Notes From Underground: How Many Fed Speakers Does It Take To Make a Greenspan?

More than two decades ago, then-Fed Chairman Alan Greenspan said, “I know you think you understand what you thought I said but I’m not sure you realize that what you hear is not what I meant.”

It seems that the cacophony of Fed speakers on Friday accomplished what the so-called Oracle did by his own design .The headlines pulled out the narrative of the FED leaving a larger balance sheet and more reserves thus allowing for more liquidity in the U.S. financial system. Equity markets, bond markets and hard assets all experienced a sigh of relief and rallied in anticipation of removal of what Druckenmiller referred to as the double-barrel approach of FED tightening policy. Fed Vice Chairman Richard Clarida spoke about the FED‘s use of balance sheet and forward guidance dynamics as two exceptional tools the Fed used to combat the Global Financial Crisis. If policy was already at the “effective lower bound” the Fed may invoke a Bank of Japan-type policy of yield curve control (YCC) by capping the rates on longer maturities.

The BOJ’s YCC policy has not been effective in raising Japanese inflation and has created problems for banks and pension funds. So, hardly a success. The various Fed speakers provided a mix outlook on many issues that come across as certain in the media, especially the dependence on the Phillips curve for the FED outlook on inflation. If a flat Phillips curve is indicative of an obsolete model, we are left hanging.

The most intriguing Fed speaker was Simon Potter, manager of the System Open Market Account (SOMA) for the FOMC. Potter spoke about models only getting forecasters so far. The speech reiterated the book, “Superforecasting,” by Philip Tetlock, a topic I covered in a blog post of November 10,2016 after the U.S. presidential election.

It is refreshing when a Fed official calls to question the limits of forecasting for it challenges the media fabrication that central banks are all-knowing. Potter cautions: “So what can we learn from these non-technical superforecasters who outperformed the intelligence community? Tetlock lists a number of characteristics that generate individual diversity and maintain that diversity in team dynamic. My quick summary of these lessons is to be HUMBLE, ALWAYS QUESTION, LISTEN TO ALTERNATIVE VIEWS, and — very comfortingly for  Bayesians like me — ALWAYS EXPRESS YOUR FORECAST AS A DISTRIBUTION RATHER THAN A POINT FORECAST, and CRUCIALLY UPDATE THAT FORECAST WHEN NEW INFORMATION ARRIVES. Further, constantly assess why forecasts work and didn’t work,” (emphasis mine).

The markets place too much certainty on the work of the world’s central banks, which creates too much systemic risk as market sentiment is based on a consensus narrative  rather than in-depth analysis. This is why NOTES is a factor of 2+2=5.

***The news item of the weekend appeared in the South China Morning Post by Tom Holland titled, “As US Mulls Plaza Accord 2.0, China Should Learn From Japan’s Fate.” This article is timely as it comes on the heels of Friday’s announcement from Trump and Mnuchin that the Chinese agreed to not intervene to weaken the Chinese yuan. It’s a memorandum of exchange rates, although President Trump proclaimed he doesn’t like memorandums as they do not carry enough legal weight. The SCMP story maintains that, “well-connected sources in Washington is that in private, U.S. officials say they are aiming at something altogether more ambitious.” The idea is not for stability of the YUAN but appreciation in a redo of the famed Plaza Accord of 1985 and its success in appreciating the YEN.

The writer warns that if a deal is done to appreciate the YUAN, the Chinese authorities OUGHT NOT fight the appreciation by stimulating the domestic economy by lowering interest rates for that would only ignite a domestic boom. The Japanese are still recovering from the effects of the busted bubble and the deflation it left in its wake. The issue is: Have the Chinese and Americans agreed to some orderly appreciation of the YUAN?

There was another story over the weekend about Chinese Premier Li admonishing the PBOC for creating too much stimulus in the economy preventing any type of restructuring more credit to sustain what presently exists. The recent efforts by the PBOC to pump liquidity into the Chinese economy has resulted in global equity markets rallying as well as a sustained upward move in COPPER, GOLD, PALLADIUM and even PLATINUM closing above its 200-day moving average.

The recent moves by the PBOC, in addition to the dovish comments from the ECB and BOJ, have generated a renewed sense of central bank stimulus sustaining the global rally in assets. In following some of the speeches from Fed policy makers it appears that the FED does not want to get too far ahead of the other central banks so a pause is in order to keep the DOLLAR from rallying and causing any slowing in the U.S. economy. A too strong a rally in the DOLLAR would also cause problems for emerging market economies with vast amounts of dollar-denominated debt. What would be the outcome for a PLAZA 2.0?
This will have to be weighed going forward but the concept is not out of the realm of possibility for it is in the playbook of Robert Lighthizer, who learned from James Baker. It would also fit the need to move the Chinese economy onto a path of more domestic consumption orientation. The market is very short YUAN as the peddlers of doom have been warning of a financial collapse in China. Which road are we heading down?

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11 Responses to “Notes From Underground: How Many Fed Speakers Does It Take To Make a Greenspan?”

  1. Judd Says:

    The Gold has had 2 good trading moves telegraphed by the Yuan
    of close to $75. Are you looking for the Gold to decouple with Yuan strength or keep a bid tone?

    • yraharris Says:

      Judd—if history is any guide the stronger YUAN if it happens will make gold cheaper for China which I presume would lead to more buying ,especially in light of the concerns of Premier Li and many others about the explosion in credit growth–so I think GOLD will hold but it has overhead resistance at 1350-60 so it will keep knocking on that ceiling—-do quadruple tops hold?Waiting for all the high quality technicians that read NOTES for an answer

      • Don H Says:

        Agree with /GC potential resistance overhead. Buyers wld need to regain & hold their bid above 1340 for a run at those levels. As it stands, anything less and the machines take /GC South from here… 2cents

  2. raymack1999 Says:

    Good summary Yra. It is going to be an interesting week.

  3. ShockedToFindGambling Says:

    Yra- Good article.

    I think some of the rally in commodities is based on the probability that we are near the end of the business cycle.

    With the enormous debt overhang, the defaults in the bond markets will be overwhelming, and their will be a flight out of paper assets.

    The $USD will be the best major currency (or maybe 2nd best to the $CD), in a really bad world neighborhood.

    The longer the central banks try to hold things up, the worse the collapse will be, in my opinion.

    I guess there’s a chance we avoid a disaster….

  4. asherz Says:

    That quote attributed to Greenspan has been also cited as emanating from State Dept. spokesman Robert McCloskey almost 3 decades ago and also to Richard Nixon. But it sounds like the Master Obfuscator so let’s give him the attribution.
    Fed forecasting has been almost as good as the CIA’s record. We spend many millions on these departments but don’t get our monies worth. Personally, I like visiting with my local haruspex who examines the liver entrails of a sheep for me.
    The Trump meeting this week with telephone hairstyle Kim Jong-Un probably has more going for it than most anticipate. Why? If you don’t think that an unreported item in the China talks includes President Xi leaning on Kim, you’re missing an important component of these talks. Xi needs a deal, and has a deuce three to Trumps pair of nines. And how would you like to be Robet Lighthizer who had his MOUs publicly thrown out by his boss, bringing smiles to the Chinese. At least he won’t be given over to the Guillotine. You should see good progress in both these talks which will further embolden the algos. Nine straight weeks of Irrational Exuberance may have more to go. Debt, Shmet, that’s months off from meaning anything. FED, BOJ, EU are in the grasp of the markets and don’t even think of upsetting them.
    Who is the tail and who is the dog. December answered that one for Jay.

    • yraharris Says:

      Asherz—thanks for the comments as they are right on target.The FED,BOJ and ECB are caught in a trap of their own design .Lighthizer is a extremely competent negotiator and has a playbook –but the Chinese are not without their Trump cards.The market are definitely the dog and the FED has caved in a big way and can now stab the financial markets with the third prong of its self-imposed mandate—the global economy.Again,following Bernanke and Yellen,by employing enough variables we can never be wrong and we have the media to sell all the counterfactuals we need to appear prescient

  5. Chicken Says:

    According to Yellen, the FEDs goals are maximum employment and price stability. She neglected to mention foreign markets, smoke, mirrors and finger pointing.

    • Chicken Says:

      But she did mutter faintly something about an PhD in economics, or was that rocket science….

    • yraharris Says:

      Chicken—I am sorry but Yellen the labor economist who came to Chicago while Fed ChairWoman to meet with the unemployed—which I applauded as an act of moral philosophy —-couldn’t give enough credibility to the flawed Philipps curve in an effort to curb wage growth–but she did have the uber dove Lael Brainard rding shotgun for her—amazing how hawkish Brainard has become although she tempered it last week by invoking the global theme multiple times in her interview with Liesman

      • Chicken Says:

        I’m still convinced they’re paid well for their work, how else can the daily flip-flopping and atrocious track record be explained without leaving some doubt, certainly not incompetence alone? 😉

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