Mount Easemore

By: Michael Ashton | Thu, Apr 7, 2016
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Thursday evening's public discussion between Fed Chairman Janet Yellen and former chairmen Volcker, Greenspan, and Bernanke - these last three in order of gravitas and effectiveness and (perhaps not unrelatedly) reverse order of academic accomplishment - was a first. Never before, apparently, have four current and former Fed chairmen appeared on the same stage. This is less amazing than it seems: prior to Alan Greenspan it was the practice of the Federal Reserve to remain out of the limelight.

Honestly, we all probably would have been better off had they stayed there.

Still, it was a fascinating event. The International House, which hosted the event, called it the "Fabulous Four Fed chairs," but since they did not serve contemporaneously a better image is probably Mount Rushmore...if Mount Rushmore had the faces by Nixon, Hoover, Carter, and Andrew Johnson instead of Washington, Lincoln, Teddy Roosevelt, and Thomas Jefferson.

Okay, all bond guys have a soft spot for Paul Volcker, who was the last Fed Chairman to try monetarism and managed to break the back of inflation using its common-sense prescription. But he should have stayed retired. The Volcker Rule has sucked a tremendous amount of liquidity out of the market (in conjunction with other Dodd-Frank rules) and is clearly a stain on his resumé.

Everyone was hoping that this collection of experienced policymakers would give us some clear consensus about what the Fed should do now - raise rates as per the original path that was implied? Raise rates more slowly? Maintain rates? Keep on adding liquidity? Instead, there was almost nothing useful to be gleaned from the conversation. The three ex-chairmen seemed to be competing to make the funniest statement (some intentionally, and some unintentionally like Bernanke's statement that "unwinding the balance sheet is very straightforward") without saying anything constructive, challenging, or even useful about current and future Fed policy; Yellen seemed to want to say useful things but it isn't clear she has anything useful to say.

One overwhelming consensus was that the economy is doing just fine, but isn't a "bubble economy." Volcker did allow that "there are aspects of the financial world that are overextended." Oh, do you think so? Maybe something like the chart below, which is an updated version of Figure 9.7 from my book?

S&P500 Index

I guess that might be considered overextended.

Here are two other interesting snippets:

In short, all of these notable central bankers (which is a little like saying "these notable hobos") seemed to agree that everything is just fine and there is no urgency with respect to anything right now. I've spent the last quarter-century deciphering three of these four speakers, and I must say I can't decide whether "everything is fine" means "the Fed can go ahead and tighten now, because everything is fine," or "there's no reason for the Fed to tighten now, because easing forever doesn't seem to be a problem."[2]

So, markets remain suspended from the pendulum of complacency, which right now seems to be quite a bit on the "complacent" side but will, I suspect, shortly swing the other way to "disturbed and uncomfortable". I must say that nothing I heard tonight suggests further Fed tightening is imminent. However, that point in itself makes me disturbed and uncomfortable and at some point the market will oscillate around to that view - perhaps next Thursday when I think there is a good chance that core CPI rises to 2.4% y/y.

 


Administrative Note: On Friday at 4pm ET, I will be on Bloomberg TV's "What'd You Miss?" with Joe Weisenthal, Alix Steel, and Scarlet Fu.

[1] In keeping with my usual tilt to keep focused on inflation and real values, it should be noted that the $64,000 question would today be the $523,277 question. The quiz show ended in November 1958 with the CPI price index at 29; it is now at 237.111.

[2] Interestingly, this last point directly echoes some of Keynes' points in the General Theory. I will revisit that point next week.

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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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