Friday was a bloody day for Ben Bernanke in the markets. Both the bond and the equity markets gave Bernanke and his confreres a THUMBS DOWN in no uncertain terms. Long-dated Treasuries continue to ascend to new highs in price (and new lows in yield) and equity markets are LOWER than they were BEFORE the FED's 3 rate cuts. What is going on here? Didn't the equity market like the new Bernanke? Didn't they comprehend his fine words, with the implicit promise for BIG rate cuts SOON? Didn't the market understand the words of Bernanke's colleague, Professor Mishkin, who said that dramatic action was needed NOW, PRE-EMPTIVELY (i.e., before the economy really implodes)?
Market action on Friday underlined the FED's fundamental CURRENT problem. The bond market has been sending the same message to the FED for many, many months now. Bond investors, placing their money on the line, have for many months been expressing great confidence THAT THERE IS NO INFLATION PROBLEM, now OR in the future. Simultaneously, the bond market has been expressing, at least since June, great confidence that a very serious economic downturn is on its way, with strong DEFLATIONARY IMPLICATIONS. After all, if this is NOT what the Treasury market is saying, then why would bond investors be delighted to accept a LOWER RATE OF INTEREST for loaning the Treasury money for 30 YEARS than they could receive for loaning the Treasury money for 1 week? In other words, where is the demand for the INFLATION PREMIUM that long-term bond buyers always require? Where is their demand for protection against the INFLATION OF WHICH PROFESSOR BERNANKE AND MANY OF HIS COLLEAGUES ARE SO PETRIFIED?
Let us put the matter plainly. The bond market is SMARTER, MORE FAR-SEEING, AND MORE ACCURATE IN ITS FORECAST OF THE FUTURE TRENDS OF THE ECONOMY AND PRICES THAN THE FED, AND BY ORDERS OF MAGNITUDE.
It is not merely that the Bernanke FED is analytically incompetent to the nth degree. It is not merely that Bernanke -- as he said this week -- missed the boat entirely, basing FED policy in 2007 on the presumption that the economy was facing a "mid-course correction" rather than a serious economic downturn. It is not merely that Bernanke & Co. MISSED COMPLETELY the significance of the sub-prime crisis and the credit contraction as they surfaced and unfolded. It is not merely that Bernanke and his associates SUBSTITUTED their opinions, judgments, and emotionally-informed and politically correct biasses FOR THE VIRTUALLY INFALLIBLE predictive powers of the structure of the yield curve, which has correctly forecast the future direction of the economy for more than 60 years. It is not merely that the Bernanke FED -- like the Greenspan FED -- preferred to rely for its policy decisions on historical data (ie., incoming data) and LAGGING INDICATORS while IGNORING and DISSING UPON LEADING INDICATORS. It is not merely that the Bernanke FED said -- trust our judgment, our wisdom, our knowledge, our acumen -- WHEN THE FED HAS BEEN WRONG AGAIN AND AGAIN AND AGAIN.
No. It is far more than that. At bottom, the bond market knows that the Bernanke FED simply DOESN'T GET IT. If any further proof of this were needed, one only need consult the resounding statements of Bernanke and Mishkin this week. It is not that there is something wrong with the promises of relief. It is more fundamental than that. Bernanke, Mishkin, & Company MISS THE POINT ENTIRELY. The markets are not interested in, nor are they impressed by, WORDS. What they demand is ACTION. Perhaps someone should inform our illustrious FED policymakers that there is a profound difference BETWEEN WORDS AND ACTION. Perhaps someone should bring to their attention that: ACTIONS SPEAK LOUDER THAN WORDS. Didn't they teach this at the Princeon and Columbia economic departments? (Since we ourselves are graduates of the latter university, we do not wish to be accused of being anti-intellectual, anti-snob).
We have penned a number of posts about the FED over the months since blog inception in August. We refer interested readers to these analyses. In particular, we recall a post we did noting that in the struggle between Bernanke and the markets, our money was on the market, since Bernanke wasn't any "Andy Jackson." This forecast is coming true, but Bernanke and Company continue to manifest the stubbornnes of small men who are essentially incapable of eating crow, appearances to the contrary notwithstanding. Therfore, Bernanke and Mishkin, in their devotion to the gods of inflation-fighting, even now are sprinkling their promises with allusions to "taking back" forthcoming rate cuts at "a future date" if -- you guessed it -- "INFLATION" rises up again. Inflation has about as much a chance of rising up again here as it does in Japan. Of course, the insanity of the anti-inflation fixation of the generality of central bankers DID NOT prevent BOJ Governor Fukui from raising the overnight rate in Japan twice, defying the warnings of the prime minister and threats from the ruling Liberal-Democratic Party. Result: as we predicted at the time, recrudescence of severe weakness in the Japanese economy and re-intensification of deflationary trends even before they have been contained for more than a flyspeck of time.
