Article / 22 June 2016 at 10:11 GMT

Steen's Chronicle: Transparent Yellen imprisoned by home-made dilemma

Chief Economist & CIO / Saxo Bank
  • FOMC has destroyed what credibility it had in the space of nine months
  • Central bankers have chosen to collude in great mispricing of cash flows
  • Fed chair Yellen guilty of overt focus on single data points
  • Political, not economic events, swaying Fed's thinking

Editor's note: Mark McNabb guests on Steen's chronicle this week. Steen's thoughts follow.


The FOMC's rate decisions have been hollow and predictable. Photo: iStock

By Mark M McNabb

The Federal Open Market Committee has in less than nine months destroyed what little credibility remained after the quantitative-easing twist and the programs that preceded it. In the name of transparency and full employment, the FOMC’s rate decisions have been hollow and predictable.  Even the September 2015 refusal, which sent markets into dislocation, was apparent to the Fed Funds futures market a month ahead. What economic game is the FOMC playing?

Should one brush off a text on game theory in order to understand this FOMC committee? No, and not because the underlying assumptions require an intelligent, rational agent. Several hundred years of economic history and recalling the importance of the first word in “political economics” studies would be of greater use. 

I am certain we could map out a group of central bankers who revere the economic beauty of the prisoner’s dilemma, or at least caught the movie. They would celebrate the central finding that if one were to break ranks of global accommodation that eternal damnation and depression would follow. The nascent recovery in economies would reverse into a deflationary spiral even if the first order effect would be to slow the misallocation of financial assets. 

Instead, central bankers have chosen to collude in the greatest mispricing of cash flows throughout the bond tenor in a rationale born of a political calculus rather than economic.

Why Janet Yellen is so predictable:

       1  Overt focus on one data point 
       2  Complicit with ECB president Mario Draghi on the notion that negative rates are acceptable
       3  Swayed easily by external events that are political not economic
       4  Political leanings to full employment at any cost
       5  Lack of a policy
       6  Difficult to be transparent and the bearer of bad news
       7  Swayed by the expectations poll for hike among peer economists


Great insight from Mark and writing this the day before the day….of course I am referring to the Brexit vote in the UK where it is abundantly clear that anything which creates more of the same will kill growth and spin us towards recession. Charles Gave of Gavekal Research has been flagging recession risk for a long time (and I have agreed…) and now the data is beginning to prove the point:


Source: Gavekal Data/Macrobond

"What I find remarkable in the Brexit debate is how the 'Remain' camp talks about capital flight, recession risk and lack of investment if UK votes leave, however this is already happening and in a big way – the Brexit vote has become yet another excuse not to ramp up capital expenditure….."

This is Bank of England UK Mortgage approvals and the OECD's leading indicator which many allocation managers use as a benchmark for their work…..both show significant slowdown..


Source: Bloomberg

I remain faithful to my risk allocation which has been in place since late April.


Source: Saxo Bank

And our 401,000 allocation model continues to be churn out good performance being long gold, fixed income and equities.

 Source: Saxo Bank

Finally, I can’t wait for the Brexit vote to be done with…….back to basics hopefully… I will let Bob Dylan have the final words: ‘Behind every beautiful thing, there’s some kind of pain’

Safe travels.


Bob's the man who sums it up best. Photo: iStock

— Edited by Martin O'Rourke

Steen Jakobsen is chief economist at Saxo Bank


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