The models are wrong.
Jerome Powell needs to create a new bubble to replace the everything bubble to replace the housing bubble to replace the Nasdaq bubble.
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” - Paul Krugman, August 2, 2002
“The Federal Reserve simply does not understand the risks of asset price bubbles and asset price collapses. It is clear from the data they don’t get it." - Jeremy Grantham
“It is ludicrous to believe that asset bubbles can only be recognized in hindsight.” - Michael Burry
"How hard is it to understand that when an industry calls it a 'liar's loan,' there might be a problem with fraud?" - William K. Black
“According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening that were only supposed to happen once in every 100,000 years. Either that … or Goldman’s models were wrong.” - How Unlucky is 25-Sigma?
How many sigma?
Cathie Wood’s flagship Ark fund draws in $1.5bn even as tech stocks tumble Another example of our worst market since the Plague of Justinian. Also, my Twitter account this year had its worst first-half ever.
Somehow the Cathie Wood story led to my reminiscing…
Bernanke believes "the Fed's job is to protect the economy, not to protect individual asset prices," said William Dudley, chief economist for Goldman Sachs U.S. Economics Research.
Well that was a lie. I wonder how much he’s been rewarded by Citadel and Pimco, among others?
Greenspan’s and Bernanke’s belief in EMH (Efficient Market Hypothesis) and the resulting belief that bubbles cannot be identified led us into our current grief. My own favorite illustration of their views was Bernanke’s comment in late 2006 at the height of a 3-sigma (100-year) event in a US housing market that had had no prior housing bubbles: “The US housing market merely reflects a strong US economy.” He was surrounded by statisticians and yet could not see the data. My view, reflected in the Kindleberger quote, is that his profound faith in market efficiency, and therefore a world where bubbles could not exist, made it impossible for him to see what was in front of his eyes. - Jeremy Grantham in the foreward (2009)
TIP371: The Top Of The Cycle W/ Jeremy Grantham, August 19, 2021
Bernanke completely didn’t see the housing bubble and the risk it posed...he was convinced it wouldn’t collapse. And of course, it did...These are not small declines, and yet they occurred in the face of passionate defenders and promoters of moral hazard...
They all talk a wonderful game...And yet, it didn’t stop two of the greatest wipeouts in American history. The most impressive thing here is not that they do the same thing over and over again as if they have somehow no memory. It’s the faith the financial community has in them…The housing bust was merciless. The stock market decline...was really painful. And yet, it’s as if it never happened. Oh, Powell says...the FED is going to be our friend. Hey, Greenspan was our friend, Bernanke was our friend and we got croaked, guys, what is the matter with you?
Yellen couldn’t. Bernanke couldn’t see a housing bubble that was a three-sigma 100-year event, where were his statisticians? The answer is the Federal Reserve statisticians do not do asset bubbles. They are, in that respect, utterly clueless. And we apparently never see that.
...this time, we don’t just have a housing bubble. We have a housing bubble, a stock market bubble, a commodity bubble and...an interest rate bubble. - JG
Michael Burry: I Saw the Crisis Coming. Why Didn’t the Fed?
This is excellent. So many voices about the rot at the Fed (including yours) and nobody sees, hears acts…. It got to have a deliberate quality. Question is if so: why does such an institution seem hell bent on ruining its own economy, its investors, its businesses… At some point the economy doesn’t get up off the mat anymore. Is that better? Thanks 🙏
Great stuff as usual.