"Where does [The Fed's] confidence come from?" demanded Stanley Druckenmiller recently.
Grant Williams has an answer:
Their “confidence” comes from a series of academic models and a lifetime spent studying ntheoretical finance and then applying it to real-world situations, often with disastrous effect.
The day these people admit to themselves (let alone to the public) that what they have believed to be foolproof doesn’t actually work, is the day they render pointless their entire lives’ work.
The alternative to grappling with hard realities — in this case to continue waltzing down the path of Keynesian folly — is, sadly, far more palatable. Eventually, though, the markets have a habit of demonstrating, beyond any reasonable doubt, that natural forces are far more powerful than the whims of a few academics. And that is, I fear, what we are setting ourselves up for.
Elk Theories — observations which are not, actually, theories but rather simply minimal accounts — are commonplace amongst today’s breed of central bankers, and for the time being there are no obvious signs of their legitimacy being challenged.
But that could change in a heartbeat. Should all the Elk Theories currently being espoused (yes, Messrs. Carney & Kuroda, I left you out of this week’s edition, but I haven’t forgotten you) be simultaneously recognized for what they are, then we will see some fireworks.
If Yellen would stop clearing HER throat long enough, her own Elk theory would, I strongly suspect, sound like this:
This theory, which belongs to me, is as follows... (more throat clearing) This is how it goes... (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?
We are absolutely convinced beyond any doubt whatsoever that we can, through the manipulation of interest rates and the theft of savings, extricate the world from its growth-free, post-2008 malaise and at the same time extricate ourselves from our $3.5 trillion dollar balance-sheet expansion.
We are quite certain that we can manipulate headline inflation to exactly where we need it to be and that any aberration can be blamed on the weather without so much as a whimper from the investing public.
We believe that bubbles are impossible to see until they burst, and we believe that we have played no part in generating the bubbles which have periodically plagued the world over the last several decades.
We know beyond question that holding interest rates at artificially and ridiculously low levels for several years will have no ill effects on the economy whatsoever; and we can assure you, with the utmost conviction, that we will be able to complete the taper without any damage being done to the equity markets.
That is my theory and what it is too.
Like those of Draghi, Yellen’s theories are nothing more than minimal observations which hardly stand up to scrutiny but for the fact that she has stated something which IS true currently.
Full Grant Williams letter below...
