Do you think you know better than a central banker? Of course you do.

Topic: trust, policy, facts and lies

Conclusion: big lies are as easy to reveal, as they are to believe

Conclusion 2: Do the math, make the effort, a simple checksum will often do – many lies are easy to catch if you at least try. Trust nobody!


Central banks use sophisticated time-tested methods to set a policy rate that reliably leads to a predictable range of inflation

-NOT!

In theory, central banks control things like economic growth and consumer price inflation, by setting their policy rates (a set of interest rates that banks pay or receive when borrowing or making deposits at the central bank. In practice, their theories, models, and actions are at best worthless but most likely incredibly harmful.

Central banks often publish their forecasts for various macroeconomic variables, including their own policy rate (that they themselves can control to a fundred percent certainty). Amazingly, even though central banks are supposed to understand how the economy works, and how their policy rate is supposed to decide among other things the future rate of inflation – and thus also what the appropriate future policy rate would be – the CB prediction errors for their own policy rate are higher than for any other phenomenon tou can think of.

Not only are the errors wrong in direction (which would be completely out of the question if their models had any relevance for the real world), when they get the direction right they are often an order of magnitude (10 times) wrong in amplitude.

The following picture shows the situation for the Swedish central bank “Riksbanken”


The central bank policy rate hedgehog

(aka the map of lies, more lies, the worst modelling in history, blind academics, power hunger, hubris and stupidity)

On September 6, 2018, the Swedish central bank, known for being the oldest and most retarded central bank in history, publishes its latest stupidity (interest rate decision).  Just 15 years ago, careful modelling and the most thoughtful decision process Riksbanken’s members could muster resulted in a policy rate of 500 per cent. Yes, that’s 50 000 basis points. In a few weeks on September 6, they are expected to stick to their current world record breaking moronic idea of a negative interest rate being prudent, effective, and simply the absolute best the central bank committee members can conceive.

Take a look at the chart below. Yes, they really are that oblivious.

Over the last ten years, Riksbanken has managed to do among other things the following:

  • Predict that they will increase their policy rate to 4.5-5 per cent, but in reality they lowered it to 0.5 per cent, i.e. 1/10 of their prediction level, not to mention the error in direction
  • When the rate was 0.25 per cent, they thought they would soon raise it to 4 per cent, but only briefly reached a peak of 2 per cent before backing down to around zero again (while most of the time holding on to delusions of going to around 3 per cent)
  • In over 25 consecutive predictions, consistently predict increasing the rate (that they control, Nota Bene) by 1.5-2 percentage points over the following few years, but in every single instant actually reducing the policy rate, most often ending up some 2.5 percentage points below their own prediction.

Most of these decisions are so wrong, ignorant and stupid that they defy mathematical description. How wrong actually is going from +1.0 per cent to -.5 per cent while predicting going to +3 per cent?

How can they, or anybody else for that matter, have any confidence whatsoever in what they are doing, when they predict increasing the policy rate by 5x from 0.5 per cent to 2.5 per cent, but actually lowering it to a NEGATIVE 0.5 per cent?

Imagine performing in a similar way at your job, or having employees with that kind of track record. It’s even worse than the performance of professional Tesla profit forecasters (picture below)

It is by now of course patently obvious that the Riksbank members have no clue what they are doing, that their models have no relevance at all for the real economy, that they are perfectly incapable of adapting (25 consecutive predictions that were completely off the mark, remember?), and that they have no concept of the complexities of real life and the dangers of unintended consequences of their retarded experiments — ever heard of phase shifts* for example?

* there is a real possibility that very weird and adverse (unknown) effects** can result from negative interest rates. Just take a moment to ponder Credit Suisse that raised their mortgage rates when the SNB’s policy rate was lowered below zero, to compensate for the cost of keeping funds at the central bank

** but who cares? Let’s ban cash to prevent people from avoiding bank accounts with negative interest rates

Conclusion: trust nobody, do the math

Question: Do you think the authorities have this covered? Do you think they know better than you, or even than most? Think again, their models and myopic thinking combined with greed and hunger for power have made them the least fit of all to do what they are doing. And yet, the more damage they do, the more power they are awarded.

Oh yeah, this will end well.

If you own physical gold that is.

admin

9 Comments

  1. But don’t the ‘authorities’ hire the smartest brains working for them? Don’t they hire top notch Phds, MBAs, analyst, scientist etc? Don’t they have superior computing software that can produce ‘superior’ models? How the F were they wrong in ’25 consecutive predictions’?
    Was anybody fired or held liable for such ineptitude?

    It seems like: charlatans, bullshiters, conman, slick-talkers, pretenders etc are ‘successful’ in this world.
    It seems like ‘economy’ is some sort of perpetual Ponzi scheme. It needs endless growth to cover endless perpetual debt.

    And… ‘own physical gold’? Seriously?
    Do you work for Schiff, Faber, Casey, Sprott, Maloney etc? (LOL I kid, I KNOW that you’re not affiliated in any way with those charlatans)

    Speaking of Tesla and Musk… I was at a party with friends and acquaintances.
    Somehow topic of Electric Cars came up and I voiced some limitations of them.
    From range issues, to electricity grid mix, to how electric cars existed since early 1900s.
    And I’m a layman as all of my peers are. We don’t know shit about EVs and nuances of economics of them.
    But, my point is that everybody seemed upset by my claims. Everybody started touting Musk and how he’s gonna ‘save the world.’ How ‘big oil’ prevents him from having a large share of car market.
    They immediately attributed all EVs to Musk/Tesla.
    My friends were attacking me because I said something implicitly negative against Tesla.
    From watching media, I knew he has a huge cult following, but I never thought I’d be viciously berated by my own friend, for criticizing Musk. (I was actually criticizing EVs, but to them that = Tesla)

    • Wonderful comment!

      Nobody gets fired from the central bank, nobody ever questions their decisions, because they will drown you in macro mumbo jumbo that you aren’t allowed to question unless you hold a PhD in economics (and you can only get one if you subscribe to mainstream economics)

      Regarding the party: I KNOW! It’s just amazing how Musk has managed to create such a cult following. At this point, you’ll have friends violently defending Musk for accusing innocent people of being “pedos”. It doesn’t matter what he does anymore, he’s untouchable in the unthinking masses’ minds.

    • Interesting to hear about your culture. In America, nobody I know ever mentions Tesla, Musk or EVs. Maybe it’s because distances are much longer, and to most people EVs just don’t make sense based on range. A few people own them. They seem to be the status seekers trying to show wealth, rather than green virtue signalers.

      A few young people have asked me if I own cryptos. When I say “no” we get into a discussion about their negatives. Americans spent a lot on lotterys and gambling, so plenty outside my social circle must be buying cryptos too.

  2. Why are their predictions so bad? I think I can answer that.

    They employ legions of people to write academic papers and make these predictions/charts. But there is a small group of *leaders* who make the actual rate decisions. They do not necessarily agree with or even read the papers when they make their decisions. Thus, is seems like they are dumb, or contradicting themselves. Really it’s just a case of decision makers living in their own insular world.

  3. Never accept the frame of reference that is handed to you. And always consider motive.

    Is the intent of the central bank to make correct predictions? How would they benefit from doing that? What about other motives for making predictions? What is the effect of a prediction /per se/ on the economy? On their own business and personal portfolios? If you were short on Tesla, would you predict huge profits for them?

    In the USA, the real estate industry is always announcing that interest rates are about to go up. They say it when interest rates are going down (a correction is imminent!), when they are going up (a trend sure to continue), and when they are stable (stability can’t last)… and therefore, NOW is always the best time to buy real estate on credit. Do they care if their predictions are wrong?

    • Great comment! That’s where this post SHOULD have gone, after my stating the obvious.

  4. Hi,

    Thanks for some thoughtful commentary.

    Firstly, as previous commentators have raised, is it really in the central bank’s interest to show an honest interest rate path in the first place? Imagine what would happen to asset prices if they put out a prediction of even lower rates for longer… That is, there is a point in preparing people for higher interest rates, even when they actually may not materialize in most scenarios. But calling it a truthful best-effort forecast is quite dishonest, I agree. And I think Riksbanken is no worse or better than the Fed in the predictions, by the way.

    Secondly, you tend to forget the concept of “risk premium”. The central bank, like any actor is not omniscient. When interest rates are low (which they have arguably been for a while), the expectation is that they will go up to more normal levels. If you look at a similar hair chart for the traded market in SEK FRAs/Eurodollars in the US, as a proxy for future interest rate paths by the central bank, I am sure you will get a not too dissimilar picture. Even pure profit maximizing actors in the private sector (eg corporate treasurers or hedge fund managers) get it “wrong” when you compare it to the actual realizations of the interest rate, ex post. The reason for this is that market participants are happy to pay a premium over the currently (low) interest rates in order to lock them in should they go up by any chance. Think of it as an insurance premium – they are happy to pay a bit of extra to avoid a big financial hit, even when they don’t expect to crash their car. That is generally why the forward curves tend to overpredict the actual realizations, or at least have during the period we have traded data (which by the way coincided with a secular trend down in rates too). The analogy to implied vs realized volatility (and the rise of VIX sellers to exploit the difference in the too) is pretty much the same.

    So perhaps give the central banks (and to a lesser extent, the overpaid finance people that trade future interest rates all day long) a break, just a little bit. What you might have come across might in fact just be an empirical evidence for the existence of risk-aversion!

    • Well put.

      The interesting thing here as you imply is NOT the poor predictions per se, it’s WHY all the system’s actors together have decided this is the best way to run things.

      (however, “Fed Up” by DiMartino Booth hints at at least Fed directors actually being clueless)

      • I’m saying that you’re comparing apples with pears. In finance-speak, you’re comparing a risk-neutral expectation with a physical realization of that same expectation at some future time, whilst ignoring to adjust for the risk premium between the two. It doesn’t necessarily mean they’re poor predictions per se. And even in you did take this into account, in order to do this rigorously, you probably need a longer data set than the one in the graph.

        And with respect to the Fed, oh yeah – they’re totally clueless.
        One example, is the successor benchmark rate which is supposed to replace the flawed Libor (remember we still use it, 10y on after LEH?). The Fed is now in charge of the replacement index and has been planning for a potential switch for years. So happens their army PhDs double counted the transactions by a hundred billion USD or so… but what’s a hundred bil’ between friends when you’re a central bank? :)
        https://www.newyorkfed.org/markets/opolicy/operating_policy_180416

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