“Pretium iustum mathematicum, licet soli, Deo notum” Sometimes we get accused of being hard on central bankers. It is, however, not central bankers per se, nor any given particular practitioners, that ruffle our feathers. Rather, central planning and economic forecasting in general is where our criticism falls. Central bankers just happen to be the best examples of where the worst practices reside. According to their own website, the Federal Reserve employs in excess of 400 PHD economists. Hard to fathom what great schemes they are formulating. https://www.federalreserve.gov/econres/theeconomists.htm#:~:text=The%20Federal%20Reserve%20Board%20employs,and%20specific%20areas%20of%20expertise. We fall rather squarely into the Hayek and Taleb camps on this topic….

“….I think we now understand better how little we understand about inflation.”  Jerome Powell. 29 June 2022 https://www.bloomberg.com/news/articles/2022-06-29/new-inflation-era-leaves-powell-and-lagarde-seeking-answers?sref=lXZ7PX1a “The longer that monetary easing continues, the bigger the side effects are, with the resulting low growth making the exit of monetary easing more difficult. The result is a vicious cycle.” “…. central banks have more or less built in the cause of the deep-seated problem.” Masaaki Shirakawa. 7 July 2022 https://asia.nikkei.com/Opinion/My-wish-list-for-monetary-policymakers-to-reflect-on It was an eventful month in the domain of monetary policy. The table below gives a quick recap across some of the major developed market central banks. As we had…

Why wait? That’s the question we keep asking our central banking friends, most particularly the laggard of laggards, the ECB. Amazingly, it almost seems as if ECB President, Christine Lagarde, heard us and hid some nuggets of such newly discovered recognition inside an otherwise long-winded mea culpa on the need to pivot away from their monetary extremism. https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog220523~1f44a9e916.en.html ”…. it is appropriate for policy to return to more normal settings rather than those aimed at raising inflation from very low levels.” Christine Lagarde, 23 May 2022. So, finally, they admit that their policies are currently at a setting aimed at…

In her novel “The March of Folly”, historian Barbara Tuchman attributes as a quote in reference to Philip II of Spain this absolute gem – “no experience of the failure of his policy could shake his belief in its essential excellence.” It is hard to imagine a more appropriate tagline for today’s central bankers and their mad clinging to their extraordinary monetary easing largesse. We could lay the above quote clearly on each and every modern-day central banker, but none more so than Bank of Japan’s (BOJ) Governor Haruhiko Kuroda. We discussed in last month’s Update https://convex-strategies.com/2022/04/26/risk-update-march-2022/ the unique and…

When thinking about real world “tail risks” few are more frightening than food shortages and famine. Aside from the obvious direct implications, they tend to be the catalysts behind most socio-political uprisings throughout history. It is not oversimplifying to state that “price stability” or “inflation targeting”, as the core premise of central banking, boils down to this basic issue. If only they could keep that in their sights. Figure 1: UN Food and Agriculture World Price Index Source: Bloomberg The implications of the long manipulation of the global economic sandpile and its inevitable transition towards its critical state, could rightly…

“We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”                       Friedrich A. von Hayek, “The Road to Serfdom” We have used the above quote previously to describe the behaviour and rhetoric of central bankers. For any that have read Hayek’s magnum opus, you will know that he was using it much more broadly to…

Back in our May 2021 Update https://convex-strategies.com/2021/06/17/risk-update-may-2021/, we noted that past historical spikes in CPI, similar to what we were seeing then, had indeed all generally been transitory in nature. They had also all aligned with Federal Reserve tightening regimes and subsequent equity/asset market sell-offs. We went out on a limb and opined “that ‘tightening’ is, as of now, not currently a factor, in fact quite the opposite and particularly if one includes the Fed’s balance sheet in the analysis; still growing at $120bn per month. Far be it from us to use the old catch phrase that maybe ‘this…

“An ounce of prevention is worth a pound of cure.” Benjamin Franklin, circa 1736. For those in the more advanced metric world, there are 16 ounces in a pound, or adjusted that would be “28.35 grams of prevention is worth 453.59 grams of cure.” Turns out the esteemed Mr. Franklin, like ourselves, was an advocate of convexity and compounding. His math may not be exact but, to put it in our F1 Race Car terms, he is trying to measure the contribution of the brakes. Sadly, there has been scarce advancement on this quantification over time. As Nassim Taleb puts…

Most will by now be aware that both the Federal Reserve Chair, Jerome Powell, as well as the US Treasury Secretary (a former Federal Reserve Chair), Janet Yellen, have officially announced the retirement of the word “transitory” in terms of how they describe the, now deemed to be “persistent”, rises in their various price measures, eg PCE and CPI. We have been mocking their ongoing use of the word “transitory”, in their justification of maintaining all-time extreme levels of accommodation, going back to early this year. In our April 2021 Update https://convex-strategies.com/2021/05/21/risk-update-april-2021/ we said “ The Fed and their mouthpieces…

Our June 2021 Update https://convex-strategies.com/2021/07/23/risk-update-june-2021/ led off with what must surely be dubbed the “Quote of the Year”: “The Fed says it will no longer react to anticipated higher inflation but only to actual higher inflation. Yet they are failing to react to actual higher inflation because they anticipate it will decline. Perhaps the real framework is anything that justifies not tightening?” Bill White; Financial Times, June 28, 2021. If you thought that Bill’s quote rang true back in June, you’d be ready to carve it in stone after what we saw in the tussle between central banks and the…