Sell The Bonds, Sell The Stocks, Sell The House —–Dread The Fed!

By David Stockman – Re-Blogged From

There is going to be carnage in the casino, and the proof lies in the transcript of Janet Yellen’s press conference. She did not say one word about the real world; it was all about the hypothetical world embedded in the Fed’s tinker toy model of the US economy.

Yes, tinker toys are what kids used to play with back in the 1950s and 1960s, and that’s when Janet acquired her school-girl model of the nation’s economy.

But since that model is so frightfully primitive, mechanical, incomplete, stylized and obsolete, it tells almost nothing of relevance about where the markets and economy now stand; or what forces are driving them; or where they are headed in the period just ahead.

In fact, Yellen’s tinker toy model is so deficient as to confirm that she and her posse are essentially flying blind. That alone should give investors pause—-especially because Yellen confessed explicitly that “monetary policy is an exercise in forecasting”.

Accordingly, her answers were riddled with ritualistic reminders about all the dashboards, incoming data and economic system telemetry that the Fed is vigilantly monitoring. But all that minding of everybody else’s business is not a virtue—-its proof that Yellen is the ultimate Keynesian catechumen.

This stupendously naïve old school marm still believes the received Keynesian scriptures as penned by the 1960s-era apostles James (Tobin), John (Galbraith), Paul (Samuelson) and Walter (Heller).

But c’mon.Those ancient texts have no relevance to the debt-saturated, state-dominated, hideously over-capacitated global economy of 2015. They just convey a stupid little paint-by-the-numbers simulacrum of what a purportedly closed domestic economy looked like even back then.

That is, before Richard Nixon had finally destroyed Bretton Woods and turned over the Fed’s printing presses to power aggrandizing PhDs; and before Mr. Deng had thrown out Mao’s little red book in favor of a central bank based credit Ponzi.

As you listened to Yellen babble on about the purported cyclical “slack” remaining in the US economy, the current unusually low “natural rate” of federal funds, all the numerous and sundry “transient” factors affecting the outlook, and the Fed’s fetishly literal quest for 2.00% inflation (yes, these fools apparently think the can hit their inflation target to the second decimal place), only one conclusion was possible.

To wit, sell the bonds, sell the stocks, sell the house, dread the Fed!

In a global economy that is plunging into an epic deflationary contraction, Yellen & Co still embrace mythical and unmeasurable benchmarks for domestic full employment and other idealized performance targets.

Indeed, they operate in what amounts to the pseudo-scientific realm of economic policy numerology. Their model can be reduced to a voodoo style formula expressed as “2,3,4,5”.

That would be 2% inflation, 3% real growth, 4% normalized Federal funds and 5% unemployment. Any difference between those targets and current readings is defined as “slack” or performance shortfall that the 12 apostles on the FOMC have been mandated to close; and to do so with the blunt force instruments of money market rate pegging, yield curve repression (that’s what QE is) and wealth effects levitation of financial asset prices.

At the end of the day, the only thing worse than Nixon’s final destruction of sound money at Camp David in August 1971 was the passage of the Humphrey-Hawkins Act seven years later.

To be sure, the act itself was merely an exercise in political messaging. It did not confer open-ended power on a monetary politburo to literally hijack the price-setting process in the entire financial system. Instead, it was a rubbery sense of congress resolution that encompassed unquantified and purely aspirational goals for maximum employment and price stability.

It was the power-hungry academics and policy apparatchiks like Alan Greenspan, Alan Blinder, Donald Kohn, Ben Bernanke,  Frederic Mishkin, Janet Yellen and the B-Dud who turned it into today’s monetary central planning machine.

The hard core reality, however, is that the very foundations of the Keynesian full employment model cannot be measured, specified, validated or achieved. For all practical purposes there is no such thing in today’s world as potential GDP, full-employment, a natural rate of Federal funds, NARU (natural rate of unemployment) or quantifiable price stability.

These are all self-serving fictions fabricated by a small community of monetary central planners and their Wall Street henchmen. And they do one big but destructive thing: Namely, they are used to justify endless manipulation and falsification of the single most important set of prices in all of capitalism—-the price of money and financial assets.

Consider Yellen’s absolutely foolish discussion of the 2% inflation target, the transient factors currently impacting it and the Fed’s insistence on symmetry between under-shooting and over-shooting the target.

In the first place, by one good measure of consumer inflation—-the 16% Trimmed Mean CPI—–the Fed has been hitting its target all along. To hit the magic 2.00%, the monthly change needs to be in the 0.16% range; and, as shown below, its pretty hard to see that they have missed by much, or that there is any kind of worsening trend during the last five years of so-called recovery.

But then, of course, Yellen actually swatted away a questioner’s observation that the Fed was already at its 2% target based on a similar median CPI published by the Cleveland Fed.

Why, no, our intrepid school marm replied——here in the Eccles Building we hold strictly to high church liturgy. Nothing less than the PCE deflator will do when it comes to the sacrosanct inflation target.

I’m sorry but that’s obscurantist malarkey of the first order. Over any reasonable period of time there is not a dimes worth of difference between the government’s various measures of consumer inflation on goods and services. And that’s ignoring the fact that all of them under measure it, anyway.

As shown below, the 16-year CAGR since October 2000 was 1.82% for the Yellen’s PCE deflator, 1.92% for the CPI less food and energy and 2.12% for the regular consumer price index for all urban consumers. Only in the Fed’s tinker toy model of the world could those fractional decimal points of difference actually make any difference.

Indeed, neither the centered 2% trend of all three indices since the year 2000 nor the short-term divergences among them during that period have anything to do with real GDP growth. On an LTM basis, the latter ranged from a positive 5% run rate to a negative 3% rate, but there is absolutely no correlation with the modest oscillations and divergences of reported consumer inflation during the period.

So what was Yellen obsessing about? Well, on a one-year basis, the PCE index is up 0.2%, the CPI has gained 0.1%, the PCE less food and energy is higher by 1.4% and the CPI less food and energy is up by 1.9%.

So what? Can you say global oil and commodity price collapse?

The essence of Yellen’s “transient” factor discussion is that the chart’s lower right-hand readings for October/November are purportedly the bottoms for iron ore, copper, crude oil and the other commodities; that these plot points will anniversary next fall; and that the year-on-year inflation rate thereafter will normalize toward 2% when the statistical drag of commodities passes through the index.

It’s just math. Yes, and a blind squirrel occasionally finds an acorn!

In truth, Yellen & Co have no clue as to when the current massive commodity gluts will be absorbed or how the leads and lags in the global commodity price equations will play out.

In fact, since we are dealing with massive over-investment in shale, tar sands, iron ore mines, aluminum smelters, bulk carriers etc., it appears that supply could still be rising for several year as cheap credit-fueled projects come on stream. At the same time, global demand continues to falter owing to collapsing incomes and wage bills in the primary materials,


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