The federal reserve and interest rates: chicken or egg?

In the comments section of a recent post, a reader challenged me on my (long standing) assertion that the federal reserve doesn't really control interest rates.  Of course, my assertion is long standing only because of how long ago I read Prechter's book, "Conquer The Crash" which IMO is borderline genius and highly enlightening if you can only suspend disbelief (herd think) long enough to let his points sink in.  Prechter makes what appear to be ridiculous claims on many occasions but over time you begin to realize that they are not ridiculous at all and in fact what is ridiculous is the herd-think trance that people allow to become "the world pulled over our eyes to blind you from the truth that you are a slave born into bondage" in the words of Morpheus from the equally genius movie, "The Matrix".

Not that I am "The One" or anything, but if I were Neo then Prechter would be my Morpheus.  He is really the one that pulled me out of The Matrix.  He didn't do it with predictions about the future but rather his insightful observations about the past.  Prechter appears to be visionary futurist sometimes simply because he is such an accomplished historian!  As quoted from Ecclesiastes 1:9, "What has been will be again, what has been done will be done again; there is nothing new under the sun.".  I prefer the more modern version of this as attributed to a quote by Harry S. Truman, "The only thing new under the sun is the history you don't know".  Either way, the message is that history is a good guide for future events and Prechter is a historian.  He is a data-centric thinker for sure.  He tends to avoid shooting from the hip in any way.

In any case, as a proof point for the federal reserve being a follower of as opposed to being the setter of interest rates, I provided a link to a video from Elliott Wave International which you can view here.  The data is undeniable.  The fed doesn't set the interest rates, it simply follows what the market has already determined.  It only stands to reason because, as everyone with any economic understanding at all knows, BUYERS set the price of market assets (including interest rates), NOT sellers.  Sellers can have an MSRP but buyers are the ultimate arbiters of whether something gets bought or not.

I recently had this discussion with a person on a plane while I was en route to a customer for a business meeting.  He insisted that sellers set the price and so I pulled out my cell phone which is a new model and asked him if he liked it.  He said of course, it's the new popular model who would not want it?  So by that I established that there was a local market for the item.  Then I asked him if he would like to buy it.  Of course, in making my own point, he said, "sure, depending on the price".  So I said how about about $2000?   After all, we were on a plane and I was the only guy selling a phone at the time.  Thus, immediate supplies were limited!  I urged him to buy it before I sold it to someone else.  "Supplies are limited, man".  He just laughed and said he could wait until we landed.  I conceded his point and lowered my price by 50% on the spot.  Only $1000 for this new model phone and it could be his?  50% off!! How could he resist that super deal??  But he countered my MSRP saying that the darned thing only costs $600 without a cell phone plan and that would be brand new.  Again, I conceded his point and so I lowered my price by 50% again to $500.  Do you think he took the deal?  Hell no.  His reason?  He already had a somewhat recent cell phone and while mine was nicer, his was good enough.  So again, I dropped the price by 50% to a mere $250.  But still he said no because he just wasn't in the market for another phone right now.

Bottom line, I lowered my price ~90% and still no sale.  There IS a price he would have said yes at but it would have been faaaaar below my cost and in fact far below the cost to produce the phone!  So who was setting the prices here?  Not the seller, folks.  Buyers set the prices and every Austrian school economist worth a crap already knows this.  This exact same thought process plays out in parallel billions of times per day.  Who can control that??  NOBODY!  And no it's not different just because it's the federal reserve because if they print too much money in order to buy bonds in order to keep interest rates low then the very act of money printing will at some point produce negative returns in terms of interest rate manipulation.  This is a fancy way of saying that debt based growth looks/appears real for a period of time, and people believe that it is real but it is not real; it is an unsustainable fabrication, a magick trick and a con game that eventually must reverse itself and thus blow up.  This is what is referred to as "the fed losing control of the bond market".  Of course the real term should be "the fed losing APPEARANCE of control of the bond market".

That is not to say that the fed doesn't know which way it would like to see rates go!  The fed will always want lower rates if the economy is doing poorly and it will always want to sneak the rates higher when the economy is doing well so that there is leeway for lower rates during the next down turn.  But the fed does not control any of it directly.  What the fed (of the US and all other central banks as well) DOES do is to tell a story and to flash the "bazooka in its pocket" in order to try to herd the market in a certain direction.  The fed and all central bankers are confidence men, scam artists, grifters and glorified carnies.

Another way of looking at it is that AAPL would always like to get premium prices for its products.  For a time the herd went along with this.  They saw AAPL products as being a status symbol, part of the young and cool crowd.  So the herd temporarily abandoned all common sense and lined up around the block to be the first to buy these products at highly inflated prices.  This is what AAPL wanted and this is what AAPL tried to perpetuate even to the extent of hiring fake buyers to stand in line in order to give the appearance of rabid, blind, unthinking desirability for their products in order to tempt the rest of the herd to fall in line.

But there was really nothing special about AAPL products which is why Android based products are now the market share leader.  Don't ask me what convinced the herd to behave irrationally in favor of AAPL products in the first place.  I guess you can say that a sucker is born every minute.  Also don't ask me why rich men get drunk, marry women, have unprotected sex with them and then end up with lifetime child support and alimony payments that eventually cause depression so severe that they hang themselves.  Call it Keynes' "animal spirits" if you like.  But it is not driven by central control of the herd as people believe happens with the fed.

That is not to say that the fed has no influence for a period of time.  Imagine you are a hunter and you come across a herd of wildebeests.  They are moving as a herd from north where the summer feeding ground are toward the south where the winter feeding grounds are.  The herd is very big.  You as a hunter have a very big gun.  If you aim at any specific herd member and pull the trigger, that herd member is going down for good.   But you do not have unlimited bullets.  Even if you bring a bazooka to the hunt you might kill 20 animals per shot.  When you shoot, the herd sees someone go down and it knows you are capable of picking winners and losers. But you cannot change the path of the herd, you can only distort it temporarily.  Why?  Because even the best hunter has only so many shots in his gun and after the bullets are gone, loud yelling is pretty much ignored by the herd.  The human herd is billions strong and it is spread over the globe.  There is only so much one agency can do!  And so that is the net of it.  The fed can distort the movement of the herd but it cannot forever change it.  The herd, which is really to say the market, is just way too big to be controlled like that.

The proof is in the fed's own statements.  They say they are going to raise rates at a certain point in anticipation of what they think the herd will do.  But if the herd doesn't do it, the fed moves the goal posts and issues new guidance.  The fed is a market watcher like the hunter is a herd watcher like the con man is a people watcher.  But in all cases, the watcher does not know in advance what the herd will do, it simply tries to react to what the herd does as quickly as possible.  The fed wants everyone to think that it is running the show when in fact it only seems that way as long as the herd lets it happen or wants it to happen.  Please don't be fooled by this con or your name might be Mark or Patsy!

We had a big, influential section of the herd known as baby boomers headed into retirement.  They wanted higher market prices.  They wanted better retirements for themselves.  So they went along with the fed's hopes for lower rates.  But now the younger generation is coming of age and they are getting screwed by this at a time when the power baton in the herd is getting handed down to the next generation.  The new young leaders don't like what is going on and so it will change despite what the fed wants.  The markets will go down because the young people are not invested in them!

The fed does not want interest rates to rise but the EW pattern says they are going to rise anyhow.  The fed will follow these rising rates with loud proclamations about why it raised rates.  The economy will tank. The markets will tank.  The sheeple will blame all this on the fed even though the fed really will not have had anything to do with it.  The fed will not explain the truth because to do so is to admit the true impotence of the fed.  Today's EW chart of the 10 year treasury is below and my current model says that today's breakout of the top rail with a big gap up was the first confirmation that wave 3 is in progress.

Let's see how the fed forecasts this coming rise which I model not from policy announcements of the fed but from rate information supplied by the real market.  The market is now coming to its senses that the fed is a con man just like people are coming to their senses that AAPL products are overpriced hype.  In both cases the next moves are not very difficult to predict once you get your mind right about what is really going on.