You don't know what you're doing

Confused yet? Macro Man is and, judging by the schizophrenic behaviour of risky assets, bonds, and currencies over the past 24 hours, he isn’t alone. Stocks and carry currencies have roared higher overnight, while bonds (except for JGBs, naturally) have sagged. Damn the torpedoes, full speed ahead, Cap’n!

Former Princeton professor Ben Bernanke’s recent performance reminds Macro Man of the old saw that “those who can’t do, teach.” Macro Man isn’t really sure what BB and the Fed are trying to do, but it doesn’t appear to be working.

Evidently, the recent change to the FOMC statement was a change in the communication strategy rather than an underlying change of view. For a guy who claims to believe in clear communication, BB certainly seems to confuse a lot of people. Ultimately, that should lead to an increased risk premium for longer duration assets and a steepening of the yield curve. Unsurprisingly, this is exactly what has happened since the FOMC statement, and the 2-10 curve is now at its steepest since last May (when BB chose to communicate Fed policy through the Money Honey.)
Even if one accepts as correct that the Fed is right to be focusing on inflation, Bernanke does little to inspire confidence. In the Q&A yesterday, he expressed the hope that core inflation would come down courtesy of the notorious owner’s equivalent rent. Now, the problems with OER are well-documented, and there is no need to rehash the argument in its entirety here. But it is perhaps worthwhile to graphically demonstrate exactly how poor this measure is in capturing changes in the price of shelter:

Macro Man’s major beef is twofold: BB is a) targeting a price measure that is utterly irrelevant to reality, which is surely not the Fed’s mandate, and b) more than occasionally guilty of cognitive dissonance, only trotting out facts or wishcasts when they appear to support his view, and conveniently ignoring them when they do not. Now, he’s clearly not alone in this regard; a number of prominent Wall Street economists and strategists make a very good living doing exactly that. Surely, however, markets can and should expect more from the chairman of the FOMC.

This man does not know what he is doing. Do you?
As a housekeeping note: due to a busier than expected week, the answers to last weekend’s quiz will be unveiled this coming weekend.





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Anonymous
admin
March 29, 2007 at 11:34 AM ×

His predecessor was, at the very least, entertaining. But this guy seems only to have succeeded in marginalizing the Fed - a tree falling in the forest. Or perhaps that's just an expression of the current world order...

CB

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OldVet
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March 29, 2007 at 11:59 AM ×

Nobody knew what to do exactly the last time we had stagflation either. Then Fed said to hell with it and cranked up rates to kill inflation. Bulls are assuming that no action equals lower rates, bears are assuming high rates and piling on carry borrowings. Schizoid, but seems to fit the weird pattern.

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Anonymous
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March 29, 2007 at 12:02 PM ×

Korean state pension system says it'll invest in local and foreign stocks - that'll drag up Asian equities, especially if others follow their lead.

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Macro Man
admin
March 29, 2007 at 12:52 PM ×

Given the general level of dissatisfaction with their respective performances, maybe BB should manage the England football team and Steve McClaren should run the Fed.

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Anonymous
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March 29, 2007 at 1:30 PM ×

I remember that teachers at school sporting beards were always the ones to beware of - normally suffering from power delusions and tendencies towards psychotic behaviour when under stress.

I wonder if Ben Bukkake sees the light and removes the mess from his face.

RK

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Anonymous
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March 29, 2007 at 11:22 PM ×

That's if the Spanish team releases him..

CB

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