Federal Reserve In The Caboose.

October 1, 2015

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Simple behavioral explanation for Fed policy statements.

Fed never had an exit strategy. Documented.

Astonishing 82% of “Economisseds” are still following the Fed.

Effective cycle and macro models left the train months ago.

Successful investing is proactive and not dependent on central banks.


Simple behavioral explanation for Fed policy statements.

It can’t be an accident that the Federal reserve has missed with its economic forecasts on the high side for 6 years in a row, and it can’t be a completely economic issue either. Peter Schiff has come up with the best and simplest explanation for fed policy statements which are now just going round in circles.

The Fed has to promote the idea that its policies are working and so the notion that it can raise interest rates soon is essential to this narrative. However, it can not actually raise interest rates, otherwise it will prove that its narrative is obviously wrong.

Fed never had an exit strategy. Documented.

Round and round we go in the Monetary Roach Motel from which the Fed never had an exit plan, as is clear from documents recently released on Fed meetings over 5 years ago.

I don’t know how long this can go on but clearly the Fed are operating from the same playbook for a December rate rise. Immediately following their no rate rise decision in September, almost every day since, Fed statements have repeatedly committed to a rate rise still this year! Doing and saying are very different as described above.

Astonishing 82% of “Economisseds” are still following the Fed.

Astonishingly it seems most “Economisseds” are still singing from the Fed playbook, while it was overwhelmingly clear to Peter Schiff that there would be no rate rise in September, as there wasn’t in June, nor in every Fed meeting for the last several years, fully 82% of “experts” expected a September rate hike.


Could it be that 82% of “experts” are still Macro050715just following the Fed’s narrative without noticing that economic growth has already peaked 9 months ago and, in addition, that the Fed was nowhere close to its objectives and moving in the wrong direction?  Back in March this was already overwhelmingly clear as I wrote in “Recovery. Fake and Failing”.


The chart above also shows how Macro1001GDPnow looked in early June. The Fed’s own Atlanta branch, which has the most accurate measure of Q3 GDP is currently below 1% as shown to the right. Why on earth would the Fed be considering raising rates?

Now that the S&P 500 has just had it worst quarter since 2011, even without any rate rise, shouldn’t investors reconsider what or who they themselves have been following?

Why is anyone surprised anymore by what has been perhaps one of  the most telegraphed macro economic slowdowns for years? It has been clearly visible to anyone just analyzing publicly available data.

Finally macro economic forecasts are 1015globalpmicoming off the rails, as the data continues on its same worldwide trajectory downward. But the Fed is still singing its tune. This means that the Fed is firmly trapped in the Caboose of economic development, and anyone just following the Fed will be left far behind the markets.

Some cycle and macro models left the train months ago.

Investors need to be aware that genuine analysis means far more than following the Fed. Cycle awareness and its consequences for investment allocation both from market and economic models already jumped off the train many months ago. This was clear in three of the four cycle dynamic models I have, and I allocated away from the Equity Selector in April, time stamped in emails and positions. Hedgeye are also time stamped on their macro model from the beginning of Q3, going to a zero equity allocation.

Successful investing is proactive and not dependent on central banks.

2015 may end up being the year of central bank failure. The Swiss National Bank gave up intervening against its own currency at a cost of 10s of billions. The European Central Bank launched its biggest QE program1015Japanrecession ever, but 8 months in, the markets are no higher and the economy is still in desperate condition. The Peoples Bank Of China has turned its stock markets into a casino and scared away investors with little to show for it. The Bank of Japan has been the most aggressive in its QE programs but is now returning to its 4th recession in 5 years!

Obviously, no one should ignore the central banks and what they do but does anyone really believe that following central banks constitutes an investment plan or effective economic guidance?

Do not stay in the Caboose with the Fed and their followers. Successful investment depends on proactive and timely anticipation, and models with credible long term track records of consistent success.



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