Is the Fed Really Watching Fundamentals Or Just Prices?
The confusion of the Fed’s direction comes from their obvious behavior which shows that they are have no deeper fundamental understanding of markets than any market price-trend follower. They do not see the connections between employment, Real Personal Income, impact of Government spending or any other economic measure vs. markets over the long term. Recent Fed reversal from anticipated rate hikes reveals to me that they were focused only on stock market prices and nothing fundamentally deeper than that. When the FANG stocks corrected, the Fed felt this signaled a weaker economy and changed their stance. Even the Fed believes that price-trends carry all the economic information they need. Nothing was further from the truth.
The Fed has become populated by Keynesians over time. These people do not see the details of how the economy works. They simply do not have focus on the data as they do not know how or do not trust using ‘numbers’, i.e. economic measures, to understand the economy but believe in a ‘top-down touchy-feely’ sense of whether the economy is expanding. They act on the media consensus perception of the economy. It is incredible that the ‘Best and Brightest’ have so shallow an understanding of economic activity. This is the result of the revolution of Harry Markowitz’s “Modern portfolio Theory” of the 1950s which has gradually taken over every business school with a pure mathematical approach to understanding economic matters. The human element of a decidedly human system has been completely ignored because no one has been trained to understand it.
The Fed has come to believe that it alone is in control of the economy. The facts are opposite to this. By lowering mtg rates and doubling down on bank regulation, the Fed has stalled housing to such a degree that we are only now coming back to 1990 recession level single-family housing starts. They all blame the banks and seem to completely ignore the role of liberal policies on the sub-prime debacle. No one in charge seems to understand the role of government, the impact of government policy or the role of the Fed. Both Liberals and Conservatives are equally in the dark.
Fortunately the Free Market is in effect until Bernie turns the country into a socialistic, anti-business state. If for some reason he wins, he will pressure for law to put ‘climate denier’s and CEOs in prison for disagreeing with his social agenda, much like Hugo Chavez. Let’s hope Bernie does not become President.
We are in a time when the tide has gone out and we have few who understand what to do. Everyone is looking for leadership and none is to be found. The Chinese curse applies: “May you live in interesting times.”