The Fed’s Perilous Fake It Till You Make It Strategy

By Mark St. Cyr

We all know the difference between reality and wishful thinking. Many of us know just how quickly the jaws of reality can crush the life out of unicorn and fairytale stories when fiction is used to cover the facts. Where the businesses and happy customers that are supposedly represented on an income statement turn out to be little more than the Non-GAAP application of a fairy’s wand and pixie dust.

However, this doesn’t stop people from buying in (literally) to the illusion. And what has far more onerous consequences is when the story tellers themselves begin to believe their own works of fiction.

Since the financial meltdown of ’08 one thing has changed in ways never before seen in its voracity, let alone the sheer breath of complacency and acceptance to it. That “change” is what used to be reported or used as benchmarks of statistical data (whether it be of the government supplied sourced or other venue) and the outright publicly displayed willingness to adulterate them.

Some will ask, “Is it really such a big deal? It’s not like reports haven’t been adjusted for decades, what’s the big deal now?”

Part of that question is correct. Yes, we’ve always tried to “smooth” out data to get a more accurate read of what is actually transpiring within an economy and more. As a matter of fact whole companies as well as individuals have built well deserved reputations for doing just that and supplying that advice to businesses and others. However, what is taking place currently (in my opinion) is the practice of “goal-seeking” as in the manipulation of that data; and moving it closer in a perilous pursuit of another methodology that may have far more disastrous consequences e.g., “Fake it till you make it.”

Personally I am all too well versed on this latter dictum. It is used extensively throughout the motivational speaking realm. The problem is not with the idea per se, it’s in the where, why, and how application that causes all the problems. Let me give you a quick example for clarity…

Want to break a habit such as smoking and more? “Fake it till you make it” works perfect here and is absolutely a useful and beneficial frame of mind to accomplish that goal. For as soon as you decide to quit you can begin living and adapting your life to that as a person who doesn’t. Want to begin and start acting like a person of success? You can do the same.

Where the dangerous version of using this example comes into play and is shouted from stages, and books too many to mention here, is when you’re advised to buy or spend (as well as kid yourself into believing this is how the rich do it) money you maybe can’t afford or, get into onerous long-term contracts and financing deals such as a high-end or exotic cars, or homes well above your current income as to “grow” into it. i.e., Fake it till you make it.

Here is where “faking it” only works for so long because someone else comes along and “takes it back” with a Sheriff’s notice for non-payment. The landscape is littered with those who bought in (again literally) to this type of advice. And yet – this is exactly what is taking place in kind at the most powerful monetary body in the world e.g., The Federal Reserve.

Just this past week the “data dependent” Fed. was supplied with the fantastic news that the Dept. of Commerce will now “double seasonally adjust” GDP data. i.e., if at first you don’t succeed – try, try again. This coincides with other reports now that have become outright jokes to anyone with a modicum of business acumen. e.g., The jobs reports, consumer spending, et al. Yet, all this data is exactly what the Fed. points to as confirmation why they should or should not alter or adjust monetary policy. I’m sorry, but this is no longer delirious or delusional economic policy and theories in action. This is out right dangerous.

For how does one now solve the dilemma when investing or anything else market related when data has been flipped from adulterated, to inverted, to an inverted adulteration? (e.g., data was at first adjusted, then it took on the caveat of “bad is now good.” to now where it’s adjusted and can literally imply both good and bad)

As much as that may seem like a play on words, I assure you it’s not. For in today’s markets all that matters is what the Fed. does and when. There is no longer anything approaching what was once known as “fundamental investing” in these markets. “Fundamental” is now nothing more – than front-running. Pure and simple.

And with that now comes another dilemma in this duopoly: Who does the Fed. now want to believe? Their own numbers? (e.g., like those of the Atlanta Fed.) Or: the double seasonally adjusted, goal-seeked versions?

One heralds: “Bad news is good, and worse is fantastic!” implying the Fed. is hamstrung to the zero bound along with keeping the narrative alive for the possibility of a resurgence of QE. And the other portends: “Bad news is now going to be adjusted to show good, and better news will be seen as “mission accomplished” releasing the Fed. to both raise rates sooner, and possibly faster, than the market anticipates. Welcome to your new version of “clarity” as portrayed by current Fed. speak.

The argument can be made (in which I’m trying to do just that) as of this week: all “clarity” as to what any relevant data point used and professed by the so-called “smart crowd” as to infer what the Fed. may, or may not do, in the coming months – has been completely and outright nullified. The Fed. by virtue of their own clarifying distinctions when they moved from “patient” to “data dependent” means one will lose their minds (as well as money) let alone patience as they now try to extrapolate what data point the Fed. now views as determinant.

Let’s use a very possible (if not plausible) example to express the above today, in real-time…

You are a fund manager with a considerable amount of money at risk within the markets whether private or customer funded. As of last Monday you were of the mindset along with the group think based upon confirmation expressed by “clarity” statements emanating from the Fed. that “data” is what will determine their policy adjustments. And so, with the narrative of “bad news is good news for stocks” you are fully exposed to equities. That has been the bread and butter trade of “insight” for nearly 6 years.

However, just days ago (going into a long holiday weekend) you just learned: the remaining “data points” that helped buttress those assumptions (i.e., deteriorating macro data points) are now going to be “double seasonally adjusted” as to show that maybe in the eyes of those discerning those numbers – they just aren’t as bad as they first portended to be. Now what?

Are you so sure the Fed. won’t raise rates in June? Maybe they won’t, maybe they won’t this year, or in our lifetime. Who knows. However, exactly who is this “data” being adjusted for to show more “clarity?” The public at large? Or – The Fed? And if it’s the latter; then all previous assumptions of what, why, when, and how are now moot. Welcome to where double speak aligns with goal-seeked expressed via Fed. speak. Good luck with any clarity in that equation. Let alone what the headline reading, algorithmic front-running arsenal of HFT vacuum tubes will now interpret it.

The Fed. embarked on the greatest experiment in the history of monetary policy based on the ultimate “fake it till you make it” strategy. They have openly stated the underlying premise (or illusion) why it was pursuing this path was for: The wealth effect. However, as with most that ever followed this type of strategy without fully comprehending the dangers – trouble is now lurking around every corner.

What was once implied as “good” can now mean just that, which in turn means bad for stocks. What was said as being “transitory” can now mean to have lasting repercussions to stock values. What was earlier programmed and algo fueled to mean “buy, buy. buy” could this Tuesday be flipped with a switch in code to mean “sell everything!” No one knows because “clarity” just took on a whole new meaning with “double seasonally adjusted.”

The only one’s that may be more surprised with the coming ramifications to a “fake it till you make it” world of monetary policy are those that still believe it’s been their investing prowess over the last 6 years that’s been the force behind their performance. For one thing will be certain.

Will JBTFD (just buy the dip) work in the markets any longer when monetary policy has more in common with trying to figure out what the definition of “is” is? And if you’re confused going forward don’t feel bad. Just take solace in how confused the HFT headline reading algo’s will be going forward. Because as the volumes as well as market data shows:

They’re the only one’s still in this market.

Source: The Fed’s Perilous Fake It Till You Make It Strategy May Be Coming Home To Roost |