The Embarrassment of Transparency Peter Schiff Wednesday, May 6, 2015 Over the past decade or so, "transparency" has become one of the buzzwords that has guided the Federal Reserve's culture. The word was meant to convey the belief that central banking was best done for all to see in the full light of day, not in the murky back rooms of Washington and New York. The Fed seems to be on a mission to prove that its operations are benevolent, fair, predictable, and equitable. Part of that transparency movement took shape in 2007 when the Fed began publicizing its Gross Domestic Product (GDP) forecasts, which previously (to the frustration of investors) had been kept under wraps. Most of the Fed's policy moves are tied to how strong, or how weak, it believes the economy will be in the coming year. As a result, its GDP forecast is perhaps the single most important estimate it makes. So the good news for investors is that the Fed now tells us where it thinks the economy is headed. The bad news is it has been consistently, and sometimes spectacularly, wrong. Talk about the blind leading the blind. In the eight years that the Fed has issued GDP forecasts in the prior Fall, only once, in 2010, did the actual economic performance come in the range of its expectations (referred to as its "central tendency.") And even in that year, Fed forecasters did not manage to put the ball through the goal posts. Instead it just hit the upright (the low end of its range: 2.5% in actual growth vs. a central tendency of 2.5% to 3.5%). In all other years the Fed missed the mark completely on the downside. The tale of the tape tells the story: Central Tendency (The Fed) vs Actual Growth (BEA) 2007 2.4% - 2.5% vs 1.8% 2008 1.8% - 2.5 % vs -0.30% 2009 -0.2% - 1.1% vs -2.80% 2010 2.5 % - 3.5 % vs 2.50% 2011 3.0% - 3.6% vs 1.60% 2012 2.5% - 2.9% vs 2.30% 2013 2.3% - 3.0% vs 2.20% 2014 2.8% - 3.2% vs 2.40% The biggest misses clearly came during the recession years of 2008 and 2009. The Fed clearly had no idea that trouble was brewing, or that the trouble would last once it started. In 2008 the actual growth came in 2.1% below the low end of its forecast range and 2.5% below the midpoint of its estimates. In 2009 it was 2.6% below the low end and 3.2% below the midpoint. 2011 wasn't much better, with the Fed missing by 1.4% and 1.7% for the same criteria. The rest of the years had more pedestrian misses of less than a percentage point. But it never really hit the mark, and it consistently overbid by a significant margin. And while we are only a few months into 2015, it doesn't look like they will be on target this year either. Full Year Central Tendency First Quarter GDP 2015 (Q1) 2.6% - 3.0% 0.20% (annualized) With first quarter growth at just a scant .2% annualized, the remaining three quarters of the year would have to average 3.4% annualized just to get to 2.6% for the full year (the low end of the Fed's range). Furthermore, the latest data, such as the spectacular increase of the trade deficit in March (to $51.4 billion, the largest month over month growth on record and the biggest monthly gap since the crisis month of October 2008), and today’s report showing the largest consecutive quarterly decline in productivity in more than 20 years,will likely force a downward revision to Q1 GDP. With April data looking even weaker than what was seen in February and March, a strong second quarter rebound, like the one seen in 2014, seems increasingly unlikely. In other words, good luck getting to 2.6%. But even if we do get there, it is no cause for celebration. 2.6% growth would be indicative of a struggling economy (recall that for the 20th Century, annual growth averaged well north of 3%). In the seven full years since the Fed brought rates to zero, and at times showered the markets with trillions of dollars of QE cash, GDP growth has averaged just 1.1%. Even stripping out the recession years of 2008 and 2009, to focus only on the five "recovery" years of 2010-2014, gives us an average GDP of 2.2%, a rate that has been below the central tendency every year. So what do we make of this? Are Fed economists just horrible forecasters? And if so, why not hire others who more competent? Or is something more troubling going on? The most benign explanation is that they simply failed to anticipate a string of unfortunate events that have supposedly prevented a real recovery from taking hold. First it was the European debt crisis, then it was the high energy prices, then it was Syria, then Ukraine, then the Polar Vortex, then it was the low energy prices, then it was the European recession, the strong dollar, and then another bad winter. Apparently, unbeknown to Fed forecasters, the world is a tricky place fraught with economic, political and meteorological crises. But hasn't that always been the case? A more troubling possibility is that the Fed simply doesn't understand how its policy tools really impact the economy. It expects that zero percent interest rates and quantitative easing will stimulate aggregate demand, encourage consumers to spend and businesses to hire, thereby initiating a virtuous cycle that will propel the economy back to healthy growth. Since it believes its medicine will cure the patient, it builds a favorable outcome into its forecasts, which biases those forecasts in an upward direction. Based on that assumption, it's a bit of a head scratcher to the Fed as to why the economy has failed to deliver as expected. So cue the long litany of excuses. But what if that's not the way it works? What if, as I have argued many times, that stimulus in the form of zero percent interest rates and QE bond purchases, act more like economic sedatives than stimulants? What if, as I have argued, that these crutches prevent an economy from finding the solid footing needed to build a real recovery? This would explain why we have failed to recover after seven years of policies expressly designed to spur recovery. A more sinister possibility is that the Fed is not really forecasting at all but cheerleading (TT: Like Piezoe!). The fact that all its forecasts have missed on the high side reveals that its misses may not be random. If the Fed were just wrong, one would expect some of its forecasts to be too low. An obvious explanation is that the Fed may be using its "forecast" to talk up the economy. By forecasting strong growth, the Fed may be hoping to engender optimism, with more spending and hiring hopefully to follow. Kind of like a field of dreams recovery -- if the Fed forecasts it; it will come. Plus the Fed may be hesitant to issue a somber assessment of future growth even if it expects it, fearful that its forecasts become self-fulfilling as businesses and consumers cut back to reflect that forecast. If so, its economics "forecasts" would be in actuality just another policy arrow in its quiver, and should never be taken seriously. Another inconvenient fact that needs to be ignored in the string of GDP reports is the consistently low inflation numbers that the Fed uses. Remember, to get a sense of real growth, the bean counters need to subtract inflation from the nominal figures. Now I have always argued that the CPI itself has consistently under-reported inflation, but I have also explained how the Fed's preferred gauge of inflation used in the GDP report, called the GDP deflator, is consistently lower than the CPI (a trend that goes back to 1977). But the GDP report for First Quarter 2015 really kicks that trend into another dimension. To arrive at the .2% annualized GDP estimate, the Fed assumed inflation was running at minus .1% annually (Bureau of Economic Analysis). With the exception of two quarters during the depths of the Great Recession (2nd and 3rd Quarters of 2009), we have to go all the way back to the First Quarter of 1952 to find a negative deflator (BEA). If positive inflation data had been used, growth in Q1 would have come in negative. Based on what we have seen thus far in the year, fantasies about a 2015 recovery should be evaporating. But, as of March 18, the Fed continues to hold to 2.5%-3.0% GDP forecasts and tangential assumptions that rate hikes will begin the second half of this year and will continue throughout next year. (A February 12th survey of economists by the Wall Street Journal shows a consensus 2.2% Fed Funds rate by year end 2016). With these assumptions baked into portfolio dispositions investors risk being caught wrong footed when the ugly truth is finally accepted.
Greetings TT, I can fully appreciate what you have said about the Fed and its ongoing failed policies and actions, for they are an undeniable financial fact. I also believe that the people of this country and other countries at large, are slowly but surely becoming more and more aware of this sham of a pseudo government organization, and its true ulterior motives and objectives. However, as a trader here on this ET Forum, I'm always on the alert to use this forum to consistently act in my own personal self-interest. I'd be very interested to hear your views on how to possibly go about "monetizing" these Fed actions, and unabashedly put some more market dollars into my own pocket. Therefore, I would like to use some of your "Fed" views to "fade" some of these failed policies and actions, using the market and its various trading vehicles. Over the years on ET, you have proven yourself to be quite knowledgeable and highly insightful in this Fed policy area. And this kind of consistent performance cannot and should not be ignored.....but it should be fully exploited to its max. We are after all....Traders,....and that is what we do,.....and why we are all here....smile. And since you're already freely engaged in this activity, I would no doubt certainly appreciate a few quick and dirty "Heads Up Sentences or Words" as to what you generally think is likely, or possible in the market as a result of some recent Fed actions. In this manner, and with the right trading vehicles, I and other interested ET traders could potentially be pointed in the right direction to be able to take full advantage of some of your long and short term insight into this grey area. Understand, I'm not asking you to tell me what to do or how to do it. I'm a trader, and I already have a profitable and reliable trading methodology. Therefore, I will accept and take full responsibility for the subsequent market actions I initiate for myself. But since my knowledge of these Fed inner workings is limited, and I have very little interest in spending time learning about these kind of idiosyncratic interrelationships, and since you're already quite knowledgeable on the topic, the fit on this ET Forum just seems too good to opportunistically pass up. Further, it shouldn't take too much imagination to see future potentialities in this for yourself. Just thought I'd give it a try.....thanks for listening. KDASFTG
The FED was created and is operated to benefit its shareholders......THE BANKS. A private Corporation, charged with regulating the very entities who own it.....Fox guarding the Hen house....
no kidding, very scary, good thing all their profits go to the U.S. Treasury or we would all be screwed.
I'll admit that I'm warily reading your thread and wondering if you are truly being complimentary or this is some sort of wind up. What markets do you primarily trade?
Greetings Again TT, I'm very sorry I interrupted your thread, your routine, and your day. I therefore very respectfully withdraw my request. Thanks for your consideration and response. KDASFTG
No interruption at all, my friend. I'd gladly try to offer what I can. It's just that on this website, people are usually not making polite requests, but instead using sarcasm to poke fun. If you would like to discuss what you trade, I'd be happy to give my thoughts. If not, I understand. Just remember that Fed policy usually influences markets over the long haul. Traders usually don't concern themselves with Fed policy in day to day activity, outside of Fed day, or minutes release, speeches, etc.
Greetings Again TT, Thanks for your response. I fully understand your caution in responding to my missive. As a rule on ET, I generally contact members via PM to discuss ideas, concepts, and issues. But as the PM route was not available to me in your case, I took a high risk chance and went public. One of the main reasons why I have chosen to conduct most of my “business” on ET via PM, is also because of the general lack of civility, and basic lack of simple common courtesy shown by some members here on ET. It never ceases to amaze me why anyone would choose to take the time and effort to create a posting on ET, which serves no useful purpose other than to sarcastically criticize and berate another person, whom he/she does not know. This is especially perplexing, when the standing alternative was to offer up ideas and concepts which had the potential for one to make more money. I guess I’ll never understand this compelling need in some individuals. In any case, regarding your offer to discuss your Fed Policy thoughts publicly here on ET, I guess I was thinking/hoping that this time would be different, because the topic was a potentially money making idea. However, right now I don’t see that this is a possibility on this forum, without constant and never ending unchecked distraction and abuse, now epidemic with just about every posting on this forum. Therefore, I have withdrawn my request. Since I daytrade Crude, I’m pretty much preoccupied during trading sessions. But my reason for making this inquiry to you was to attempt to begin to modify my current Trading Plan to accommodate some longer term position trading using my current daytrading methodology. The connection between the Fed's Policy decisions, your apparent knowledge base, and the markets, was just too temptingly obvious to pass up. So I took the risk,...."and the trade didn't work out". No problem here,...I'm a Trader.....it happens every single day.....smile. I still fully intend to pursue this course of action, but I will once again use my "other ET means" to fulfill my requirements. Again, thank you for your time and consideration. KDASFTG