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Why The Fallacy Of The Fed's Feedback Loops Has Failed - "The Bust Is Still Underway"
Submitted by Pater Tenebrarum via Acting-Man.com,
Bureaucratic Fantasies
As trained Kremlinologists we were truly baffled by yesterday’s FOMC statement. Yes, we know, they are eager to hike rates at least once, just so they can prove they can still do it, but the comments on the US economy in yesterday’s statement sounded as if the entire committee had just spent the past month in a submarine with a defect radio.
Here is a chart posted by John Hussman in his recent weekly missive, that illustrates US economic activity on the production side, a topic we have recently discussed extensively as well (see: “US Economy – Close to a Bust?” and “More Ominous Data Points” for details).
An amalgamation of incoming data from the Fed’s own district surveys via John Hussman
And just what 'improvement' and 'stability' The Fed sees in any US data is beyond us
As we have pointed out, in terms of total spending and output, the manufacturing sector is the US economy’s largest sector by far (even if it is just 13% of “GDP”). It seems therefore pretty clear that when its most important components are in the kind of free-fall normally seen only in recessions, that something is seriously amiss.
It does not matter what has caused this. It is not somehow made “better” by the fact that the only just beginning bust in the oil patch is one of the main triggers. After all, this is how all economic busts begin: the sector with the largest extent of malinvestment keels over first. Moreover, the fracking boom was the by far greatest contributor to capex and employment during the entire post crisis recovery, so its demise is bound to make waves.
You can compare the once gain relatively terse FOMC statement with the previous one with the help of the WSJ’s trusty FOMC statement tracker. What makes it so funny is that all words of warning or caution are gone – the US economy’s soggy performance is described as “solid”, the troubles in submerging markets, which exercised Mr. Draghi less than a week earlier, no longer even rate a mention. In short, it’s really bizarre.
Interest Rates and the Fed – Feedback Loop Confirmation
Mind, we are not making a comment here on whether or not the Fed should hike rates. We think it shouldn’t even exist, and just as the Fed cannot possibly know what the correct level of interest rates should be, neither can we. However, yesterday’s market reaction once again proved our contention that the markets and the Fed are in an observer-participant feedback loop, and that it is simply not true that the Fed “cannot influence interest rates” as was recently averred by Eugene Fama.
The degree of the Fed’s control is limited, that much is true, and there are situations when control can and will be lost entirely. However, most of the time said feedback loop undoubtedly exists. Below we show a chart illustrating the effect of the last two Fed decisions on the two year note yield:
The 2 year note yield is clearly driven by the market’s perception of future Fed policy. What is most astonishing about this is that people still seem to deem the Fed’s forecasts credible – in reality they couldn’t forecast their way out of a paper bag – click to enlarge.
Why are They Seemingly so Sanguine?
We have been wondering why the FOMC is showing so little concern when many US macro data – with the exception of lagging indicators (and even those have been weak of late) – are at their worst point in years. In fact, manufacturing seems to be approaching the dire situation of 2009. Furthermore, as we alluded to above, the bust in the oil patch is really only just in its initial phase. What is still to come is a wave of defaults, as oil hedges slowly but surely run off.
The only answer we can come up with is this: they are by and large Keynesians. Their focus is primarily on labor markets (a lagging indicator) and consumption, they aren’t concerned as much about the actual wealth-generating sectors of the economy. They are judging the economy’s performance in terms of aggregate data such as GDP, and in GDP accounting it appears as though consumption were 70% of economic activity and production (manufacturing) just 13%. The actual ratio in gross output terms is more like 35-40% consumption, 40-45% production (manufacturing alone!).
Conclusion
Should the Fed actually hike in December (the statement explicitly mentioned the possibility), we think it’s highly likely to become a “one and done” that will be taken back shortly, similar to the BoJ’s handful of attempts to hike rates after the bursting of the 1980s bubble. We say this simply based on the economy’s actual performance. After all, it took only a minimal tightening of policy (the “tapering” of QE3) to induce a bust in the sector most exposed to capital malinvestment.
This bust is still underway, and its downstream effects continue to spread. We believe it is highly unlikely that activity in other sectors of the economy will remain immune, especially given the fact that the economy is brimming with assorted debt bombs thanks to ZIRP (from corporate junk debt, to sub-prime auto loans, to the student loan bubble and the echo bubble in NINJA mortgages).
Note in this context that junk bond issuance has begun to stall out rather noticeably, which means that defaults are likely to rise noticeably as well – many companies in this segment simply don’t have the cash flows to service their debt and survive on “refinancing” alone. Needless to say, that’s a market segment that is not likely to be helped by an actual rate hike. This would actually be a salutary effect, but surely not from the perspective of the planners.
Oh well, at least the nasty asteroid is going to miss us. Besides, everything is awesome anyway!
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The only feedback loop I see is the bullshit loop. The FED spew BS, people suck it up, more BS comes out, they suck it, up and so on and so forth.
The BS meter is on 100%. Ne canna go any higher cap'n.
The 80s just called......they want Jimmy Carter and 20% interest rates back.
Remember when we could afford 20% interest rates?
Boy....wasn't that something?
1913 reasoning revisited:
Old: "We need to make the Fed a private institution so we can prevent monetary policy from being swayed by politics."
New: "We need to make the Fed a private institution so the Fed can sway politics."
They are private. Goldman Sachs owns it.
Put interest rates back where savers and others earn a fair return on their money....
Banks will lend with the higher rates....people wwill spend the interest income....economic activity will pick up..
but housing will get popped ....so whose gourd gets ground?
It is all a matter of who gets to spend the interest income...and right now the government is spending it...
by an arrangement set up by the Fed.
Why all the hyperventilating about a possible .25% interest rate hike? Is it to make it seem like a big deal and an actual normalization of rates when in fact it is hardly a rounding error on what real normalized rates would be (5-6%)? It's fucking meaningless from the standpoint of retiree's and/or fixed income folks being able to afford the future.
This is nothing and we shouldn't even give the FED the pleasure of watching us debate the merits and/or fallout from this move. The message that "we" should be sending is get back to us when you are serious about actually raising rates and stop talking about some piddlyass .25% hike as if it is significant.
We are playing into their hands by even discussing the significance of it. Whether they can do it or not is irrelevant, it changes nothing meaningful to the folks dependent on normal interest rates whether they do it or not. That should be the message.
NO! The country cannot limit the currency printing, and in so doing, allow someone to prosper by frugal business sense. NO!
We must all become profilate welfare recipients that spend every penny we get within the first two days of every month when the government checks are issued to enforce equality among the masses. Welfare from cradle to grave for all the world's feeble immigrant cretins. -------- EVERYTHING IS FREE IN AMERICA! COME AND GET IT! --------- And be sure and vote Democrat.
Everything is just awesome! And with just a little more hope, change and faith in the liberal America way, everthing will work out just fine.
Se habla Espanol?
Not only do all the immigrants need to be sent home to build their own market economies in THEIR countries, we should fasten the hangman's noose and try all these Democrats for wasting away our country's finances, encouraging illegal immigration and spreading dope around the country.
How many coke-snorting, crack-smoking and heroin-shooting people are there in Obama's Administration? Or have been appointed to the bench in our American legal system?
With interest high,RE principal super-low.
Sure it can. They just turn it up to 11.
Besides, I am all for busts that are under way.
(not so much under weight though....)
the Fed and their cheerleaders will remain bi-polar if for no other reason than their fear -and that of their handlers-of becoming irrelevant.
It's like a sponge slowly losing the ability to soak more bs.. eventually once that capacity is lost then the fed cannot spew further any more bs and that's when gold goes up
The rate hike is just the surface.
Looting the treasury is the real gig.
That will go on till the end.
Still got my WIN button .......
Why is it that so many of these 'experts' think that continuing to support malinvestment is going to improve the economy? The Fed can hike in December and I will expect very little change in the current rate of collapse.
"At this point, what difference does it make?" Registered republican, really.
It's a quarter of one percent, kids.
The Fed has only delayed the inevitable and will make it much worse when they reach the point of desperation and they will. Then fixing the blame will be the business of the day. They will never admit mistakes and will keep fumbling around until they can't. They will take us from a severe cold to pneumonia and beyond. They are my fear as their pride and ego may take us to point of no return instead of standing up now and declaring that they can no longer support a/their program that is taking our nation to its knees. America must take it's medicine now for tomorrow may be to late.
Just looked at,
http://www.dailyjobcuts.com/.
Seems like 1 or 2 people are being laid off and companies are losing a couple of bucks. The chance of a December rate hike grows with each passing day.
people are getting their jacked up "affordable care" notices just in time for xmas. this eCONoME is going to crash like a motherfucker.
the facade is crumbling
"the stock market leads the economy" bob prechter
"fed policy works until the perception of risk changes, which can be seen in market internals.." hussman
"government creates jobs.." hillary clinton
the fed is sitting on a big fat wad of inflation, when energy drops off the yoy comparisons. then they remove the accomodative policy and fracking and shale oil development collapse, energy prices normalize or rise. inflation is a proxy for economic growth. the challenge is to get money flowing into investment, not savings, which is why they jacked up the MM reserves, those MMs should reach the same speculative evcess they had in 2008 when they couldnt meet their NAV. the feds faux paux should send gold through the roof, because there is no investment out there, but there is inflation.