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Slackonomics 101

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  • Charlie Bilello

Slackonomics 101

It’s back to school time and there’s a new economics course being offered this fall at universities across the country: Slackonomics 101. The course will explore the revolutionary economic theory that is driving current Federal Reserve policy. The course outline and beginners guide to Slackonomics can be found below:

Chapter 1: Never Let a Crisis Go to Waste

Economic crises are to be viewed as an opportunity to expand the role of the Fed and justify its existence. When a crisis occurs, throw as much money at it as possible. Expand the Fed’s balance sheet, lower interest rates to 0%, just make sure to do something. Eventually the crisis will fade and you will be given credit for taking action and praised for its resolution.

Chapter 2: The Solution To the Crisis is the Cause of the Crisis

An extended period low interest rates by the Fed is one of the primary causes of the greatest housing bubble the world has ever known. The bubble bursts. What do you do? If your answer is anything other than moving interest rates down to 0% and keeping them there for the longest period in history, you don’t understand Fed policy. If there is a bubble and it begins to burst, simply start blowing it back up and you don’t stop blowing until another bubble forms. No one ever went broke underestimating the intelligence of the American people; they will be none the wiser and will even thank you for propping their asset prices back up, even if it is only temporary and leads to a massive misallocation of resources.

Chapter 3: If You Build It (a Bubble), They Will Spend

Once an economic expansion takes hold, do not be hasty in tightening monetary policy as was done in the past. Simply shift the rationale for easy money from “crisis mitigation” to a “wealth effect” built on the back of higher asset prices. After all, who wouldn’t get behind an idea like a wealth effect, where higher stock prices boost consumer wealth and help increase spending in a virtuous circle? Better yet, who would dare to stand against such an idea?

Chapter 4: When in Doubt, Do More, Never Less

Never let the facts get in the way of more easy money. If an economic expansion is the slowest in history and real wage growth is nonexistent, don’t view this as a failure of your policies. Use this as ammunition to shift the narrative once more. Instead of talking up a “wealth effect” which is becoming more difficult as the “wealth gap” has only widened under easy money policies, shift the focus to weakness in the labor market. Ignore naysayers who say that you already had the longest period of easy money in history and the labor market remains weak. They will never be able to prove the counterfactual so simply say that the labor market is still weak because we simply haven’t done enough yet. Works every time.

Chapter 5: Slack is the Word

Talk down any strength in the economy at every opportunity. Use the word “slack” as often as possible in describing the labor market.  This will maintain popular support for the longest period of low interest rates and exponential balance sheet growth in history (five and a half years and $4.4 trillion and counting). As a bonus, the trading algorithms love the word “slack” because it means extending the period of 0% interest rates. This in turn helps the wealth effect, etc., etc.

Chapter 6: Transient Noise

Dismiss any inflationary evidence as transitory or noisy. Focus not on the real life increases in costs for the average American household (housing, health care, education, taxes, food, etc.) but only your own narrow definitions of inflation (PCE, CPI, etc.). If there is no inflation under your definition, there is no inflation, period. Don’t entertain any evidence that shows otherwise. And if anyone suggests that driving up housing prices above levels that can be supported based on income is inflationary, just refer them to Chapter 3. The wealth effect outweighs any negative inflationary forces.

Chapter 7: Develop an Alibi

Don’t rest on your laurels, you know this is a short term game that will not end well. Protect your image and the Fed by making casual observations like there are “low levels of volatility” and there is “some evidence of reach for yield behavior.” The key is to make these observations with a straight face, never acknowledging the glaringly obvious relationship between Fed policy and risk-taking behavior. This is very important because despite your stated goal of propping up asset prices in the aforementioned “wealth effect” theory, you don’t want to be blamed when it all goes awry. Don’t worry, no one will call you out on this, just keep a straight face. For those killjoys complaining elevated valuations, throw them a bone by talking about “smaller firms in the social media and biotechnology industries.” Talking about a small subset of the market is ok, but don’t ever acknowledge the existence of a market wide bubble, even when it is staring you right in the face.

Chapter 8: Bubbles Will Be Bubbles

Whenever the topic of bubbles comes up, make sure to state convincingly that the Fed has no control over such things, can’t identify them, and even if they could it should not be their objective to stop or slow them down. Yes, we understand that this is a difficult concept to grasp as the Fed is allowed to inflate bubbles but this rule is not to be violated. The American people have grown to love a boom-bust economy and anyone who interferes with their precious bubbles will not be treated kindly.

Guest lectures here from Alan Greenspan and Ben Bernanke, discussing why you should never, ever acknowledge the existence of a bubble (they simply cannot be identified) and how to assume absolutely no responsibility for inflating the  bubble after it bursts.

Chapter 9: The Bigger the Word, the Better the Policy

Whenever possible, use big words that the financial media will endearingly refer to as “Fed speak.” It doesn’t matter if what you say makes no sense at all, just be sure to say it convincingly. “Macroprudential” is a wonderful word. Anything you say after it doesn’t matter. You had them all at macroprudential.

Chapter 10: But In the End…

Stop right there. Don’t worry about how it will all end; that is not your job. The buck stops with the next Fed chair, the next congress, not you. Your job is simply to keep inflating today and hope for the best. If Greenspan and Bernanke have been given a pass and even thanked for their heroic actions after bubbles have burst, you will too.

Sample Test Questions

1) Ben Bernanke has stated that he has what degree of confidence in the Fed’s ability to prevent inflation from getting out of control due to unprecedented easy money policies?

a) 0% b) 50% c) 75% d) 100%

2) Complete the pattern: QE 1, QE 2, Operation Twist, QE 3, ____.

a) No more QE b) Twist 2 c) QE 4 d) b or c

3) Janet Yellen used the word “slack” this many times during her Jackson Hole speech on August 22, 2014:

a) 0    b) 5    c) 10   d) 25

4) Interest rates will remain low for _______ after the asset purchase program (QE) ends.

a) a day b) a week  c) a month  d) a considerable or extended period of time

5) According to Ben Bernanke, the Fed is:

a) printing money b) not printing money c) a and b.

6) Don’t _____ the Fed!

a) pity  b) fool c) mock d) fight

7) _______ Ben.

a) Ranger b) Trucker c) Captain d) Helicopter

8) Back in Prehistoric times when the Fed actually increased interest rates after an expansion took hold, this was the old saying:

a) 3 sheets to the wind b) 3 hikes and you’re out c) good things come in threes d) 3 steps and stumble

9) Job gains have exceeded 200k in each of the last six payroll reports and jobless claims are at their lowest levels since 2006. The word that best describes the current labor market?

a) sluggish b)  slowing c) slackening d) all of the above

10) There are bubbles forming in:

a) collectibles c) real estate c) junk bonds/stocks d) everything e) nothing

Bonus Question: True or False: In 1979, a newly appointed Fed chairman increased the Fed Funds rate from 11% to 12% during a weekend in October. This became known as the Saturday Night Special. Two years later, this same Fed chairman would move the Fed Funds rate as high as 20% to fight inflation, knowing that it would likely send the economy into a recession.

a) True b) False

Answer Key:

1) d

2) d

3) d

4) d

5) c

6) c

7) d

8) d

9) d

10) e (remember, act like a Fed chairman, see Chapters 7 and 8 above)

Bonus: a

CHARLIE BILELLO, CMT

Edward M. Dempsey Pension Partners New York

 

 

 

 

 

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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