What a Stupid Fixation the Market Had

It doesn’t seem so long ago that every Thursday at 4 pm I would be strapped in seat hoping for the best and fearing for the worst. Thursday afternoon was when the money supply numbers used to come out. The numbers moved prices, big. Think of how the market reacts to monthly Non-Farm Payroll number today.  Days both pre and post 1st Friday it influences talk and markets. It was the same back then with the Ms.

In many ways if was even worse than the NFPs. The Ms came out 4 times a months instead of just one. And the tape crossed on this exactly at 4pm. There is no market to move size after 4. You had to dump something in Asia or Europe. Often you had to wait to the following morning in NY to find liquidity.

People made/lost fortunes on this. An outfit called Salomon Brothers had a guy named Henry Kaufman. He was good with numbers, and had a real handle on calling the headline. “Henry the K” would whisper in someone’s ear and the Brothers made a bundle playing both sides of the casino.

It got so out of hand that they changed the rules. They moved the numbers to a Friday 4pm release. This of course was the worst possible choice for guys like me. You had to wait the whole weekend to see how things would work out. I lost a few weekends worrying about Monday.

Here’s the joke. These numbers mean next to nothing today. They actually stopped keeping track of M3. Money supply is still discussed, but the weekly numbers are a ho-mummer. Think of what a stupid fixation the market had at that time. We might do it again.

I bring this up because I do not believe in coincidences. Here is an example of a “coincidence” that should not be trusted. The first piece is that the Fed is releasing a statement at 2:15 Wednesday. The second is that Jon Hilsenrath wrote (another) article that give a very clear insight into the thinking of Mr. Bernanke.

The bottom line on the Hilsenrath story is that Bernanke is pushing to change monetary policy so that it goes on autopilot when inflation exceeds or falls below clearly defined bands.

Bernanke is an academic. He wants a computer to define when to tighten and when to loosen policy. That view fits in with his orderly view of the world. Oh, that it were orderly.

Ben also wants to introduce this new policy as a defensive move. He knows he is headed for a ton of criticism over QE. Both domestically and internationally. To blunt that he will introduce Inflation Targeting (“IT”). It removes him as a decision maker, so no one can blame him for the consequences. Very convenient. Not unlike the new rules that make it impossible for the Fed to incur a loss.

The Fed statement should be, well, a ho-hummer. No changes to anything. But read through the language and I think you will find:

i) Some talk that the Fed is forming a formal group to review inflation targeting as a policy determiner.

ii) A meaningful increase in the GDP forecast for 2011. If they push this estimate to 3.3% or higher it will fly in the face of continuing QE.

If you play poker you look for “tells”. Something that gives you a better “read” on the other guy’s hand. Should we see some language from the FOMC that confirms they are going forward with IT there will be two tells. The first is that it confirms the cozy link between Bernanke and the WSJ. It will also confirm that Bernanke is calling all of the shots. Everyone else is just saying “yes”. (Look for no dissenters Wednesday. New Board = Yes Ben)

US monetary policy can’t be run by a robot. A pragmatic approach is required. Bernanke is shunning the Fed’s responsibilities. He doesn’t want the Fed to be accountable. Very convenient.

IT won’t work of course. It will drive the market nuts with every blip up and down with every measure of inflation out there. Because the Fed has set visible targets they will be forced to act. Failure to do so would be very damaging to their credibility. But they will inevitably be forced to act at precisely the wrong time and in the wrong fashion. Just like they have done in the past.

The funny thing? 20 years from now someone will write about this and point to the new street bandits that made a killing and conclude, “what a stupid fixation the market had”.

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