Markets Become Backward Looking
As we have previously argued, financial markets don't 'know' anything, especially close to major turning points. Conventional wisdom eventually almost always turns out to be dead wrong, and quite often the valuations that are accorded to securities strike one as absurd in hindsight, even if one only considers what was already known at the time when these prices were paid.
What has become especially notable in recent years is the extent to which financial markets have become dependent on central banks and have begun to mimic the methods employed by central bankers.
These methods consist by and large of looking at the data of the immediate past, pretending that these tell us anything about the future, and then deciding on monetary policy in knee-jerk, ad hoc fashion. That is basically the degree of 'planning' employed by our vaunted central planners. It would of course not help one bit if they were trying some different method, as central planning simply cannot work under any circumstances – i.e., it will always lead to outcomes that are less optimal than those that would have been achieved by an unhampered market (perhaps an improvement could be achieved by simply throwing dice). There are no ifs or buts in this context. Mises showed that economic calculation under socialism is impossible, and one can extend this theorem to special cases such as central banking in the context of a market economy. Essentially, central banks are socialist islands in a capitalist sea. To some extent they can take their cues from market prices, but their existence as such already distorts such prices, so the information they receive is tainted from the outset. They cannot possibly gauge the extent of the harm they inflict on the economy.
Anyway, financial markets are generally held to be forward looking. Quite often this has actually been true – but the more the market is subjected to interventionist policy, the less true it perforce becomes. This has never been more obvious than in recent years and months, when the markets were most of the time yanked this way or that way by something a central bank did or a central banker said. The markets have also begun to focus on lagging economic indicators like e.g. the payrolls data, simply because it is widely known that the central bank focuses on them as well. This makes no sense whatsoever, unless one concedes that market prices are by now extremely distorted and that future price trends therefore depend mainly on whether or not there will be more monetary pumping.
The Height of Absurdity
The most bizarre monthly ritual has become the breathless anticipation of the 'Fed minutes'. Not only do these minutes contain the useless backward looking analysis of the FOMC and its advisers (who have yet to recognize a major economic trend change ahead of time after a century of fruitless trying), they are a month old by the time they are released to boot!
One feels almost stupid participating in a market that reacts to such plainly useless information. And yet, that is precisely what happens. Wednesday the financial press was full with articles describing the 'nervous anticipation' gripping the markets prior to the release, and the subsequent relief at the receiving what at this point can only be described as 'meaningless non-news'. Here is a brief excerpt of the what the minutes contained:
“Even as consensus built within the Federal Reserve in June about the likely need to begin pulling back on economic stimulus measures soon, many officials wanted more reassurance the employment recovery was on solid ground before a policy retreat.
Financial markets have largely converged on September as the probable start of a reduction in the pace of the U.S. central bank's $85 billion in monthly bond purchases, but minutes of the Fed's June meeting released on Wednesday suggested that might not be a sure bet.
"Several members judged that a reduction in asset purchases would likely soon be warranted," the minutes said. But they added that "many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases."
Global investors have recently recovered from a mild bout of panic that followed Fed Chairman Ben Bernanke's roadmap for an end to so-called quantitative easing, which he said would likely draw to a close by the middle of next year. Financial market fears have been allayed in part by a chorus of Fed officials who have sought to reassure traders that the end of asset buys will not lead to imminent interest rate hikes.
"Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate," the minutes said. Whether the markets have gotten the message is not fully clear; the yield on the 10-year U.S. Treasury note has risen a full percentage point in just two months and stands close to its highest levels since 2011. This has already slowed activity in the mortgage market, which had been key to the recent economic rebound.
At their June meeting, some Fed officials worried not only about the outlook for employment, but the pace of economic growth as well. Many economists believe the economy grew at less than a 1 percent annual rate in the second quarter, although most look for a pick-up in the second half of the year.
"Some (officials) added that they would … need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases," the minutes said.”
Of the Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done "to prevent the potential negative consequences of the program from exceeding its anticipated benefits.”
We would essentially term all of this vapid blather. It is the same stuff we read in every FOMC press release: if the vaunted 'data' show that things are getting better, then there will be less monetary pumping. If not, it will continue or may even be intensified. At this stage, how can anyone possibly be 'surprised' by the content of the minutes? Or for that matter, by anything the Fed does or says? Just watch a few aggregate economic statistics, and you will know what they'll do, since they always adjust their actions to the events of the recent past in order to influence a future they cannot possibly discern.
There is a single point that we find mildly interesting: only two regional Fed presidents are left to argue that 'QE' may have more drawbacks than 'anticipated benefits'.
FOMC: producing decisions that harm the economy in addition to a lot of meaningless blather, in a well appointed room.
(Photo credit: unknown author)