Federal Reserve

Is the Fed Lazy, Stupid, or Crazy?

By David Stockman  |  August 12, 2019

If you can reconcile these two series, you and I probably aren’t going to agree on much:

In blue is the Equity Market-Related Economic Uncertainty Index. In red is the Economic Policy Uncertainty Index for the United States.

The methodologies are so similar; here’s the former explained, and here’s the latter. And yet their results this Monday are so wildly different. It is, as Sven Henrich suggested, completely inexplicable.

As such, it’s the perfect emblem for the current market environment.

“Nobody knows anything,” as William Goldman famously wrote of the screen trade. “Every time out it’s a guess and, if you’re lucky, an educated one.”

Goldman – whose pen generated the screenplays “Butch Cassidy and the Sundance Kid” and “All the President’s Men” as well as the novel The Princess Bride – nailed it but in a much broader sense than he had in mind.

Today, everything’s about money, television, and bullshit. And, indeed, nobody knows anything.

Let’s Consider Another Example

Goldman Sachs’ U.S. economists cut their forecast for fourth-quarter gross domestic product (GDP) growth by 0.2 percentage points in a research note published on Sunday.

“Fears that the trade war will trigger a recession are growing,” they wrote. “We have increased our estimate of the growth impact of the trade war.”


A couple weeks ago, Goldman Sachs’ top U.S. equity strategists raised their 2019 year-end price target for the S&P 500 Index by 3% to 3,100. In the same note, they cut their earnings-per-share forecast for the index by $6.

Folks, it’s all about multiple expansion.

Preservation of Wealth

Indeed, as I note in the August issue of The Stockman Letter, “Over the 125 months since the March 2009 bottom… there have been more than 50 distinct opportunities to buy the (small) dips… and, if done on leverage or with options, make a killing in the next upward move.”

Markets are irrational right now. And the Federal Reserve has amply demonstrated it will do everything it can to preserve this status quo.

And that’s why things are about to get a little more dynamic with the asset allocation model that centers The Stockman Letter.

“Preservation of wealth” is and will always be our No. 1 priority. But we’ve added talent in the form of a seasoned trader who will help us “make a killing in the next move”… whether that move is “up” or “down.”

Inflation Of The Everything Bubble

There’s too much confusion because the Fed is utterly lost in a puzzle palace of Keynesian academic gobbledygook. And that can only lead to two things: further inflation of the Everything Bubble and then it’s thundering collapse.

Their total commitment to rate cuts grows from “official worry,” according to The Wall Street Journal, that “inflation pressures remain too weak, not too strong.”

The authors further note that “the Fed targets 2% inflation as a sign of healthy growth across the economy” and that it “has failed to convincingly reach the goal since formally adopting it in 2012.”

That’s just not so. I checked out seven different ways they measure general consumer inflation. None of them are perfect, and all tend to understate the true increase in the price level. That’s because of arbitrary gimmicks like “hedonic adjustments.” Hedonics are supposed to measure the change in the quality, function, and value of goods over time.

Measure Of Inflation

Here’s the spoiler alert with respect to all of these seven measures of the general price level:

In the context of a dynamic and huge market-based economy, the size, shape, quality, durability, utility, and value of every single good and/or service is constantly changing.

That’s what capitalists do in response to competition, innovation, and changing consumer preferences, among a multiplicity of other factors.

In any event, here are the seven measures of inflation and their seven-year compound annual growth rates since inflation targeting was adopted:

  • Consumer Price Index: 1.60%
  • Core CPI (less food and energy): 1.95%
  • 16% Trimmed Mean CPI: 1.94%
  • Personal Consumption Expenditure Deflator: 1.34%
  • PCE Deflator for Services: 2.30%
  • PCE Deflator less food and energy: 1.68%
  • “Sticky Price” CPI: 2.25%

The average annualized inflation rate for the seven measures is 1.86% over the last seven years. It’s virtually dead on 2.00% during the last 12 months.

Yet our monetary central planners are pleasuring Wall Street with ever-cheaper money because they see shortfalls in the second decimal place… they’re simply fiddling.

And it’s flat-out insane.

Your Escape Begins Here

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR