‘ Some’ mumbo-jumbo
On Wednesday night, the financial world again conducted its favorite ritual – the Federal Open Market Committee held one of its eight annual meetings over Tuesday and Wednesday, at the end of which it decided… wait for it!... to do nothing.
Interest rates remained at record lows, entirely as expected, but with respect to the critical question of whether the FOMC was ready to start raising rates in September (its next meeting), or later, there was no clear news. The message was that the Fed is still “data-dependent” – a sophisticated way of saying “we’ll wait and see” – but the medium through which that message was communicated, namely the statement issued after the meeting, was painstakingly scrutinized for clues.
Sure enough, all the very smart people whose job is to follow, analyze and then predict what the Fed is going to do, lit upon an important change between this statement and the previous one from June. Whereas then, the Fed said it wanted to see “further improvement” in the labor market before it would raise rates, this time “some further improvement” would be necessary.
Instantly, and ever since, millions of words have poured forth from countless keyboards, chewing over the relative significance of “some.”
Of course, these ultra-clever analysts would all scoff at the comparison to medieval Christian scholars debating how many angels could dance on the head of a pin. Today’s highly-paid financial analysts are, after all, engaged in matters of obvious practicality and overwhelming importance, namely what the financial markets are going to do tomorrow, next week and next month.
It can be argued that the record of forecasters is so appalling that nothing they say should be treated at all seriously. However, that is an ex post argument that does not exclude the possibility that forecasting could be useful and even fairly accurate – and alongside the evidence of general failure is also that of persons and methodologies that achieved some measure of success.
It also can be argued that the financial markets have become so distorted, and consequently dysfunctional, that using any objective analytical tools to predict them is now a hopeless task and should be seen as such ex ante, not just ex post.
This column entirely agrees that markets are dysfunctional – but the reason that is so is because of the systematic, massive and open-ended intervention of central banks. If so, it surely follows that central banks, as the dominant “movers and shakers” of markets, require constant attention and intense analysis.
Recent events in China would seem to confirm this.
The central bank is the supreme puppet-master
The Chinese stock market has undergone a manic (and epic) boom and bust cycle over the past year – that is still not complete. The Chinese authorities did not merely let the bubble develop, they actively catalyzed the process. Now, when it has popped, they are making extraordinary efforts to stem the damage and restore stability.
In other words, what matters in China is not what the market does, but what the authorities do – because the market is a puppet in the hands of governmental puppet-masters. Anyone involved in the market should – nay must – try and decipher what the government is doing or, better yet, thinking of doing.
The American and European financial markets are also manipulated.
Ten years ago, that would have been considered a shocking, almost absurd, statement. Five years ago, it still would have been controversial. Today, however, it is on par with vaccination – the jury is in, the evidence has been accumulated and published in articles and books and revealed in regulatory investigations.
In the developed world, at least, it seems the manipulation of each market is conducted by different entities – though the names of the world’s biggest financial institutions come up with remarkable regularity. But all the markets, irrespective of what they trade, run on the same fuel – liquidity. In the modern financial system, it is central banks that determine how much liquidity is available and, in corrupt countries, to whom. Ultimately, therefore, the central bank is the supreme puppet-master.
This, then, is the rationale for the entire religion of following central banks, listening to central bankers and delving deeply into every utterance – written, spoken or tweeted. The analysts who do this are indeed like medieval priests, convinced that their intellectual efforts are religiously justified and will lead to better understanding of the Divine Will. So, too, will the effort to understand the implications of the nuances in the communications of the central bankers lead to Nirvana, in whatever Mammon-oriented way that term is understood by investment banks and other financial institutions.
To participate in this effort, even as a passive bystander, is therefore an act of faith. If you don’t believe there are angels, let alone a Divine Will, it’s a waste of time and effort.
Nowadays, too, you must believe in the centrality of central banks and their power to direct markets as they wish – otherwise, who cares whether the word “some” was added and what it means?
But the Chinese debacle, as have so many before it, proves that this power is limited and, when abused by excessive use, creates a reaction that produces precisely the opposite result to that intended by the supposedly all-powerful central bankers.