Monthly Archives: April 2015

Keynesian groupthink. Crowds and investors take it all in strides.

Not few smart people from main street are baffled: most investors not only calmly assume negative interest rates for their investments, but also seem to enjoy playing the Central Bank controlled “common knowledge game”. I am frequently asked: why is it that investors, both individuals and institutions, calmly accept NIRP or ZIRP? How come investors seem to be willing to buy either negative yielders, when they play it safe, or equities or high yielders, when they want to go for income? What’s more, they don’t look like being particularly stressed about it. Nobody senses the danger embedded in actual pricing. ¿Does that make sense?

groupthink1It’s a very good question. You know it is, when you understand the extraordinary relevance of the issue, and  you are nevertheless unable to provide a short, sharp reply. In order to find one, it may be time to switch out of economics (it offers no rational answers for this conduct), and take a look instead at both sociology and psychiatry. The observable fact is that rational investors are an endangered species. They seem to share the fate of the black Rhino. ¿Why?

Something is amiss in my long and elaborate reasoning. This crazy monetary and fiscal environment goes on and on with no signs of an end. Worse yet: it has been approved and consented by a majority of the population. And validated by institutional investors. There has to be a deep human reason for the market to blindly follow the  CB leader “du jour”.

victim-of-the-spanish-inquisition-everettMuch like in the Nazi Germany with Hitler, most of the population and investors are not in the Central Bank/keynesian groupthink game. But following the leader is the easiest way out of their personal conundrum. Individual thinkers have a tough time, and the Gestapo might single them out. It’s best to go with the flow.

Nothing new. When the time comes, humanity is seldom brave to stand up against wrongdoing. The Spanish medieval inquisition court is a case in point: people looked the other way. We are still there nowadays. Think of the standard witness behaviour in rape scenes in the NY underground! We have to invest in real education for the population: everywhere!

I was unable to see this. I thought people would not take any more lies at some point. I was wrong. We all get things wrong, Bernanke being the living exception of course, but nonetheless, my ego has to put up with it. Thankfully, when humbled by human behaviour, and conceding error, it does help it to see my shortcoming pale, when put in contrast with Eugene Fama’s EMH (efficient market hypothesis). This quote shows his degree of conviction in his theory:

I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I couldn’t disagree more. Markets can only be efficient, and the price generated optimal, when economic actors are buying and selling rationally, in full knowledge and understanding of all the relevant information. This is not realistic. Where’s the rationality to be found in a buyer of French debt at negative yields? He is just following the obvious course, the one that inflicts him less pain in the very short, inmediate term. We all expect too much of rational behaviour, and that doesn’t help our investment performance. We have to allow for ignorance, herding, misunderstanding, and central bank rigging. That makes investing a very difficult science to master. Continue reading

All u can borrow ¡for free!

Dear Ben (Bernanke),

Thank you for your famous blog. A compelling compilation of quaint narrative essays where all the conventions of storytelling: plot, character, setting, and ending, are present. Needless to say, you do experience that special feeling when reading through the specific, and often sensory details, provided to get the reader involved in the conveniently biased sequence of the story.

Fairy tales at their very best. Indeed, I expected no less. You have induced some interesting thinking in some readers. We must be grateful for your efforts to stimulate our minds, even if it comes at the cost of offending our “uncommon sense”.

The first thing that has come to my mind, is the stark contrast between your conduct and that of your predecessor Paul Volcker. You and Greenspan have validated that old latin adage that goes to say “Excusatio non petita, accusatio manifesta”. Funny how Volcker has never felt the urge to talk about his incumbency at the Fed. Okay, to be fair, maybe it’s just that you and the maestro are more outspoken. Perhaps.

And you are smart as well Ben. You sure know how to cover your tracks. Your last post “Should monetary policy take into account risks to financial stability?” is a compendium of self-serving prose. Let me see if I got you right:

1.- The Fed has kept rates low, “conditioned by the great recession”. No previous mistakes at all. No cause effect dynamics between the great recession and previous easy monetary policy. The miraculous “great moderation” that preceded the great recession was awesome, and fully enabled by the Fed. It was just bad luck that the great recession ensued. You don’t know why it happened. Monetary policy had nothing to do with it. It was a black swan. Nobody could have seen it coming. You did not keep rates too low for too long. We are not making the same mistake again.

2.- You, and the Fed, saved America, or at least, in your own words, “Fed policies had a lot to do with that”. And you did that despite the “headwinds” arising from fiscal policy, the financial crisis, and “other factors” (again, none of them your fault).  Superman wouldn’t have done better. No mistakes, only action of the right kind, accurately following the Princeton sect manual.

3.- The actual economic environment in the US is excellent, jobs have improved, and the terrible ogre of deflation is under control. Everything is as well as it could possibly be, particularly considering the difficult circumstances that you encountered during your tenure as chairman. Janet should be grateful for the wonderful position she finds herself in. You haven’t painted her into a corner at all. She’s a dove, and ought to feel comfortable with ZIRP anyway.

4.- Best of all, and topping the list, is the fact that Ajello, Laubach, and López-Salido have provided some insight on the fact that monetary policy cannot be used  to promote financial stability or pop asset bubbles. Nothing is said about inducing them with excess money and credit creation.  After all, monetary policy is, in your own words, a “blunt tool”, and “to the extent that it is diverted to the task of reducing risks to financial stability, (it) is not available to help the Fed attain its near-term objectives of full employment and price stability”. That makes sense because, in the long run, we are all dead, and who cares. So the near term objectives are all that counts. ¿Right?

5.- In truth, you are certain that monetary policy never generates instability and/or bubbles (the subtle implied message reading between the lines), and it is too blunt a tool to help prevent them. Instability just happens to exist, as Minsky said, and we have to use methods other than monetary policy to restrain it as much as possible. And if we can’t, well … tough luck. Again, it’s not your fault (see picture of your favourite pet).

6.- Even if moneatry policy is a blunt tool, it is the tool that God gave you (the last messiah after the maestro), to attain “full employment and price stability”. And, blunt as it is, you nevertheless used it wisely to save America and the world. It is for that reason and no other, that real interest rates below the five year term, have been negative for six years and still counting. But we should not think of you as a cold-hearted individual. You are after all, a compassionate man and feel sorry for retired savers. You and your people at the Fed lament their bad luck. But they really don’t matter because, even in the short run, they will probably be dead. Zero return on their savings will help them get there sooner (and suffer less on their way to the end).

You’ve done very well Ben. I hear you get a six figure number for every event you attend. Make sure you cash in a lot of money. If you live a long live you are going to need it (ask pension fund managers). pension underfunding gets worse ds9janUnfortunately Ben, one of the consequences of your policies is that it will probably cost you a couple of basis points (see fedspeak for the meaning of a couple) anually, just to remain invested in a portfolio of global safe bonds. More so, if you pay a wealth tax and the depositary. But don’t despair, you will probably make enough money beforehand to account for that.

Brilliant writing. Keep it up. It is always best to suffer martyrdom, than confess to any mischief or wrongdoing. Never do that. Beware of perfection though. Because nobody can be perfect, perfection puts your life at risk unnecessarily. I would recommend you allow for some minor imperfections, like not exercising enough, drinking too much cofee, or the likes. It would be good for your image as well.

And, not to forget, good luck with your equity portfolio if you have one. Hold on to it, you have to help preserve the wealth effect. No rushing for the exits when the time comes please, we don’t need another italian ship captain. Hold on to equities for the long run, and some new chairman will bail you and Siegel out. Trust the Fed.

Yours faithfully, Continue reading