I don't know. Nobody can predict the future, even (especially) central banks. Maybe hiking and then following by cutting shows an adaptive ability (when the facts change, I change my mind ...) which may be the most important quality of a governing body. Again, You Don't Know. We Don't Know. As Bernanke, Dudley, and Yellen again trot out to admit zero responsibility for ANYTHING other than rising stock prices, and insisting on staying the course, it might be something to think about. Whatever the case, yukking about a central bank hiking rates shortly before a bank collapsed doesn't move any thinking forward. It happened. Big freaking deal. Ben had some pretty nice boners in 2006-07-08 as well. I said to a friend Tiger was going to win yesterday shortly before he 3-jacked #12. Big deal.
And I am so so tired of people bashing the Fed (and BOE) as a bunch of clueless ivory-tower academics with no grasp of the real world while praising the ECB. When in reality one CB is as smart or clueless as the other.
Sure, fine, we can all agree that nobody can predict the future. I don't see why this means that we should stop trying. As to the adaptive ability, isn't the Fed doing exactly the right thing, according to your definition? Official measures of inflation are low (if you don't like the measures, that's a different issue) and unemployment is well above trend (again, if you disagree with their definition, that's a different story). Surely, using the "ECB approach" to central banking, the Fed's doing exactly what they should be doing? As to "yukking about the hikes", as I mentioned before, to me it's not a big deal, but rather a symptom of the problems with the ECB and the EMU as a whole. The adaptive inflation-fighting heroes at the ECB are the exact same people that are responsible (at least, partly) for blowing up the bubbles in peripheral Europe. So that's my big issue with them: with their exclusive focus on headline inflation, they quite literally refuse to see anything else.
And yet you're cool with the Fed continuing to pump because "official" inflation is ok. To call not liking official measures of inflation a different issue makes little sense. The Fed (Greenspan) played a huge role in adjusting the CPI calculation to keep it low. The Boskin commission's stated task was to make the CPI lower! The current Fed uses this Orwellian production to cover its ass. And when headline CPI gets high, well then we move to core CPI, which is basically just OER, another flawed Orwellian concept. MIT's Billion Prices Project does a far better job and it's showing exploding inflation. The Fed is monetizing debt (QEII) for the stated purpose of sending stock prices higher. They've moved from central planning what short term rates should be to explicitly (they implicitly did it under Greenspan) deciding what the level of stock prices ought to be. If you fail to see the danger in this as well as the future collapse that will occur because of it, then I can't help you. Ben now has himself boxed in. He's helped set off another asset bubble, but refuses to or can't admit it, and thus will keep pumping, ensuring an even bigger collapse. If he has his way, rate hikes are off the table in 2011. 2012 is an election year - is he going to jack rates while his patron in the Oval Office is running for re-election. I fail to see a way out for the guy.
The BPP to my knowledge tracks brick & mortar products and ignores prices for services. It's interesting data, but at times it can be as misleading a proxy for "real inflation" as commodity price indices can be.
I never said whether or not I was OK with the Fed continuing to pump. I said that, if we use the logic that you apply when you praise the ECB, we must surely praise the Fed. Why does it make little sense? Is the Fed responsible for calculating CPI? Does the US government produce any other official measure of inflation that the Fed can use? What's the right measure the Fed should be using? If you have a problem with the BLS, the Boskin Commission, the OER weight in the core, why don't you blame the people responsible, i.e the Congress and the Administration? Ultimately, the power to make these decisions is with them, rather than the Fed. As to debt monetization, let me quote you back your own words: You. Don't. Know. The argument is that Fed policies are contributing to looser monetary conditions, of which higher stock prices are a component. I choose to not read more into that and to avoid conspiracy theories about the Fed targeting higher stock prices. You're free to believe what you will and I don't need your help. Finally, regarding the asset bubble and the bigger collapse. I don't see a bubble, but then I am not an expert on stocks. If you think it's a bubble, you know what to do, right? Put your money where your mouth is and go limit short. If you're right, you'll be richer than Paulson in no time.
Why does it make little sense? Is the Fed responsible for calculating CPI? Does the US government produce any other official measure of inflation that the Fed can use? What's the right measure the Fed should be using? If you have a problem with the BLS, the Boskin Commission, the OER weight in the core, why don't you blame the people responsible, i.e the Congress and the Administration? Ultimately, the power to make these decisions is with them, rather than the Fed. I just said the Fed had a large role in creating what we now call the CPI. It's not news. Greenspan was out front on this for a long time. So the Fed using the CPI as its preferred measure should not be separate from whether the measure is flawed (it is) because the Fed played a huge role in its creation - specifically to make sure it reported a lower number. As to debt monetization, let me quote you back your own words: You. Don't. Know. The argument is that Fed policies are contributing to looser monetary conditions, of which higher stock prices are a component. I choose to not read more into that and to avoid conspiracy theories about the Fed targeting higher stock prices. You're free to believe what you will and I don't need your help. What? That's not me saying that. It's Bernanke. Did you read his WaPo column after QEII started? He said he wanted to jack equity prices. In subsequent interviews, he and his minions have taken credit for higher stock prices, but for nothing else. Hell, in one interview he happily pointed out the Russel 2000 outperforming the S&P as evidence what the Fed was doing was working! There's no conspiracy theory, those are the Fed's own words. Finally, regarding the asset bubble and the bigger collapse. I don't see a bubble, but then I am not an expert on stocks. If you think it's a bubble, you know what to do, right? Put your money where your mouth is and go limit short. If you're right, you'll be richer than Paulson in no time. [/QUOTE] Well you're an expert in something. We never really know what you're doing, but I just operate from the assumption you're posting from your seaside mansion. Saying to go limit short in a bubble is asinine and you know it. Guys who correctly saw the biggest rally in Treasury history in 2008 still lost their shirt in the swings. Trading is a lot harder than that. As documented on this thread, I had a handful of 3 baggers in Feb/mar being long EWH, EWT, and FCX puts (broke even on those stupid XLY puts), but would have lost without being nimble. Also, as documented, I'm now long SLV calls (just a double so far, but its only been a couple of weeks), and re-bought some FCX puts as well (nice hedge there, I think).
Yeah, but whose decision is it ultimately? Even now, if CPI is so horribly flawed, who can decide to abandon CPI in favor of another measure? It's not like the Fed can do this unilaterally, is it? Moreover, this does not address the issue of a lack of an official alternative. Of course, I read his column. If you don't take his words out of context and read more attentively, what he said was related to the easing of financial conditions. Same with the RUT, as far as I can tell. Again, you may read whatever you choose into it, but I have no reason to imagine conspiracies. Well, I do OK for myself, thank you very much. As to trading the bubble, fine, find creative ways to put the trade on and you can't go wrong (which is what you seem to have done). My point is that there's lots of people talking about bubbles. Well, guess what, we have a mkt that's designed precisely to allow you to profit handsomely on "irrational exuberance". So people who think it's a bubble should put their money on the table and walk the walk. Myself, I have no friggin' clue how high equities are gonna go before they might crash and burn (or not), so I refrain from calling things "bubbles".
John Hussman speculates that a rise in interest rates could be potentially highly inflationary as it could decrease demand for cash(and increase demand for USTs) http://www.hussmanfunds.com/wmc/wmc110411.htm I have some problems with his analysis -First he notes UST bills have been collapsing in yield lately, this is likely related to the FDIC decision to close out the arb loophole that the banks were taking advantage of. EFF and all kinds of short-term rates have declined since that, not because of QE2(This is not to say that QE2 has not had an impact but lately the vast majority was the FDIC stuff) -With regards his 16 cents theory, I haven't made my mind on this fully(I'm shooting Scott Sumner an email about this) but Hussman does not consider the fact that the Fed was manipulating the monetary base in order to accommodate changes in Velocity(Which Milton Friedman assumed was stable but actually it wasn't) so at least part of the high negative correlation he finds between the monetary base and velocity does not come from people dumping cash for USTs during high rates periods and vice-versa but actually from Fed policy Finally IF he is correct, it seems to me that the Fed is not aware of this, I have never seen anyone remotely related to the Fed claiming all assets would have to be sold before a hike. Nor that hikes would be inflationary so I'm not sure actual policy forecasts can be derived from his analysis
As hopefully you figured out, my trading and how I feel about what the Fed should do are 2 separate things. It wouldn't surprise me if I put on a massive long eurodollar position sometime this spring and summer, even as i feel the Fed ought to hike. My issue with the Fed is that their actions are ultimately destructive to U.S. society. When that destruction occurs, they paper it over with even more money, creating a whole new boom/bust cycle. The Fed is just another unaccountable bureaucracy in the business of central planning, and I try to look at it as such - it will protect its power, answer to no one, never admit a mistake, and basically do whatever the hell it wants, all the time acting like a servant of the people. I see little difference between it and a Soviet Dept of Economic Affairs, or China's NRDC, ... An oldie but a goodie - want a job or want to move ahead in the world of economics, better tow the line for the Fed. http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html