Think central bankers have “lost control?” Think again. Consider this headline from Bloomberg:
“Latam currencies find some stability after volatile NY session, finishing Monday stronger as U.S. equities rise, dollar weakens and UST yields are steady; dovish Brainard speech helps calm market, with Mexican peso rebounding past 19.00 key level after falling through it during London hours.”
We’ve been keen on making what we at think is a keen distinction. There’s a difference between losing control of markets and losing control of your own sanity. OPEC didn’t lose control of markets in 2014, they consciously orchestrated a price collapse. What happened thereafter was a 16% budget deficit and a royal political shakeup. They didn’t lose control of oil markets, they just lost their mind in a geopolitical fog.
The same thing is going on with central bankers. They haven’t lost control of markets. Look at the reaction to Brainard today. It hasn’t quite reversed Friday’s bloodbath, but it’s come damn close. And she really didn’t say much.
But, like OPEC, central bankers have most assuredly lost their sanity. They’re relying on econometric models to make real-world decisions. That’s a mistake in anything but the so-called “hard-sciences.” You can’t make policy decisions based on models that rely on the ambiguity of human behavior. The world doesn’t work like that. You can make predictions based on physics and biology, but not on economics. Why? Because economics is partially a slave to human behavior which is both fallible and unpredictable.
The same ill-fated effort has been tried to largely no avail in political science. When there’s human decision making involved, you can’t nail it down. You can’t make reliable predictions. All you can do is guess. With oil markets the situation is infinitely complicated by sectarian strife between Tehran and Riyadh. With capital markets, there are so many confounding factors that it’s literally impossible to draw any conclusions. How, for instance, do you draw conclusions about PE multiples when you’re allowing companies to borrow for basically nothing and use the proceeds to buyback their own stock? It’s a perversion.
But just like the Saudis can keep oil prices suppressed for as long as they please to achieve whatever geopolitical ends they’re trying to achieve, central bankers can keep these markets afloat, suppressing volatility along the way.
But “as long as they please” has limits. Eventually, the Russia/Iran alliance will break Riyadh. They’re already running a 14% budget deficit and if they think they can battle the Russians and Iranians to a standstill in the oil market they’re wrong. Why? Because the Saudi citizenry is accustomed to a certain way of life (i.e. they expect costly government subsidies). On the other hand Putin and the Ayatollah can do whatever they want without the “electorate” (if you want to call it that) batting an eye. This won’t work forever. Eventually, the riyal peg will break and the Saudis will too.
It’s the same thing with the Fed. They can keep control of asset markets for an extended period of time. Brainard’s Monday speech was a prime example. But eventually, this will snapback. When will that be? Well we can tell you exactly when. When the American people realize the absurdity in issuing debt and then buying it from yourself. We’ve said this before, but it always seems to fall on deaf ears. This is a ponzi scheme. And Janet Yellen is no Alan Greenspan.
A ponzi scheme isn’t that hard to understand. And eventually, the public’s “lightbulb” will go off. At that point, the Fed won’t have to worry about inflation expectations anymore.
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