Is the Fed Telling Us What Lies Ahead?
The Fed collects enormous bundles of data. It generates multitudes of reports. It sponsors dozens of academic papers. So the Fed can see what's coming better than you or I can, right?
Before you answer, please consider the following:
The Fed missed the stock bubble in 2000, prior to three consecutive down years for the stock market, the worst fall in prices to that point since the Great Depression. It did not think the stock market was overvalued in 2007, the year before the 2008-2009 greatest fall in stock prices within 12 months since the Great Depression.
The Fed said there was no housing bubble and that sub-prime debt did not pose a threat to credit markets. And so it missed the credit market catastrophe in 2007-2008, asserting, even as it was happening, that there was no problem.
So let's try again.
The Fed collects enormous bundles of data. It generates multitudes of reports. It sponsors dozens of academic papers. So the Fed can see what's coming better than you or I can, right?
Consider first what a person using their reason might conclude. Could such a person conclude that the Fed knows more than you or I? Could such a person conclude that the Fed knows, well, anything?
So where does this leave the Fed's decision to taper? Well, given their track record, I don't think we can conclude that such a decision was based on any particular knowledge or understanding of what the future holds. So the decision may be an attempt to "do something." Or it may be an experiment to see just how markets would react to the slight tapering they've announced. If so, they now know. Stocks are up, gold is down, bonds haven't changed much.
Or perhaps they believe they know something - whether or not they really do. In that case, they've reduced buying bonds, but will keep interest rates super-low for some extended - as in a really long - period of time (like what...forever?). Their actions would be saying that the economy has improved - but not much. So little that, in fact, the economy still needs cheap money that institutions can borrow at virtually zero interest in the hopes that such borrowed money will be "put to work" making or doing something - anything that will stimulate economic activity, even if it does add to the mountain of debt that still sits out there. In which case, the Fed believes that the threat of deflation still looms large.
But before you react in the least little way to what the Fed thinks or believes, rely on your reason and I think you'll see that you'd be reacting to a group of folks who over and over have demonstrated that they really don't know either what's going on right now nor what might go on in the future.
If you're a trader and you're responding to the Fed's actions, I get that. If, on the other hand, you're a long-term investor looking for some special insight to help you make a decision regarding how to allocate your assets, then you'd probably be best off turning down the volume on your "Fed-speak" receiver and get on with your life as if Bernanke and/or Yellen weren't even in the room. Turn off the Fed, turn on some good music to help you relax and think. That's the only reasonable thing to do.
Before you answer, please consider the following:
The Fed missed the stock bubble in 2000, prior to three consecutive down years for the stock market, the worst fall in prices to that point since the Great Depression. It did not think the stock market was overvalued in 2007, the year before the 2008-2009 greatest fall in stock prices within 12 months since the Great Depression.
The Fed said there was no housing bubble and that sub-prime debt did not pose a threat to credit markets. And so it missed the credit market catastrophe in 2007-2008, asserting, even as it was happening, that there was no problem.
So let's try again.
The Fed collects enormous bundles of data. It generates multitudes of reports. It sponsors dozens of academic papers. So the Fed can see what's coming better than you or I can, right?
Consider first what a person using their reason might conclude. Could such a person conclude that the Fed knows more than you or I? Could such a person conclude that the Fed knows, well, anything?
So where does this leave the Fed's decision to taper? Well, given their track record, I don't think we can conclude that such a decision was based on any particular knowledge or understanding of what the future holds. So the decision may be an attempt to "do something." Or it may be an experiment to see just how markets would react to the slight tapering they've announced. If so, they now know. Stocks are up, gold is down, bonds haven't changed much.
Or perhaps they believe they know something - whether or not they really do. In that case, they've reduced buying bonds, but will keep interest rates super-low for some extended - as in a really long - period of time (like what...forever?). Their actions would be saying that the economy has improved - but not much. So little that, in fact, the economy still needs cheap money that institutions can borrow at virtually zero interest in the hopes that such borrowed money will be "put to work" making or doing something - anything that will stimulate economic activity, even if it does add to the mountain of debt that still sits out there. In which case, the Fed believes that the threat of deflation still looms large.
But before you react in the least little way to what the Fed thinks or believes, rely on your reason and I think you'll see that you'd be reacting to a group of folks who over and over have demonstrated that they really don't know either what's going on right now nor what might go on in the future.
If you're a trader and you're responding to the Fed's actions, I get that. If, on the other hand, you're a long-term investor looking for some special insight to help you make a decision regarding how to allocate your assets, then you'd probably be best off turning down the volume on your "Fed-speak" receiver and get on with your life as if Bernanke and/or Yellen weren't even in the room. Turn off the Fed, turn on some good music to help you relax and think. That's the only reasonable thing to do.
Comments