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"Lift-Off" Lies And The Fed's Reputational Risk

Tyler Durden's picture




 

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

Every Fed watcher’s favorite word these days is “lift-off”. As if the Fed’s first rate increase, whenever that comes to pass, is the ignition of some giant Saturn V rocket that will inexorably carry interest rates up, up, and away. Please. This is Narrative creation … really, Narrative abuse … of the first order. The next time you read or hear someone use the word “lift-off”, I’m begging you to remember Jim Mora’s classic press conference when he was asked about the Colts’ chances of making the play-offs, because it’s a dead ringer for what Janet Yellen is saying in her heart of hearts.

You think Yellen is thinking ahead to a rates lift-off? Really? The reputational risk and future payday risk associated with this first rate increase is astronomical for Yellen, much less a series of rate increases. Yes, wage inflation is slowly staggering up off the floor after being knocked unconscious for the past five years. Yes, it would be nice if the Fed were not scared to death of spooking the bond market (thank you, Captain Obvious … err, I mean former Fed governor and current BlueMountain millionaire Jeremy Stein). But the notion that we’re either off to the races in the real economy or that Yellen woke up on Monday with a political and personal deathwish to tell off the bond market is just ludicrous.

The Fed wants to raise short rates to put some bullets back in the exhausted gun of ordinary monetary policy, and that gives a totally different meaning to the notion of a rate increase today than in, say, 1994. Since when was the Fed concerned about getting in front of – gasp! – 2.3% wage inflation? No, the Fed wants to reload with conventional ammo before the next external shock or the next inventory-led slowdown, which is all smart and good and thoughtful, but they’re being forced to reload while the battle is still raging. That creates a very different decision-making and implementation path for rate increases than any historical corollary of the past 60 years, which means that any investment conclusion based on those historical corollaries is almost certainly a category error, the worst possible methodological mistake you can make. Sorry, but my crystal ball is still broken, and I think yours is, too.

Second, I want to call attention to the crucial distinction in logic (and gambling) between probabilities and odds. Will the Fed raise interest rates one day? Sure. There is a 99.999% probability that this event will occur over a long enough time period, in exactly the same way there is a 99.999% probability that a Triple Crown winner will materialize over a long enough time period. Is it profitable to attempt to predict when that day will materialize? No. The payoff odds associated with any specific meeting being THE meeting of the Fed rate increase will inevitably be poor, in exactly the same way the Belmont Stakes betting odds on American Pharoah (it kills me to misspell this word) and every other Triple Crown candidate over the past 35 years were poor. Why? Because when human beings pay great attention to any probabilistic event, they ALWAYS over-estimate the likelihood of that event occurring. This is one of the strongest findings in all of behavioral economics, and it runs rampant at both the track and the stock market. Over-estimated probabilities mean bad odds. To wit: just because American Pharoah won the Belmont stakes, and if you bet on him to win you were absolutely right, that doesn’t mean it was smart to make a bet at 3:5 odds.

I’ve got a lot more to say on the issue of investor attention, as it’s one of the most interesting areas of modern academic research on markets, but for now I’ll leave you with this. We will never know the approximately “true” probability of American Pharoah winning the Belmont stakes, because we can’t repeat the experiment a dozen or so times. What we know with near certainty, however, is that the expressed odds of 3:5 for the single experiment were worse than whatever the true probability might have been. What we also know with near certainty is that pundits LOVE infrequent probabilistic exercises like Fed meetings or Triple Crown races, and their attention magnifies investor attention in a profoundly unhealthy way. Why do pundits swarm like flies around these events? Because they are tautological exercises – without a repeated experiment, you can NEVER be proven wrong in your pre-race or pre-meeting assessment of probabilities – and that’s a great business model for them. Of course, that means it’s a terribly weak signaling model for you. My view: once you hear more than a handful of Missionaries arguing about any sort of well-publicized probabilistic event, whether it’s a horse race or an election or a Fed meeting or a jobs report or whatever, it’s un-investable. Run away. Far better to adapt to whatever the outcome turns out to be as part of a prepared strategy than to fling yourself from pillar to post in an attempt to anticipate an overly-examined, poorly-estimated, totally-gamed event. That’s not the sexy way to invest. It’s not the heroic way to invest. But if there’s one Epsilon Theory lesson that I never get tired of repeating, the Golden Age of the Central Banker is a time for investment survivors, not investment heroes.

 

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Wed, 06/17/2015 - 13:33 | 6206208 JustObserving
JustObserving's picture

Fed has a reputation?  

The you believe that the Nobel Prize Winner is a great leader and Hillary will make a great president and the Department of Homeland security is there to protect you.

If not for lies, Yellen would have nothing to say.

Wed, 06/17/2015 - 13:34 | 6206219 Hippocratic Oaf
Hippocratic Oaf's picture

Even a whore has a reputation.

Wed, 06/17/2015 - 13:37 | 6206224 y3maxx
y3maxx's picture

The usa will declare ww #3 asap

Wed, 06/17/2015 - 14:01 | 6206300 PRO.223
PRO.223's picture

Lift off??!! Are you kidding me? Lift off??!!!!! I can just here it.

Wed, 06/17/2015 - 13:37 | 6206226 JustObserving
JustObserving's picture

I doubt that is the reputation that Yellen was looking for.  But she has sold out to the interests of the 0.1% at the expense of the 99% more times than you can count.

No surprise that the 0.1% have more wealth than the bottom 90% in the land of the free today.

Wed, 06/17/2015 - 13:32 | 6206210 youngman
youngman's picture

What is the famous quote????

 

Wed, 06/17/2015 - 13:40 | 6206234 NoDebt
NoDebt's picture

The one about "if you can't figure out who the mark is, it's you"?

Wed, 06/17/2015 - 13:48 | 6206260 centerline
centerline's picture

Funny.  I started off writing a post with the same content.  You just know folks in the hot seats are starting to eye the exits here.  lol.  Whose gonna be the scapegoat?  My guess is that DC ultimately gets the spanking.

Wed, 06/17/2015 - 13:42 | 6206242 madcows
madcows's picture

Playoffs!?  Are you kidding me!?  Playoffs?!

Wed, 06/17/2015 - 15:17 | 6206587 Chipped ham
Chipped ham's picture

Times 100. Only one better was Allen Iverson about practice. 

Wed, 06/17/2015 - 13:46 | 6206253 Dr. Engali
Dr. Engali's picture

Get me a beer boy.

 

 

~Homer Simpson

Wed, 06/17/2015 - 13:33 | 6206213 Hippocratic Oaf
Hippocratic Oaf's picture

Mora presser was a classic!!!

Wed, 06/17/2015 - 13:33 | 6206215 centerline
centerline's picture

Pretty decent article.

Wed, 06/17/2015 - 13:37 | 6206228 H H Henry P P P...
H H Henry P P P Paulson's picture

Rates will be raised, stocks will correct 1%.  Rates will be cut back to 0, stocks will jump 50%.

Wed, 06/17/2015 - 13:44 | 6206246 Creepy A. Cracker
Creepy A. Cracker's picture

Yes, rates might be "raised" from 0.0% to 0.25%. 

That the U.S. economy after six years of extreme regulation increases still can't handle a 0.25% rate shows how bad the economy really is.  A "normal" 5% - we're a dead economy where paying interest on government debt is the budget.

Wed, 06/17/2015 - 13:47 | 6206258 ejmoosa
ejmoosa's picture

Rates will stay the same.

Other nations will cut.

Fed declares a "rate hike" relative to the others.

Market rises as you suggest....

Wed, 06/17/2015 - 13:40 | 6206232 Dr. Engali
Dr. Engali's picture

Come on old Yeller..... woman up and grow a pair. Raise the fed funds to 5% and call it a day.

Wed, 06/17/2015 - 13:41 | 6206240 NoDebt
NoDebt's picture

And then you can send me my sammich. 

Wed, 06/17/2015 - 13:44 | 6206249 Dr. Engali
Dr. Engali's picture

I'll gladly send you two if she puts this thing out of it's misery. It may be a radioactive sandwich, but it will still be a sandwich.  

Wed, 06/17/2015 - 13:43 | 6206245 kevinearick
kevinearick's picture

Old School Perspective

So, it’s all a big welfare program, for the majority, which wants to talk, supervise others and be paid for the privilege, and real estate is the by far the largest component, all trying to convince you that you need a hundred layers of management to tell you what needs to be done, based upon a theory of moron information advantage, skynet, demanding a share of the output accordingly.

And they have gone exactly nowhere, watching their standard of living fall, waiting to see where the next wind blows. Even Trump has been sucked into the gravity, talking about jobs with nary a word about work. He’ll find somebody. The enemy is always someone else.

For the few who may want some perspective, this is what my wife beats me over the head with every night, from Ray Meetmeinthemeadow in this case:

“Kindness happens when love acts.

Joy happens when love celebrates.

Patience happens when love waits.

…” you get the idea.

We have a pair of otters now, deer, seals with pups, all manner of birds breeding, and I expect a bear any day now, drawn in by the “eco-tourists,” and my wife is seven months pregnant, so why should I go to the city, to wade through drug needles, used condoms, vomit, and all manner of human waste, to get the city critters on their way, “99%” of whom want to hunt me down, tax me into the grave, and force my children into early childhood brainwashing, by an angry feminist, who is going to vote for Hillary, the $15M woman, promising equality by selling war to ensure the outcome, just another gang, with a female head?

Old School is just common sense. The majority is always hiding from nature, blaming anyone who doesn’t for outcomes, putting the poor in prison for being poor. A man needs a woman to have children, and a woman needs a man to provide for the future, but look to government for any answer you like.

Those computers are redundant, arbitrary and structurally embedded to feed climate variability, with a rapidly shrinking half-life. Good luck with all that, expecting to replace labor with a c-clamp and politicians representing entitlement babies pretending to be labor, without the common sense to get out of the way for their own grandchildren.

The feudalists are welcome to their lifestyle, of deficits and debt, until they try to impose their political correctness with Family Law on labor’s children, at which point you might want to be able to fix your own crap, or not. I won’t be the one standing in your way if you go to war; you will be looking at yourself in the mirror. Time is merely the distance between what you choose to see and reality, and the speed of light is far slower than what you are told to believe.

Labor doesn’t work for paper, shiny objects, or arbitrary numbers in a computer. Labor works for its children, which the majority cannot afford under any condition. Do really think that those surrounding you with surveillance, and interfering with your progress, stand a chance in the hell they occupy, or that there is any place left on this planet for the retreads to hide, should labor choose to unleash what it is capable of unleashing?

Be about your business, and leave the majority to lie in the bed it made, for itself. There is nothing going on in that skyscraper that you can’t see from the basement, if you look. Everything is wired back to the controller. All you need is a meter and a screwdriver. The rest is for show. That error code is the third point on a line, not the first. Don’t address the second derivative and expect a happy outcome.

Slave or master, employee or employer, in a circle of slaves and masters, make-work jobs all, is a false choice. And what they really hate about you is that you have one foot in and one foot a thousand miles away, because you did your homework, long before class began, early childhood programming right out of the womb, fitting for a cookie-cutter society, of artificial facades. Labor doesn’t care what the Fed does next, but the next point on the curve is +0675.

Government is never going to give you an incentive to work, to threaten the status quo. Look at the connections in the hash table, not the stack. Donald Trump is a far more serious candidate than most assume, because the real estate welfare state is being addressed, along with everyone’s role in the sh-show. If you listen, all the politicians argue about objectives, and none of them do anything. The doing is always up to you, so you may as well set your own priorities, and learn for yourself.

If a transgender can make a million on a reality TV show, why can’t a white woman be a black, to complete the circle, and what does that say about affirmative action, rights granted by the State?

Go to any big city. Order a part, go get it, bring it back, and look at it, and then calculate the real cost, after you have installed and replaced it three times. I don’t need a 3-D printer to make a plastic pair of pliers. I need a machine to reprogram the programmers, now that Virginia has made a shambles of public education, making it yet another piss-poor, economic-activity black hole. Security for those so made insecure is not an economy.

Global trade among thieves promising something for nothing, driving real estate inflation with the resulting artificial scarcity, is always a bridge to nowhere, but that never stops the majority from queuing up at the abutment, exchanging its children as slaves for a hovel, expecting you to do the same by law. Funny, children aren’t born chasing money, an accounting token, worth no more than the collection of thieves controlling it, in a peer pressure group.

Nixon was no outlier, and increasing the number of landlords in the ponzi didn’t make natural resource exploitation better, surprise. Education isn’t about the quality of the teacher; it’s about the quality of the student, and retreading corporate politicians as Albert Einsteins, with best business practice, is never going to produce a good result, except as a set of counterweights.

Wed, 06/17/2015 - 13:44 | 6206248 Miss Expectations
Wed, 06/17/2015 - 13:46 | 6206256 Sutton
Sutton's picture

Actually I don't think there is a 99.9999 percent chance the Fed will ever raise rates. The Republic will be dissolved and our national system replaced That's where we are headed

Wed, 06/17/2015 - 13:50 | 6206265 847328_3527
847328_3527's picture

Moar Banker Bonuses and Wall Street pocket-lining is all Yellen [and Congress] care about.

Wed, 06/17/2015 - 14:01 | 6206302 Mike Honcho
Mike Honcho's picture

That dude Yellen just Facetagramed her new bicep tatoo: money gun.

Wed, 06/17/2015 - 15:49 | 6206701 gcjohns1971
gcjohns1971's picture

It is too late to reload.

The new recession began this past winter.

The only hope was to gain some credibility, and save face.

 

When the down turn is seriously confirmed this fall...AND IT WILL BE...we're going to be off to the races.  But whether it will be a race to be out of the market or to keep up with the tidal wave moving out of dollars is anyone's guess.

Thu, 06/18/2015 - 01:23 | 6208221 polo007
polo007's picture

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=14001

JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore.

So the big question in the world of economics is whether or not the Federal Reserve will raise interest rates and end their bond buying program known as quantitative easing. Chair Janet Yellen will give a quarterly economic and interest rate forecast at a meeting between June 16th and the 17th. But what would her announcement mean for everyday people? Joining us to discuss all this and the man behind the Hudson Report is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

Thank you, Michael, for joining us.

JESSICA DESVARIEUX: So Michael, just briefly can you start by explaining how quantitative easing works, for our viewers?

MICHAEL HUDSON, PROF. OF ECONOMICS, UMKC: The Federal Reserve created $4 trillion worth of credit electronically on its computers when the economy was in trouble in 2008. It could have used this $4 trillion to write down the debts. It could have used it to spend into the economy and create sort of a recovery. But instead it gave all the money to the banks, and its claim was that if you give $4 trillion to the bank reserves this is going to help the economy, because the bank is going to lend more money to the economy and drive it in, $4 trillion deeper into debt.

This was a crazy idea. Here we were in a debt crisis, and the Fed said what the economy needs to cure the crisis and get employment moving again, is more debt. So the banks got the $4 trillion. And of this was so much money that interest rates were driven down to 1/10th of 1 percent on government bonds. And the Fed was lending money to the banks at 1/10th of 1 percent. So the idea was, the pretense was that now the Feds can lend mortgage money at hardly anything at all, and people can [bid] prices, house prices even higher. And that will save the banks from losing all the money on their liars' loans--the liars were the banks--on their junk mortgage loans. Or the Fed will lend the money to industry, and corporations will now say gee, we can borrow so cheaply that all we need to do is make maybe a three or a four percent profit, and we can hire enough labor to make people all fully employed again.

DESVARIEUX: All right, Michael. Hold on, hold on, one second. Now that the federal government though is talking about ending quantitative easing, also known as QE, who would be the winners and losers of this policy ending?

HUDSON: Well, in order to say who would be the winners and losers I have to say what happened when they did the easing. When they did it it drove interest rates down to, as I said, to a fraction of a percent, what did the banks do with the money? They didn't lend to industry to hire, they lent to industry to essentially arbitrage. They lent to corporate raiders to buy out industrial corporations, and they, most of all, they lent to companies to buy back their own stock.

So in the last, for this year alone, Standard & Poor's and other agencies guess that the winners are going to be the corporations that are going to spend over a trillion dollars in buying back their own stock. Because they can borrow so cheaply, why not buy back their own stock with interest rates so low.

So this trillion dollars is not going to be invested in new goods and services and production. It's not going to be invested in hiring labor. So who will be the winners? Well first of all, the pension funds have been complaining that interest rates are so low that they haven't been able to make enough money in their funds to be assured to pay the pensions that are falling due. The cities and states, California, New Jersey now, Illinois, are all saying wait a minute, we're so far behind in our pensions because we haven't been able to make the money, that we need higher interest rates in order to make enough money to pay the pensions. And the insurance companies have said, well, look, we need higher interest rates to solve the problem that we're making so little money securely that we promised to pay all these annuities, and we may go broke.

So in principle the whole idea is to help the pension funds, insurance companies and retirees make enough money to live on. That's the promise. But it's a false promise. It's just really the cover story. Because what's going to happen, as is so often the case, solving one problem creates yet new problems.

So look at who the losers will be if the Federal Reserve stops quantitative easing. Well for one thing, if they raise interest rates here--and when they say stopping quantitative easing, Janet Yellen really means let's raise interest rates and get them high again, as if that's going to help the economy. Well the first thing is if the United States raises interest rates that's going to push the dollar way up against the Euro, and most of all against third world and Asian countries. This means that countries that owe foreign debt, that's almost all denominated in dollars, especially to the International Monetary Fund or the World Bank, they're going to have to pay much more money in higher-priced dollars for their own currency. So this is going to aggravate debt deflation and defaults in third world countries.

Secondly, all of a sudden when they raise the interest rates, all this arbitrage that's been occurring to bid up the stock market, to bid up the bond market and to bid up real estate markets is going to be reversed. Because if interest rates rise, banks are not going to lend as much money to buy stocks and they're not going to make as much money to lend real estate.

So the economy's really painted itself into a corner. Nobody's able to win at this point, that's the problem with the economy. And in that sense you can say it's not that we really have a problem. We have a quandary. And a quandary is something where there isn't a solution. Mathematicians call this the optimum solution, or the optimum position. The optimum position is one where you can't make any move without making things worse. And that's the position the United States is in right now. This is as good as it gets, which is another way of saying it's all downhill from here.

DESVARIEUX: Michael, you don't see any way of us being able to get out of this sort of, debt deflation, this worst case scenario options here? Do we have any sort of options that allow us to kind of get out of this?

HUDSON: There is one way to get out of it, but it's, they're not willing to do it. The way to get out of debt deflation is you write down the bad debts. And this is what should have been done in 2008. As a matter of fact, when President Obama was running for election he promised to write down the bad mortgage debts to bring the mortgages in line with what people could pay. Well, right now you have a lot of interest on mortgages. You have a lot of principal coming through. You have a rise in defaults on mortgages because the debts are not written down.

And as soon as Obama was elected, Barney Frank went to him and said look, I've got the Republicans to agree and Paulson at Treasury's agreed we can write down the debts. And Obama said, I changed my mind, I'm not going to do what I promised. I'm appointing Tim Geithner as the bank lobbyist in charge of the Treasury Department, and he said we have to help the banks and forget the voters. And so the debts are not written down. If you don't write down the debts, the economy is going to have to use its money to pay down the mortgage debts, to pay all the corporate debts.

Let's look at these corporations that are buying their own stock, for instance. They say, well, look. If our stock is paying, maybe, 6 percent dividend, or 5 percent, or even 4 percent, let's borrow money from the bank and buy the stock. But now if the interest rate goes up, the stock market may fall easily by 20 percent. That's what people are so worried about. Whenever Janet Yellen talked about ending quantitative easing, the stock market takes a couple of hundred points' plunge.

So if the stock price goes down, say, 20 percent, then here are these companies that have borrowed to buy their own stock. And instead of making a two or three percent gain, the difference between the 1 percent they borrow at and the 4 percent, say, that the dividend rate is, all of a sudden they lose 20 percent and they're in trouble. They've taken a huge loss.

So all of this seeming gain, this sort of fictitious capital that's been created is going to be wiped out if you don't simply write down the debts. And because you, the government and the politicians, Congress, have all said we're assigning economic policy outside of the government, we're letting the Federal Reserve be the central planner, well, the Federal Reserve is loyal to its customers and its owners, the commercial banks. So basically Congress and the executive branch has said we're going to save the banks, not the economy. And saving the banks means you impose debt deflation on the economy, you shrink the economy. There's not going to be a revival in employment under these conditions. There's not going to be rising wages. And the capital gains that have been spurring the stock and bond markets, and the real estate recovery, are going to be reversed.

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