Here’s my Twitter feed since I tuned into Jay Powell’s abomination of a presser this afternoon.
But then I remembered.
THIS HAS ALL HAPPENED BEFORE.
A little more than five years ago, back in September 2013, Ben Bernanke had a similar press conference. A press conference where he announced that QE was not going to roll off as expected, where he announced that “data dependent” really meant “market dependent”, where he announced that the Fed was a political prisoner of the White House and Wall Street.
As Casey Stengel and James Thurber would say, you could look it up.
I wrote an Epsilon Theory note about that press conference, titled “Uttin’ on the Itz”. You’ll see why. I’ve shortened it up a bit (this was back in the days when I’d write two pages of quotes) and republished it below.
You Are Here. Again.
Uttin’ on the Itz
September 22, 2013
High hats and arrowed collars, white spats and lots of dollars
Spending every dime, for a wonderful time
If you’re blue and you don’t know where to go to
Why don’t you go where fashion sits,
Puttin’ on the Ritz.
– Irving Berlin
Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce.
– Karl Marx
Every time I hear a political speech or I read those of our leaders, I am horrified at having, for years, heard nothing which sounded human.
– Albert Camus
The structure of a play is always the story of how the birds came home to roost.
– Arthur Miller
In Young Frankenstein, Mel Brooks and Gene Wilder brilliantly reformulate Mary Shelley’s Frankenstein; or, The Modern Prometheus, a tragedy in the classic sense, as farce. The narrative crux of the Brooks/Wilder movie is Dr. Frankenstein’s demonstration of his creation to an audience of scientists – not with some clinical presentation, but by both Doctor and Monster donning top hats and tuxedos to perform “Puttin’ on the Ritz” in true vaudevillian style. The audience is dazzled at first, but the cheers turn to boos when the Monster is unable to stay in tune, bellowing out “UTTIN’ ON THE IIIITZ!” and dancing frantically. Pelted with rotten tomatoes, the Monster flees the stage and embarks on a doomed rampage.
Wilder’s Frankenstein accomplishes an amazing feat – he creates life!
But then he uses that fantastic gift … to put on a show.
So, too, with QE.
These policies saved the world in early 2009. Now they are a farce, a show put on by well-meaning scientists who have never worked a day outside government or academia, who have zero intuition for, knowledge of, or experience with the consequences of their experiments.
Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural.
The procedural event was the intentional injection of ambiguity into Fed communications. As I’ll describe below, this is an even greater policy mistake that the initial “Puttin’ on the Ritz” show Bernanke produced at the June FOMC meeting when “tapering” first entered our collective vocabulary.
The structural event – which is far more important, far more long-lasting, and just plain sad – is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government paternalism. These are true-believers in too-clever-by-half academic theories such as management of forward expectations and in the soft authoritarianism of Mandarin rule. They are certain that they have both a duty and an ability to regulate the global economy in the best interests of the rest of us poor benighted souls.
Anyone else remember “The Committee to Save the World” (Feb. 1999)? The hubris levels of current Fed and Treasury leaders make Rubin, Greenspan, and Summers seem almost humble in comparison, as hard as that may be to believe. The difference is that the guys above operated in the real world, where usually you were right but sometimes you were wrong in a clearly demonstrable fashion. A professional academic like Bernanke or Yellen has never been wrong. Published papers and books are not held accountable because nothing is riding on them, and this internal assumption of intellectual infallibility follows wherever they go. As a former cleric in this Church, I know wherefore I speak.
There’s frequent hand-wringing among the chattering class about whether or not the Fed has been “politicized.” Please. That horse left the barn decades ago. In fact, with the possible exception of Paul Volcker (and even he is an accomplished political animal) I am hard pressed to identify any Fed Chairman who has not incorporated into monetary policy the political preferences of whatever Administration happened to be in power at the time.
Bureaucratic capture is not politicization. It is the subversion of a regulatory body, a transformation in motives and objectives from within. In this case it includes an element of politicization, to be sure, but the structural change goes much deeper than that. Politicization is a skin-deep phenomenon; with every change in Administration there is some commensurate change, usually incremental, in policy application. Bureaucratic capture, on the other hand, goes clear to the bone, marking a more or less permanent shift in the existential purpose of an institution. The WHY of the Fed – its meaning – changed this week. Or rather, it’s been changing for a long time and now has been officially presented via a song-and-dance routine.
What Bernanke signaled this week is that QE is no longer an emergency government measure, but is now a permanent government program.
In exactly the same way that retirement and poverty insurance became permanent government programs in the aftermath of the Great Depression, so now is deflation and growth insurance well on its way to becoming a permanent government program in the aftermath of the Great Recession.
The rate of asset purchases may wax and wane in the years to come, and might even be negative for short periods of time, but the program itself will never be unwound.
There is very little difference from a policy efficacy perspective between announcing a small taper of, say, a $10 billion reduction in monthly bond purchases and announcing no taper at all. But there is a HUGE difference from a policy signaling perspective between the two. Doing nothing, particularly when everyone expects you to do something, is a signal, pure and simple. It is an intentional insertion of uncertainty into forward expectations, a clear communication that the self-imposed standards for winding down QE as established in June are no longer operative, that the market should assume nothing in terms of winding down QE.
Think of it this way … why didn’t the Fed satisfy market expectations, their prior communications, and their own stated desire to wait cautiously for more economic data by imposing a minuscule $5 billion taper? Almost every market participant would have been happy with this outcome, from those hoping for more accommodation for longer to those hoping that finally, at last, we were on a path to unwind QE. Everyone could find something to like here. But no, the FOMC went out of its way to signal something else. And that something else is that we are NOT on automatic pilot to unwind QE. A concern with self-sustaining growth and a professed desire to be “data dependent” are satisfied equally with either a small taper or doing nothing.
Choosing nothing over a small taper is only useful insofar as it signals that the Fed prefers to maintain a QE program regardless of the economic data.
But wait, there’s more …
Given the manner in which inflation statistics are constructed today – and just read Janet Yellen’s book (The Fabulous Decade: Macroeconomic Lessons from the 1990’s, co-authored with Alan Blinder) if you think that the Fed is unaware of the policy impact that statistical construction can achieve, as changing inflation measurement methodology is one of the key factors she identifies to explain how the Fed was able to engineer the growth “miracle” of the 1990’s – inflation is now more of a proxy for generic economic activity than it is for how prices are experienced. In a very real way (no pun intended), the meaning and construction of concepts such as real economic growth and real rates of return are shifting beneath our feet, but that’s a story for another day. What’s relevant today is that when the Fed promises continued QE so long as inflation is below target, they are really promising continued QE so long as economic growth is anemic.
QE has become just another tool to manage the business cycle and garden-variety recession risks. And because those risks are always present, QE will always be with us.
In Pulp Fiction the John Travolta character plunges a syringe of adrenaline into Uma Thurman’s heart to save her life. This was QE in March, 2009 … an emergency, once in a lifetime effort to revive an economy in cardiac arrest. Now, four and a half years later, QE is adrenaline delivered via IV drip … a therapeutic, constant effort to maintain a certain quality of economic life. This may or may not be a positive development for Wall Street, depending on where you sit. I would argue that it’s a negative development for most individual and institutional investors. But it is music to the ears of every institutional political interest in Washington, regardless of party, and that’s what ultimately grants QE bureaucratic immortality.
It is impossible to overestimate the political inertia that exists within and around these massive Federal insurance programs, just as it is impossible to overestimate the electoral popularity (or market popularity, in the case of QE) of these programs. In the absence of a self-imposed wind-down plan – and that’s exactly what Bernanke laid out in June and exactly what he took back on Wednesday – there is no chance of any other governmental entity unwinding QE, even if they wanted to. Which they don’t. Regardless of what political party may sit in the White House or control Congress in the years to come, it will be as practically impossible and politically unthinkable to eliminate QE as it is to eliminate Social Security or food stamps.
QE is now a creature of Washington, forever and ever, amen.
At least in June the Fed still projected an aura of resolve. Today even that seems missing, and that’s a very troubling development. Creating a stable Narrative is a function of inserting the right public statement signals into the Common Knowledge game. As described above, it really doesn’t matter what the Party line is, so long as it is delivered with confidence, consistency, and from on high. But once the audience starts questioning the magician’s sleight-of-hand mechanics, once the Great and Terrible Wizard of Oz is forced to say “pay no attention to that man behind the curtain”, the magician has an audience perception problem. Fair or not, there is now a question of competence around Fed policy and its decision-making process.
Sure the Monster can sing, but can it sing well?
What does all this mean for how to invest in the short to medium-term? Frankly, I don’t think that “investment” is possible over the next few months, at least not as the term is usually understood, and at least not in public markets. When you listen to institutional investors and the bulge-bracket sell-side firms that serve them, everything today is couches in terms of “positioning”, not “investment”, and as a result that’s the Common Knowledge environment we must all suffer through.
This is the fundamental behavioral shift in markets created by a Fed-centric universe – the best one can hope for is a modicum of protection from the caprice of the Mad God – and efforts to find some investable theme are dashed more often than they are rewarded.
The Narrative of Central Bank Omnipotence – that all market outcomes are determined by monetary policy, especially Fed policy – is stronger than ever today, so if you’re looking to take an exposure based on the idiosyncratic attributes or fundamentals of a publicly traded company … well, I hope you have a long time horizon and very little sensitivity to the price path in the meantime. I will say, though, that the counter-Narrative of the Fed as Incompetent Magician, which is clearly growing in strength right alongside the Omnipotence Narrative, makes gold a much more attractive option than this time a year ago.