And by 'remember' I meant don't ascribe thoughts and actions to a concept without a concious like "the fed" or "democrats" or "china".   There are only individuals, and all groups are just the aggregate choices of individuals. 

 

I was paraphrasing Ludwig von Mises, asshole.

Sun, 05/17/2015 - 19:40 | 6104179 stocker84
stocker84's picture

No shit... Groups are made up of individuals. Rocket science, for you, it appears.

Meanwhile...

 

http://economicpredictions.org/peter-schiff-predictions/index.htm

Timing is everything!

 

 

Thu, 05/07/2015 - 00:21 | 6068163 TheFourthStoog-ing
TheFourthStoog-ing's picture

Is the Fed the all-seeing orb? 

Is it just one big conspiracy where everyone's in on it - including your own parents and siblings - except you?

Does conversation cease as soon as you walk up, then continue as you walk away?

Psst...someone's at the window peering in.

Quick, draw the shades!

Thu, 05/07/2015 - 00:54 | 6068203 Bazza McKenzie
Bazza McKenzie's picture

So, still listening to the voices in your head.

It's a pity they just talk gibberish.

Wed, 05/06/2015 - 23:34 | 6068043 Broken_Trades
Broken_Trades's picture

I would tend to agree.  He's been swinging the same since before the crisis.

 

What's the deal with Euro Pac Bank?  Anyone heard anything about this gold backed account stuff?  Read some not so flattering reviews online. Yet I am still attracted to this idea of a bank that holsd 100% deposits (even if they are witha  risky counterparty correspondant bank)  comments?

Wed, 05/06/2015 - 21:35 | 6067751 LasVegasDave
LasVegasDave's picture

Shhh, dont tell anyone, ZHers, but Schiff is a Yid.  Probably out flying one of sheldon's ZWO drones to hasbara island or Diego Garcia

Thu, 05/07/2015 - 02:31 | 6068280 JoJoJo
JoJoJo's picture

Schiff is a Yid in his own class - not  agreeing with the vast majority of left wing Jews on anything - politically, fiscally, spiritually . . . So what do lib Gentiles have to brag about?

Thu, 05/07/2015 - 04:31 | 6068352 Butterflying
Butterflying's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... www.jobs-review.com

Wed, 05/06/2015 - 21:18 | 6067685 ZerOhead
ZerOhead's picture

You had a $1.8T deficit in 2009... and a $1.4T deficit in 2010 in a $16T economy.

That amounts to about a 10% GDP stimulus for each of those years.

Yet they claim only a -2.8% GDP drop for 2009 and a 2.5% GDP increase in 2010. What would the GDP drop have been if the budget had been balanced on spending cuts of 10% GDP?

What am I missing here?

Wed, 05/06/2015 - 21:27 | 6067724 kowalli
kowalli's picture

What am I missing here?

you are believe that it was only a $1.8T deficit in 2009.

You can't tell that fed tell - truth here and lie there.

All words are nothing more than BIG LIE . Period.

 

Wed, 05/06/2015 - 22:05 | 6067731 mvsjcl
mvsjcl's picture

You're not missing anything, ZerO. The numbers are meaningless, as substantive as a will-o-the-wisp.

 

Actuall I should clarify: not completely meaningless, as those numbers are used to create the smokescreen which will obfuscate the true state of the economy. Moreover, these meaningless numbers are also used to dictate policy, and provide the talking heads with fodder with which to further lead you astray from the truth.

Wed, 05/06/2015 - 21:29 | 6067734 Seasmoke
Seasmoke's picture

2016. No one could have seen it coming. 

Wed, 05/06/2015 - 21:33 | 6067748 Oldwood
Oldwood's picture

Not a soul.

Wed, 05/06/2015 - 21:32 | 6067744 lester1
lester1's picture

Peter Schiff is sealing his legacy with his predictions. He always ends up being right.

Wed, 05/06/2015 - 22:28 | 6067900 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

I don't miss a Schiff podcast...

Smartest guy in the room.

Wed, 05/06/2015 - 23:10 | 6068009 lester1
lester1's picture

Same here. His podcasts are awesome to listen to.

Wed, 05/06/2015 - 21:37 | 6067757 flyonmywall
flyonmywall's picture

They aren't missing anything. They are paid liars to lull people into complacency, and separate them from their hard earned money for the benefit of the banksters.

This is pretty obvious. However, Peter Schiff can't say that, otherwise he would actually lose whatever credibility he has in the eyes of the paid-for-media. So he is reduced to basically calling them incompetent in a nice way. It's nice that he actually tries to have a voice, and sound reasonable. You can actually see it in his eyes when he does interviews, as he controls himself to the best of his ability.

I wish there were more people like him.

 

Wed, 05/06/2015 - 21:40 | 6067766 TheSilverJournal
TheSilverJournal's picture

Something more sinister is going on. The central planners must keep pretending that they can come off of the life support of QE and ZIRP. If they told the truth - that the economy is getting nearer and nearer to a hyperinflationary death and QE will not only never go away, but must continually be increased in order to keep the music playing - the world monetary ponzi would collapse immediately.

Wed, 05/06/2015 - 21:42 | 6067769 Oldwood
Oldwood's picture

Of course they are cheer leading. Their selling it. They recognize that there is absolutely nothing supporting our economy EXCEPT confidence. The house is on fire, the sky is falling, and the water is rising...but everything is fine, we're booming, nothing can stop us now.

They obviously do not believe in hell, otherwise I doubt they would be lying their asses off anything like what we all see them doing. Their predictions cannot be that wrong for that long and not suffer a critical meltdown in credibility....yet they persist. All because the media refuses to shine a light on them, but principally because, what we like to call our economy, is dominated by the financial industry, an industry that can only survive if they keep selling. Negative perspectives are death for them and they will fight that end if it takes down every living person on the planet.

Wed, 05/06/2015 - 21:45 | 6067779 ZerOhead
ZerOhead's picture

 Excerpts from 'The Economist' magazine 1988...


   In 1988, The Economist ran an article titled, ‘Get Ready for the Phoenix’, in which they wrote, “thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the late twentieth century.”

     The article stated that, “The market crash [of 1987] taught [governments] that the pretence of policy cooperation can be worse than nothing, and that until real co-operation is feasible (ie, until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.”

     Amazingly the author of the article adds that, “Several more big exchange-rate upsets, a few more stockmarket crashes and probably a slump or two will be needed before politicians are willing to face squarely up to that choice. This points to a muddled sequence of emergency followed by patch-up followed by emergency, stretching out far beyond 2018 – except for two things. As time passes, the damage caused by currency instability is gradually going to mount; and the very trends that will make it mount are making the utopia of monetary union feasible.”

 

Thank you for all your hard work CFR and Rothschild family members...

Wed, 05/06/2015 - 22:51 | 6067955 Oldwood
Oldwood's picture

See! See! I knew we were headed for Utopia! I just knew it!

Thu, 05/07/2015 - 06:41 | 6068453 RaceToTheBottom
RaceToTheBottom's picture

Always "In Transit".

Just never seem to get there....  HMMM....

Thu, 05/07/2015 - 07:58 | 6068583 Huh Reeeally
Huh Reeeally's picture

Precisely... more planned economic false flag events, more war, more (un)natural disasters and a much deeper pile of BS are needed to get the sheeple's attention.

Wed, 05/06/2015 - 22:27 | 6067899 Pancho de Villa
Pancho de Villa's picture

Where the Hell did the FED go? They're so Fucking "transparent" I can't even see 'em... 

Wed, 05/06/2015 - 22:32 | 6067910 MajorFall
MajorFall's picture

When the policies of the FED encourage companies to buy back their stock rather than invest in CapEx, nothng more is needed to be said...

Wed, 05/06/2015 - 22:41 | 6067921 texas economist
texas economist's picture

p { margin-bottom: 0.1in; line-height: 120%; }

Again, obsere the Fed accoring to how it functions rather than how it is assumed to operate. The Fed is carrying out a political agenda.

Government does not make economic decisions. It is incapable of doing so. The Fed makes political decisions and is not capable of doing otherwise.

A ten year old makes an economic decision in a candy store. He wants $10.00 worth of candy but he only has $5.00. The ten year old must economize and buy what he wants the most.

This is an economic decision and governments can only make political decisions. I imagine the Fed's forecasts have all been politically inspired so as to manage public opinion. Their forecasts seem to err consistently on the positive side. That is no accident.

James Quillian, Commonsense Economics, quilian.net

Wed, 05/06/2015 - 23:12 | 6068012 lester1
lester1's picture

Or he borrows the remaining $5 from his rich parents.

Wed, 05/06/2015 - 23:31 | 6068058 bearwave
bearwave's picture

They're going to need one hell of an excuse to go from expectation of rate hikes to QE4. Buckle up we're coming in hot!

Thu, 05/07/2015 - 00:05 | 6068123 kchrisc
kchrisc's picture

"Peter Schiff: The Embarrasment Of Fed Transparency"

I've never seen a transparent piece of shit either. Maybe the FedRes will perform a miracle in that regard?!

Liberty is a demand. Tyranny is submission.

 

Guillotine the Fed. Audi the heads.

Thu, 05/07/2015 - 03:46 | 6068322 Arnold
Arnold's picture

Porsche the heads may be more correct.

The rest of the rant makes sense though.

Thu, 05/07/2015 - 21:16 | 6071276 kchrisc
kchrisc's picture

Great comment on my faux pas.

Maybe Mercedes truck the heads?!

Liberty is a demand. Tyranny is submission.

Thu, 05/07/2015 - 02:34 | 6068282 JoJoJo
JoJoJo's picture

Must hear Schiff podcast at schiffradio.com

Thu, 05/07/2015 - 04:06 | 6068331 Batman11
Batman11's picture

Lesson learnt from 1930s depression:

"The only thing we have to fear is fear itself"

Hence, FED cheer-leading.

Lesson learnt from 2010s depression:

"If you keep lying no one believes you any more"

You can always learn from past mistakes, but there are so many new mistakes to make.

 

Thu, 05/07/2015 - 05:20 | 6068400 thegekko
thegekko's picture

I think the Fsd has been cheer leading for sure, and who knows, maybe CNBC and co are in on the whole cheer leading fix, hoping that if they repeat it often enough, the economy will follow.

Another question needs to be asked. Why was the Atalanta Fed the most accurate with their Q1 GDP forecast? How did they outpoint head office? What do they know?

And to the Schiff knockers, give the man a break. He's been more right than all the mainstream banksters & brokers, and deserves respect. He's out there telling the truth about the economy, like a handful others over there. We could certainly use a Peter Schiff type in Australia.

Thu, 05/07/2015 - 06:07 | 6068430 Zimscooter
Zimscooter's picture

but it begs the Q? where has all the QE gone? if it has served to inflate assets (QE) or enable share buy-backs (ZIRP) then that does "create more GDP". But briniging consumption forward is unsustainable so there has to be a limit to the useablility of QE. what is not in doubt is that so long as there is QE - stock markets should go on rising because there is no better hedge against monetary debasement than to be in stocks?   

Thu, 05/07/2015 - 06:12 | 6068436 q99x2
q99x2's picture

The FED is curtain behind which the enemy lies.

Thu, 05/07/2015 - 06:59 | 6068474 Midnight Rider
Midnight Rider's picture

So what exactly is the "wrong foot" investors should be trying to avoid? Is the direction of the market attempting to be forecast? And what is it? Is the assumption that the Fed will be "forced" into QE4 and thus the markets will rise? What about the possiblity that QE4 would actually bring about the long awaited loss of faith in the Fed and the market craters is the face of QE4, finally coming to grips with economic reality? The reaction of the market to these events is still not known. I would not be surprised if the loss of Fed faith scenario were to play out in any scenario, rate rise, rate not rise, QE4, not QE4. The economy is heading for a recession regardless of what the Fed does at this point. With it the market is likely to follow. The scenario of the economy in undeniable and utter recession and markets remaining at all time highs or beyond seems to be a bit much of a stretch.

Thu, 05/07/2015 - 07:01 | 6068476 Downtoolong
Downtoolong's picture

the Fed is not really forecasting at all but cheerleading

It's a symptom of Joe Lavorgna Syndrome. It’s common among economists who are born with birth defects, especially over-sized heads.  

Thu, 05/07/2015 - 07:34 | 6068542 Huh Reeeally
Huh Reeeally's picture

A good analysis by someone worth reading. The obfuscation of data by the Fed must be by design since they, along with the rest of the CB'ers, either sit on the board or are observers of BIS meetings every month. They know exactly what they're doing, destroying the economies of the world so they can save us all by introducing SDR's and consolidating their control of nations by allocating an annual budget to each nation. The loss of personal representation at local government and national levels has been a gift to the UN and globalists in general, shifting power to non-elected officials who certainly have no concerns about my interests or yours. The political agenda (agenda 21, Georgia guidestones, BIS promoting the Phoenix as world currency, those are obvious but the signs are literally everywhere) has been almost completely usurped and the economic plan is unfolding as intended. People still want to believe that the Fed are well-intentioned souls, striving ernestly every day to improve the lot of the average citizen, but just falliing ever-so-slightly-short EVERY TIME. I look forward to the next episode of Fed hand-wringing and bafflement at the economy!

Here in Canada we have a case (COMER vs Federal gov't. before the supreme court to return control of the CB to the government. There's a good chance this will prevail since lower courts sided with the people:

Therefore, we Canadian civil society organizations, who work for public welfare, call on our federal government to revive the powers of the Bank of Canada to provide funding to all levels of government in Canada, largely with interest-free loans, as was done between 1935 and 1975 with very low inflation, enabling our nation to break out of the Great Depression, to fulfill extraordinary responsibilities during World War II, and to prosper while building our infrastructure and highly valued social programs during some thirty post-war years. We Canadians now urgently need a renaissance of these powers of our Bank of Canada.

I dunno if this will help, but I'm thinking at this stage that it sure can't hurt any worse.

Do NOT follow this link or you will be banned from the site!