The price of everything

Look ma – no rules !

 

 

“Hell, there are no rules here – we’re trying to accomplish something.”

-      Thomas Edison.

 

Operating outside of a rule book may be advantageous for entrepreneurs. But it is likely to be hazardous for central bankers and for the markets that trot, for the time being, obediently behind them. Since central bank activity is now the swing factor behind prices in all markets, unprecedented actions in monetary policy run the risk of unprecedented consequences.

US Treasury bond yields began their slow, stately descent from the mid-teens in the early 1980s. Newly installed at the Federal Reserve, Paul Volcker was determined to squeeze inflation out of the system, and he succeeded. Fed funds stood at 11% when Volcker entered office in 1979. By June 1981 he had hiked them all the way to 20%. Corporate America was not impressed. Indebted farmers blockaded the Eccles building.

But the pain was relatively short-lived. And as Volcker’s victory over inflation became more apparent, markets applauded. As bond prices started to rise, stock prices joined them. Both credit and equity markets began a multi-decade bull run.

As far as US interest rates are concerned, we appear to have reached the end of the line. Janet Yellen is widely expected to announce a modest tightening next month. How the bond and stock markets react will be, if you’ll pardon the pun, interesting.

Over here in Europe, zero has not marked the lower bound for rates. The ECB’s deposit rate stands at -0.2%. Unlike Janet Yellen, Mario Draghi is widely expected to cut its deposit rate even further, and to approve more quantitative easing.

ZIRP, NIRP and QE have consequences. One of those consequences is that government bond yields throughout Europe have gone negative. Out to two year durations, government bond yields are now negative in Switzerland. And Germany. And Finland. And the Netherlands. And Austria. And Belgium. And Denmark. And France. And Ireland. And Sweden. And Italy. And Spain. Irrespective of the credit quality of those borrowers, bond investors in all of those countries are guaranteed to lose money if they hold that short-term paper until it matures. That is quite odd.

The weirdness has spread from bonds to cash. From January, depositors in Alternative Bank Schweiz in Switzerland will earn -0.125% for lending their money to the bank. Depositors of over 100,000 Swiss francs will earn -0.75%. Which is certainly an alternative to traditional banking.

If you wanted to trigger a bank run, this is certainly how you might go about it. Drive interest rates down to zero. Then cut them some more. At the same time, start floating trial balloons about banning cash altogether. And if you’re in the euro zone, make sure you squander seven years doing precisely nothing to restructure your banking system after the near-death experience of 2008.

Could QE be causing deflation ? It’s a valid question. By suppressing interest rates, central banks are making it impossible for market prices and bad economic actors to clear. (The world, in other words, has turned into 1990s Japan.) With otherwise insolvent businesses – zombies – remaining operational, supply is rising. Assuming no change in demand, prices are falling. That is either disinflation or outright deflation. And Mario Draghi is determined that the beatings will continue until morale improves.

What should the rational investor do in an environment of ongoing financial repression ?

To know the answer, we need to know whether central banks will be successful in their increasingly quixotic efforts to vanquish deflation. We think the ultimate outcome will be an inflationary mess on a scale perhaps unprecedented in financial history, but not, perhaps, before a deflationary crisis happens first.

Either way, western market government bonds no longer offer any margin of safety, only the prospect of guaranteed loss. They have once again become certificates of confiscation.

The attractions of common stocks are more nuanced, given the extent to which they are dependent on ongoing monetary expansion (not easily forecastable – “Don’t fight the Fed” has been the appropriate response since 2008, but it will not be forever). For us, the logical solution is to focus only on the highest quality businesses trading at the lowest possible multiples – which invalidates most western markets, notably those of the US, from consideration.

We find price momentum strategies (i.e. long term systematic trend-following) appealing on two fronts – a historic lack of correlation to stock and bond markets first, and a proven ability to generate strong positive returns during market shocks.

And notwithstanding the price action of the last four years, we continue to see merit in precious metals. Think of gold, for example, not as a commodity per se (gold is rarely if ever consumed), but as a special type of bond. In the words of Charlie Morris, a zero coupon irredeemable bond. With no credit risk. And where the issuer is God.

 

Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.

Seek and ye shall find

 

 

“A man who wants to lead the orchestra must turn his back on the crowd.”

-      Max Lucado.

 

So. Farewell then Jim Slater, who died earlier this month. We met Mr. Slater only once, at an investment conference at the height of the financial crisis in 2008. Just before going on stage we asked him what he was doing with his own money. He replied,

“I own index-linked Gilts in bearer form and I am holding them in a fire-proof safety deposit box.”

We doubt if he was joking.

Seven years on from the collapse of Lehman Brothers, everything has changed, and yet nothing has changed. There is no longer a perception of panic. $14 trillion of central bank stimulus has seen to that. But at the same time, a predicament brought to crisis by too much borrowed money has been exacerbated by much more borrowed money: $57 trillion of it, according to the McKinsey Global Institute. Perhaps the most prescient commentator before the fall of Lehman Brothers was Tim Lee of pi Economics, who wrote the following back in November 2007, fully 10 months before the failure of a second-rate investment bank triggered a global credit crisis:

“There is little doubt, to my mind, that we are now at a defining moment in financial history, a time that, once it has passed will be referred by economic and market historians in much the same way as the Wall Street Crash of 1929 or the credit and banking crisis of 1973-4 are now.

“Unfortunately, as is becoming increasingly clear, this crisis is not really just about subprime mortgages. It is much more serious than that. It is the beginning of an inevitable realignment of credit and wealth with incomes and accumulated savings… subprime is merely the first part of the credit edifice to give way, rather than the whole story…”

For seven years and counting, only one question has really mattered to investors: inflation, or deflation ? Thus far, the answer seems to have been: inflation in financial assets, deflation or stagflation in pretty much everything else. It’s been difficult to get the macro right because central bankers have morphed from being referees in the game to being the key players, and with the ability to rewrite the rules, and continually move the goalposts, as the game plays out. The apparent dominance of central bankers over the free market should be of concern to anyone who expects the free market, at some point, to return with a vengeance. Meanwhile, as Mark Dampier suggests in his new book ‘Effective Investing’, just published by Harriman House,

“The question I like to ask fund managers is not what they think about the general economic climate but:

‘Are you still finding opportunities in the stock market today ?’”

This week’s ‘Economist’ magazine (‘Many unhappy returns: investing in a world of low yields’) points out that their answer should be ‘No’; the average American state or local government pension fund assumes it will earn a nominal annual return of 7.7% in future, according to NASRA, the National Association of State Retirement Administrators. Good luck to them. According to AQR, projected nominal returns on a typical American portfolio, given prevailing valuations in the stock and bond markets, are closer to 2%.

“The good news is that this is a long-term problem. Low returns are like a car with a fuel leak; it can still be driven for a while before it grinds to a halt. The bad news is that, precisely because this is a long-term problem, investors (particularly the politicians responsible for public pension funds) will be tempted to leave it to their successors. That will only make the eventual funding crisis even bigger.”

If the answer to Mark Dampier’s question is, truthfully, ‘No’, then the next question should logically be:

‘Are you sure you’re looking in the right market ?’

Investors, whether professional or private, have a tendency to succumb to home country bias. This problem will likely come back to haunt American investors because their home market is one of the more glaringly expensive. Robert Shiller’s cyclically adjusted p/e ratio for the US market stands at 26.4. Given that its long term mean stands at 16.6, that would tend to suggest that US stocks are trading at a roughly 60% premium to fair value. Two more reasons to be cautious on US stocks.. US interest rates are widely expected to rise next month. Not by much, but any kind of rise may mark the end of a three-decade secular bull market in rates. That has implications for all financial assets. And sceptics will have noticed two recent trends: a growing number of profits warnings on the part of large cap businesses internationally; and a growing tendency for US companies to ‘engineer’ better returns for their senior executives shareholders simply by buying back their stock at egregiously expensive levels. Stock buybacks conducted at a discount to book are value-enhancing. Buybacks conducted at whopping premiums to book, on the other hand, destroy shareholder value.

If the US stock market looks dangerously overpriced, where should equity investors be looking ? We think the answer is: in Asia, and more specifically in the likes of Japan, Korea and Vietnam. The shareholder return ratio in Japan, for example, stands at 36.6% - a derisory level compared either to Europe (71.4%) or to the US (82.9%). Japanese shareholders historically have been given a meagre slice of the pie. The good news is that their share of the pie is likely to go up. Both dividend payments and share buybacks as a percentage of profits in Japan are already on the rise, and we think they have plenty of room to catch up towards other ‘Western’ levels. The managers we invest with in Japan report that the change in Japanese corporate behaviour, especially amongst mid-cap businesses, is real. Since Japan also offers us highly profitable companies on p/e ratios of around 10x and price / book ratios of around 1, we simply don’t need to overpay to own the US market like the rest of the herd. (The prospect of more QE in Japan doesn’t exactly hurt – though we clearly prefer to have our currency exposure hedged, especially if US rates do rise.)

The Korean market is inexpensive too, trading on a p/e of roughly 10 and a price / book of around 1x. Vietnam is admittedly more of a ‘frontier’ animal, albeit one that’s widely expected to be recategorised as ‘emerging’ by the leading index provider in the fullness of time. As to valuation.. Vietnam has the lowest ratio of market cap to GDP in Asia, at just 30%.

So our answer to Mark Dampier’s question is: at a time when many investments are looking desperately mispriced, yes, we truthfully are finding attractive opportunities in the stock markets. We’re just looking at different stock markets compared to everybody else.

 

Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.

Doubtful

“Sir, Martin Wolf writes: “It may be hard to avoid crises but it is vital to make them both small and rare.” (“In the long shadow of the Great Recession”, November 11.) It is precisely this line of thinking that resulted in the Great Recession in the first place. Although advanced economies have managed to decrease the frequency of recessions since the early 1980s, they inadvertently increased their severity, i.e. the Great Recession itself.

“The more governments and central banks want to smooth the business cycle, the more risk and debt people and businesses are willing to accept, because they are less fearful of any economic downside. Such misplaced confidence will result in increased leverage in the economy and malinvestment (the misallocation of capital and labour). And the longer periods of malinvestment last, the more painful and difficult the inevitable future corrections will be.”

-      Letter to the editor of the Financial Times from Reza Ladjevardian, Washington, DC, US.

 

“I was very impressed by the fact that the Bank of England has a view on inflation in the fourth quarter of the year 2018. I wonder if the Bank knows if it’s going to rain a week from Thursday ?”

-      James Grant discusses central bank behaviour on Bloomberg News.

 

Léon Walras is the patron saint of modern economics. In other words, he was a clueless failure who hijacked immutable principles from the world of physics and misapplied them to the economic realm. The result, predictably enough, is that modern economics doesn’t work. It doesn’t work because it masquerades as a science when it is really just a combination of dogma and very crude modelling. The modelling doesn’t work because garbage in equals garbage out. Sadly, this doesn’t stop the Financial Times’ chief economics correspondent, or the governor of the Bank of England, advocating overly simplistic policies in a highly complex world. There is something to behavioural economics, however (the economy is not a model, it is us) – so don’t expect that to get taught seriously on university campuses any time soon.

The conventional narrative has it that the financial crisis was caused by commercial bankers. This is not precisely true. Central bankers also played their part. What is alarming today is that almost nobody dares challenge the mandate or even ongoing existence of central banks as prime fixers of prices in the financial markets. (Spoiler warning: price fixing doesn’t work.)

“Attempts to control and fix prices and wages span most of recorded history,” writes David Meiselman in the foreword to the definitive history of economic hubris, ‘Forty centuries of wage and price controls’ (Robert Schuettinger and Eamonn Butler).

“Price and wage controls cover the times from Hammurabi and ancient Egypt 4,000 years ago to this morning..

“The experience under price controls is as vast as essentially all of recorded history, which gives us an unparalleled opportunity to explore what price controls do and do not accomplish. I know of no other economic and public policy measure whose effects have been tested over such diverse historical experience in different times, places, peoples, modes of government and systems  of economic  organization..

“The results of this investigation would merit attention for the light it sheds on economic and political phenomena even if wage and price controls were no longer seriously considered as tools of economic policy. The fact that wage and price controls exist in many countries and markets and are being seriously considered by others, including the United States, compels attention to the historical record of wage and price controls this book presents.

“What, then, have price controls achieved in the recurrent struggle to restrain inflation and overcome shortages? The historical record is a grimly uniform sequence of repeated failure. Indeed, there is not a single episode where price controls have worked to stop inflation or cure shortages. Instead of curbing inflation, price controls add other complications to the inflation disease, such as black markets and shortages that reflect the waste and misallocation of resources caused by the price controls themselves. Instead of eliminating shortages, price controls cause or worsen shortages.”

Interest rates across the developed markets have been kept at emergency levels (and all time historical lows) for seven years. Do we think that allowing banks to access essentially free money is more or less likely to give rise to the sort of malinvestments that caused the financial crisis in the first place ? If you believe that the answer is ‘less likely’, there is a job at the Bank of England’s Financial Policy Committee with your name on it. (It will help secure the position if you have previously worked at Goldman Sachs, like our current central bank supremo, Mark Carney. Or the head of the ECB, Mario Draghi. Time was when unaccountable private banking cartels made some attempt to hide their origins. Now they flaunt them in plain sight. That’s how much they respect taxpayers.)

“Despite the clear lessons of history, many governments and public officials still hold the erroneous belief that price controls can and do control inflation. They thereby pursue monetary and fiscal policies that cause inflation, convinced that the inevitable cannot happen. When the inevitable does happen, public policy fails and hopes are dashed. Blunders mount, and faith in governments and government officials whose policies caused the mess declines. Political and economic freedoms are impaired and general civility suffers.”

Another question. Does central bank interference in the price mechanism make financial markets more or less volatile ? We think the answer is less volatile in the short term, and hugely more volatile in the longer run.

Benoit Mandelbrot reminded us that markets are volatile. Or at least they should be. If they actually reflect a price graph that rises serenely from the bottom left to the top right of the page, they are either frauds, or they are about to blow up.

Markets are also risky. (Note that we distinguish between volatility and risk. Unlike the regulator.) Mandelbrot and Hudson:

“According to the standard model of finance, in which prices vary according to the bell curve, the odds of ruin are about.. one chance in ten billion billion. With odds like that, you are more likely to get vaporized by a meteorite landing on your house than you are to go bankrupt in a financial market. But if prices vary wildly, as [we] showed in the cotton market, the odds of ruin soar: They are on the order of one in ten or one in thirty. Considering the disastrous fortunes of many cotton farmers, which estimate of ruin seems most reasonable ?”

Market timing also plays a role. Big gains and losses concentrate into small packages of time. The "clustering" effect of outbreaks of volatility is well known. The scale of such clustering sometimes beggars belief. Mandelbrot cites the exchange rate of the US dollar against the Japanese yen between 1986 and 2003 - a period of steady decline for the dollar.

“But nearly half that decline occurred on just ten out of those 4,695 trading days. Put another way, 46 percent of the damage to dollar investors happened on 0.21 percent of the days. Similar statistics apply in other markets. In the 1980s, fully 40 percent of the positive returns from the Standard & Poor's 500 index came during ten days - about 0.5 percent of the time.”

Conventional wisdom has it that “time in the market” is more important than “timing the market”. For investors with long enough time horizons, that may be broadly true. But if one senses, for whatever one believes to be sufficiently robust reasons, that significant downside volatility is a realistic near-term outcome, it is surely only sensible to take some form of ameliorative action.

Prices often leap, not glide - that adds to the risk. Mandelbrot forcefully suggests that the mathematics of Bachelier, Markowitz, Sharpe and Black-Scholes, inasmuch as they assume continuous changes from one price to the next, are flawed. Markets are wilder than much conventional economics theory indicates (surprise !).

In markets, time is flexible. 

“Time deformation is a mathematical convenience, handy for analyzing the market; and it also happens to fit our subjective experience. Time does not run in a straight line, like the markings on a wooden ruler. It stretches and shrinks, as if the ruler were made of balloon rubber. This is true in daily life: We perk up during high drama, nod off when bored. Markets do the same.”

Markets are inherently uncertain, and bubbles are inevitable. Again, notwithstanding the self-serving pronouncements of former Fed chairmen, not only are bubbles in financial markets inevitable, but identifying them may be down to simple pragmatism. This argument gets confused by the noise created by the investment media when any dramatically rising market gets tarred by the bubble brush. Because of the scaling characteristics of financial markets widely discussed throughout the book, making investment decisions is difficult. Making sensible predictions about financial markets is difficult. Bubbles are an inevitability.

The financial markets today resemble some kind of unwieldy Heath Robinson contraption, contrived, wobbling unnervingly, and held together by spit, sawdust and the prayers of the central bankers whose hands are on the levers.

We elect out. So we’re not macro tourists in the bond market. We’re not blithely tracking stock indices or surfing overpriced mega-cap consumer brands that, one by one, are being taken to the woodshed and shot, courtesy of some rather painful Chinese-led deflationary pressure. Since our central banker friends are working hard to discredit cash, we see unusual merit in only the highest quality, most inexpensive listed businesses (Japan and Vietnam being among the cheapest sources of such companies), and in healthy amounts of portfolio protection (systematic trend-followers in terms of uncorrelated insurance, and precious metals in terms of systemic and inflation insurance and, yes, we know where their prices in money terms currently are).

It would make sense for investors today to reduce their exposure to speculative investments. Unhappily, dogmatic central bankers with too much misplaced confidence in flawed economic theories have made virtually all investments speculative. David Meiselman again:

“First-hand experience of most of us with wage and price controls in our own lifetimes in addition to the lessons of history and of validated propositions in economics so skilfully catalogued in this book would seem to be more than sufficient to convince the public and government officials that price and wage controls simply do not work. However, the unpleasant reality is that, despite all the evidence and analyses, many of us still look to price controls to solve or to temper the problem of inflation. Repeated public opinion polls show that a majority of U.S. citizens would prefer to have mandatory controls. If the polls are correct, and I have no reason to doubt them, it must mean that many of us have not yet found out what forty centuries of history tell us about wage and price controls. Alternatively, it raises the unpleasant question, not why price controls do not work, but why, in spite of repeated failures, governments, with the apparent support of many of their citizens, keep trying.”

In the aftermath of this weekend’s horrible events in Paris, religious dogmatism is rightly condemned. If only dangerous economic dogmatism could be similarly repudiated.

 

Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.

Unsubscribe

 

 

“I had this nightmare that the economy was run by micromanaging Econ professors, who worked for the big banks & had no real-world experience.”

-      Tweet by Rudolph E. Havenstein (@RudyHavenstein).

 

Even after 25 years of writing these commentaries, receiving that single word ‘Unsubscribe’, unsolicited and unaccompanied, in one’s inbox causes a degree of soul-searching. Did we overstep the mark somehow ? Well, the truth hurts sometimes, whether it’s our truth or somebody else’s.

For the avoidance of doubt, and at the risk of triggering more unsubscription requests, here’s our perspective, and our truth. We utterly reject the discredited, statist, Keynesian, inflationist, banker-friendly, central banking god worshipped by Wall Street and the City and certain high profile columnists for the New York Times and the Financial Times. As a wise man once said,

“I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours.”

But before we delve further into debating a secular religion, a brief history lesson:

“The basic plan for the Federal Reserve System was drafted at a secret meeting held in November 1910 at the private resort of JP Morgan on Jekyll Island off the coast of Georgia.”

(Source: ‘The creature from Jekyll Island’ by G. Edward Griffin.)

This is not conspiracy theory. This really happened.

Present at this secret meeting were:

Nelson W. Aldrich, Republican “whip” in the Senate and business associate of JP Morgan, and father-in-law to John D Rockefeller, Jr;

Abraham Piatt Andrew, Assistant Secretary of the United States Treasury;

Frank A Vanderlip, president of the National City Bank of New York;

Henry P Davison, senior partner of the JP Morgan Company;

Charles D Norton, president of JP Morgan’s First National Bank of New York;

Benjamin Strong, head of JP Morgan’s Bankers Trust Company;

Paul M Warburg, a partner in Kuhn, Loeb & Company, a representative of the Rothschild banking dynasty in England and France.

What emerged from the Jekyll Island meeting was, in the words of Griffin,

“a cartel agreement with five objectives: stop the growing competition from the nation’s newer banks; obtain a franchise to create money out of nothing for the purpose of lending; get control of the reserves of all banks so that the more reckless ones would not be exposed to currency drains and bank runs; get the taxpayer to pick up the cartel’s inevitable losses; and convince Congress that the purpose was to protect the public.”

So the US Federal Reserve, rather than being an arm of the US government, is actually a private banking cartel. Note, in particular, that fourth objective:

“Get the taxpayer to pick up the cartel’s inevitable losses..”

Three years later, the Federal Reserve Act became law, and the creature from Jekyll Island was finally born.

Now fast forward to the Financial Crisis of 2007 - ? The former Fed chairman Ben Bernanke, now doing victory laps around the world to celebrate the launch of his new book, ‘The courage to act’, simply delivered according to that fourth objective. Courage to act, indeed. Or maybe it really does take courage for unelected economic bureaucrats to print up trillions of dollars of taxpayers’ money in order to bail out Wall Street banks. It will certainly be courage if and when the taxpayer finally wakes up to it.

Sooner or later, even the most powerful cartel fails. The Fed (along with its cousins in Europe and Asia, not all of which are necessarily run by alumni of Goldman Sachs* – Haruhiko Kuroda at the Bank of Japan was previously with the ADB) is up against a force of nature in the form of the free market. A banking cartel can clearly achieve an awful lot, albeit entirely in its own interest, but in the fullness of time, the market will win out. To suppose otherwise is to believe that central planning works. As Jim Grant observes,

“The Fed is a relic of the age of command and control, the Fed is an anachronism.”

So now we have this fatuous “will she, won’t she ?” Dance of the Seven Veils as orchestrated by world famous veil dancer, Janet Yellen. Whether the Fed can really hike interest rates by – gasp – a quarter of a point next month is functionally irrelevant. The reality, at least as we see it, is that the Fed has lost the plot; the Fed has also lost control of the bond market; and a sceptical crowd is finally paying a little more attention to the man (or woman, in this case) behind the curtain. The FT today carries a feature, ‘Peak Independence’, indicating the growing political pressure to rein in central banks that are “hubristically attempting to tame the business cycle while storing up threats of bigger crashes down the road”. But, irritatingly, its authors don’t take the logical next step of asking why we even require central banks to (try and fail to) manage the business cycle – free markets used to be good enough.

*For example, Mark Carney at the Bank of England, or Mario Draghi at the European Central Bank.

According to ‘The Usual Suspects’,

“The greatest trick the Devil ever pulled was convincing the world he didn’t exist.”

The greatest trick central bankers ever pulled was convincing the world they were acting in anyone’s interests other than those of the banks.

Here in the UK, we have a crime known as High Treason: the crime of disloyalty to the Crown. “Adhering to the sovereign’s enemies, giving them aid or comfort” is a High Treason offence. So is “counterfeiting money”. Destabilising the monetary system to the point of potential collapse would probably qualify, we think, perhaps on both grounds.

So the next time Andrew Haldane, the Bank of England’s Chief Economist, or one of his banker buddies, proposes the abolition of physical cash or the introduction of negative interest rates, in somebody’s interests – but clearly not those of the taxpayer, the saver or the general citizenry – they should be grateful that we no longer have the death penalty for High Treason. The threat of life imprisonment should be a sufficient deterrent against such fatuous, dangerous, undemocratic, banker-friendly intellectual poison. We’d also like to unsubscribe, to opt out from this dialogue of the insane. Sadly, we don’t think it’s possible to.

 

Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.

Lunch with the FT: Neb Nerbanke

 

 

“Sir, It was with increasing incredulity that I read Martin Wolf’s Lunch with the FT interview with Ben Bernanke (“Hostility and hyperinflation”, Life & Arts, October 24). The former Fed chairman starts the article by defending the dubious and ends it articulating the insane.

“Mr Bernanke denies that the Fed unfairly “enriched the rich” because it only “returned asset prices and the like back to trend”, and the recent rise in US stock prices “is because returns are low”. So, the recent exuberance in stocks is contributable to low returns in other fields of investments. With bonds yielding less and bank interest at well below 1 per cent, it makes sense that more investors would pour money into stocks, causing prices to rise. But who controls interest rates in the first place? Is it not Mr Bernanke (now his successor, Janet Yellen) and other central bankers? He leaves this mystery hanging as he reaches his next point. The simultaneous helping of the rich and hurting of savers by Fed policy is an “inconsistent” claim, he tells us. I beg to differ.

“Low interest rates can simultaneously drive up the stocks, which are primarily owned by the wealthy, and cut bank interest rates, where savers keep their money. The rich have their returns buoyed by low interest rates, and the savers have their interest payments cut. Mr Bernanke does raise a valid point that the lowering of interest rates sparked a recovery from the recession. Yet, seven years after the 2008 crash, stagnant wage growth and slowing job growth bring the validity of the low-interest rate fuelled recovery into question. Is the recovery real, or just a paper gain egged on by easy money? More to the point, with interest rates still well below 1 per cent, central bankers have nowhere to lower interest rates come another crash.

“One of Mr Bernanke’s later points is more troubling still. The banker claims that the 2008 US subprime crash was caused by a “mania, a psychological phenomenon”. His analysis of the crash ends there. He makes no mention of the low interest rates that encouraged the risky lending. The reader is then left to believe that the 2008 crisis was some sort of inexplicable madness that gripped the financial world, and not the result of false incentives.

“Mr Bernanke states that he is happy that he is no longer the one making the “tough calls”. Make that the two of us.”

-       Letter to the editor of the Financial Times from Mr Nicholas Midler, San Diego, CA, US,

27^th October 2015.

 

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After literally saving the universe while at the helm of the US Federal Reserve, its former chairman is now quietly pursuing lucrative speaking engagements and sinecures at hedge funds. Marty Fox meets him in Chicago

 

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At the allotted time of 2pm I am sitting at a booth at Bavette’s Bar and Boeuf steakhouse in Chicago. My mobile phone rings. It is Neb Nerbanke’s personal assistant. It transpires that I have gone to the wrong restaurant.

Fortunately it only takes my sedan chair carriers five minutes to carry me hurriedly to the right venue. The restaurant is empty, cold and dark. It is also raining. Inside. Which is weird.

Nerbanke, 61, is waiting for me. He is wearing a plain brown suit and a luminous cravat. I have met him often since he became a governor of the US Federal Reserve in 2002. I am very important. He is very important. We are both very important.

It was good fortune indeed that this academic, scholar, raconteur, philosopher, lounge singer, poet, ladies’ man, acrobat and healer of sick people was chairman of the Fed during the biggest crisis that the Fed ever caused. His new book, ‘I Am Neb Nerbanke’, provides a fascinating account of the effort to save the world from yet another Fed-caused catastrophe.

I start by praising his cravat, and then asking him how much the book tour will net him. “A few million dollars,” he replies. I suggest he will probably be considerably richer when it is over. “Yes,” he answers. And what will he be doing afterwards ? He reels off a list of lectures that would probably intimidate someone less intelligent than I. Meanwhile he is based at the Money Institute, a centrist lobby group in Washington. He is doing some consulting. A little plastering. Some juggling. He plays the Andean nose flute. He does weddings. He is also on the speaker circuit.

The waitress takes our orders. I choose devilled peasant with a side order of minced pauper. He selects grilled sharecropper lightly drizzled with a blue cheese sauce. I ask him whether he still takes an interest in the economy. “Why should I start now ?” he replies. I snicker, sycophantically.

I ask him how he coped with the mild criticism sometimes levelled at the Fed. “Well, haters gonna hate,” he replies, toying with his portion of sharecropper and nibbling at it from time to time.

Many critics point out that the Fed essentially funnelled billions of dollars to Wall Street while trashing the rest of the economy and destroying savers in the process. And also that his personal delivery does tend toward the dull and prolix. How does he respond ? “Because monetary policy affects spending and inflation with a lag, policy decisions must be based on an assessment of medium-term economic prospects.  Thus, the Committee cannot fully explain its policy decisions without sharing its economic outlook with the public and the Congress.  To provide more-timely information about the evolving outlook, the Federal Reserve releases FOMC participants' economic projections four times each year. Projections will continue to be released in February and July of each year to coincide with the semi-annual Monetary Policy Report and the associated testimony to the Congress.  Two additional sets of projections will be published in conjunction with the minutes of the FOMC meetings held around the beginnings of the second quarter and the fourth quarter of the year. Each of the participants in the FOMC meeting--including the Federal Reserve Board members and all the Reserve Bank presidents--will, as in the past, provide projections for the growth of real gross domestic product, the unemployment rate, and core inflation (that is, inflation excluding the prices of food and energy items).  In addition, participants will now provide their projections for overall inflation.  Both overall and core inflation will continue to be based on the price index for personal consumption expenditures.”

So what does he say to those critics who accuse him of being an academic, living in an ivory tower far away from the concerns of ordinary people ?

"f(x)=a0+Z(a_ncos^nX+b_nsinL)sin a+cos Xn^x-b(a/xL_n)."

I add that after so many trillions of dollars were conjured by the Fed out of thin air, many critics still fear the prospect of hyperinflation. “No. Because we’ve never had hyperinflation in the US. So clearly we never can and never will. Only an idiot would think that.”

I hate idiots, too. But I love Neb Nerbanke. And I think he loves me back.

What about QE ? Sceptics might say that having expanded the Fed’s balance sheet by $4 trillion, QE has done nothing to aid the wider economy or the man in the street – it’s merely made bankers richer. Can I ask you about the efficacy of QE ? “No.”

Fair enough, I might add. On to communications policy. The Fed has had its fair share of critics over the much-heralded strategy of ‘forward guidance’. So what do you say to those critics who accuse the Fed’s guidance of being difficult to follow ?

“Fnnr gurrnn pffrumph trrwzzle zwiqshlgrpff twngzkzk arpffqfpkwzkk !”

Thank you. Moving on, could the Fed have prevented the failure of Lehman Brothers in 2008 ? “Absolutely not. It was completely unavoidable. Besides, Goldman Sachs asked us not to.”

But didn’t the Fed then bail out every other Wall Street firm and allow the likes of Goldman Sachs to convert to a bank holding company and thus qualify for Fed liquidity assistance direct, even though it isn’t actually a bank ? “I must be going, Marty. As ever, it’s been a pleasure.”

I tell him the pleasure was all mine. Mmm. I worship Neb Nerbanke. I would willingly sell my house and all its contents just to have the untrammelled joy of sucking at the soles of his shoes. Anyhow, that’s what our lunch was like. Just another day speaking truth to power.

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McMorack & Schmuck’s

48E Upper Wacker Drive

Chicago, IL

Devilled peasant with minced pauper $22.99

Grilled Alabama sharecropper in blue cheese sauce $27.74

Double espresso $6.99

Tea $3.50

Fed balance sheet expansion to date $4,400,000,000,000

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Tim Price is Director of Investment at PFP Wealth Management and co-manager of the VT Price Value Portfolio.