Kayfabe emerged within the ranks of professional wrestling as certain promoters discovered that orchestrated and scripted entertainment that pretended to be real was a better product than actual wrestling. It was emergent in the sense that market forces and incentives drove the success of those who figured this out.
The broader kayfabe of the past 50 years, in which we now exist across western society and culture, has similarly been emergent, IMO. It has not been some centralized plan deployed by the elite, ‘Illuminati’, etc. For example, I do not believe that there was a plan for the Federal Reserve to eventually end up in its current state at the founding in 1913, or in 1933, 1971, 1981, 1987, or in 2008.
The first ‘fake’ concept relative to the Fed to discuss is the so-called ‘dual mandate.’ This one is rather easy to see as being fake, as their decision-making in crisis rarely conforms with those supposed mandates. In addition, as laid out in this post, the measuring sticks for the mandates are also garbage. Go back in history and look at the initial employment reports around recessions and the subsequent revisions!
As with professional wrestling, it can be difficult for the audience, and indeed even the ‘actors,’ to keep track of what is real and what is fake. If you have never seen it before, watch the ESPN 30 for 30 documentary on Ric Flair to see how his life transformed from a ‘regular’ person into his wrestling character. Do the people at the Fed know what is real and what is fake?
Have they intentionally kept the Fed Funds rate anchored below actual inflation for nearly 20 years? Surely, at this stage, they must know the degree of asset bubbles QE has fueled? They are ‘experts,’ right?
A historical analysis of the Fed suggests how poor they have been at what is a very difficult ‘job.’ I place that in quotes, as outside of trying to protect the mega-banks, I am not sure what their ‘job’ actually seems to be. It is through this lens of protecting their actual constituency which makes their decision-making appear more rational, IMO. The rest is kayfabe to try and maintain institutional credibility so as to enable them to continue with their primary job.
This is where analytical tools like Dynamic Stochastic General Equilibrium models, which include all sorts of fancy math, suggest expertise, but fail time after time. The Fed’s track record of navigating the business cycle with policy decisions has been woeful. Generally speaking, the times when some modicum of ‘success’ can be identified stand out from the rest; perhaps Volcker in the early 80’s and Greenspan’s brief dalliance with using ECRI’s leading indicators in the mid-1990s, when he raised rates using leading indicators on pre-Boskin inflation data?
So as the Fed proceeds with applying bad models on fake data, it will be important to remember that their ultimate job is to protect the mega-banks. That can include pretending that they care about inflation for a time as part of trying to retain institutional and political credibility within Washington D.C., but if/when asset prices ‘crack,’ then they will surely spring into action regardless of what the garbage employment or inflation data are at the time.
However, these calculations are not linear themselves, and the interplay of politics and their institutional security as mega-bank protectorate is hugely important. With the current cyclical consumer inflation dynamic reaching levels which are now mainstream political talking points, the calculation is likely far different than in 2018, or even 2007-2008, for example.
The late 2018 game of chicken between the Fed and asset markets culminated in a 20% decline in the S&P 500 before the Fed blinked like Chuck on his tractor in Footloose. ECRI’s future inflation gauge (FIG) currently suggests a leveling out and likely deceleration in the inflation cycle this year. However, inflation tends to be sticky, and narratives like ‘transitory’ can cloud and confuse. If reported garbage inflation data comes in at 4.5% this year instead of today’s 7%, will that be ‘transitory’?
I have no idea where the intersection of political calculation and asset market price volatility will intersect with the Fed acting, but my guess is it is likely to be much lower than 2018. Also, the combination of poor analytical models and political pressures in an election year increases the risks of tightening financial conditions into a significant global economic slowdown. This is likely to open a window of vulnerability to economic shocks, which could tip things into a business cycle recession.
But surely the Fed would pivot if that becomes apparent?! The consensus amongst establishment economists and the Fed in summer 2008 was that recessionary risks remained muted, despite the recession having started in December 2007. Here were comments from the official US Treasury economic update for December 7th, 2007:
Job Creation Continues:
Job Growth:94,000 new jobs were created in November, the 51st straight month of job gains. The United States has added 1.5 million jobs in the past 12 months and about 8 and a half million jobs since August 2003. Employment increased in 48 states and the District of Columbia over the year ending in October. (Last updated: December 7, 2007)Low Unemployment: November's 4.7 percent unemployment rate is close to its lowest reading in 6 years. Unemployment rates have declined in 25 states and the District of Columbia over the year ending in October. (Last updated: December 7, 2007)
There Are Many Signs of Economic Strength:
Economic Growth: Real GDP growth was 4.9 percent in the third quarter of 2007, supported by strong gains in business investment and exports. (Last updated: November 29, 2007)Business Investment: Business spending on commercial structures and equipment rose solidly in the third quarter. Healthy corporate balance sheets bode well for continued investment growth. (Last updated: November 29,2007)
Exports: Strong global growth is boosting U.S. exports, which grew by 10.2 percent over the past 4 quarters. (Last updated: November 29, 2007)
Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.2 percent over the 12 months ending in October. (Last updated: November 15, 2007)
Here was a portion of the BEA’s Q2 2008 advanced GDP press release:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.9 percent in the second quarter of 2008 (that is, from the first quarter to the second quarter), according to advance estimates released by then Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.
Q1 would ultimately be revised down to -1.6% versus 0.9% referenced in that Q2 advanced report, while Q2 would be revised higher to 2.3% from 1.9%! You ever heard that a recession is ‘two consecutive quarters of GDP’? That is kayfabe too - nonsense.
So the Fed is not even doing the ‘job’ they are supposedly chartered to do, or perhaps they really are just absolutely terrible at it. Regardless, the recent ‘bearish flattener’ move in the US Treasury yield curve may be yet another signal that a major cyclical setup emerges. It is plausible that the hypercritical nature of market risks at present will mean they move far further and faster than many expect relative to potential carnage in asset markets being severe enough for the Fed to see that as a greater risk than the political landscape. I think the strike price on the ‘Fed put’ is likely to be much lower than many seem to think.