Modern (Chicken$hit) Monetary Theory

Submitted by QTR’s Fringe Finance

Wharton Professor Emeritus Jeremy Siegel, who has a longstanding presence as an economic commentator and author laying chalk on the modern monetary system and reliably “predicting” the heavy favorite that the market would always continue to go up, humiliated himself this week on national television.

However, in the process, he offered important perspectives on how truly dopesick our stock market and its participants have become.

On Monday, which as of Thursday night has turned out to be the only day with serious volatility to the downside this week, Siegel was on CNBC before the market opened clamoring for 150 basis points in rate cuts.

You can watch the video of him, where it sounds like he’s about to cry, making his case for “emergency cuts” here:

There was no counterbalance to the rest of Monday’s idiocy on financial news, however Fast Money’s Guy Adami did a great job cancelling out Siegel’s white noise after the trading day by making a couple very simple points about Jeremy Siegel’s protest – namely: “There’s no emergency. The stock market can go down, too.”

And by Thursday night, once the piss stain on his Dockers from watching Sunday night’s Japanese index futures had time to dry, Siegel had already gone on the record with CNBC to back off of his position from Monday.

He told CNBC: “I no longer certainly think it’s necessary. But I want [Powell] to move down to 4% as fast as possible. Would it be bad? No. But would it be necessary? No, not at this time.”

In other words, Siegel changed his mind in less than 3 trading days and tipped his hand that he was reacting, almost tick-by-tick, to moves in the stock market — something that any economist knows should not be driving decisions on monetary policy and is not part of the Fed’s dual mandate of price stability (pause for laughter) and maximum employment.

Siegel’s appearance, and his imploring of the Fed to cut rates, was a perfect cross-section of how addicted to total euphoria market participants have become. This “emergency” not only displayed our massive dopamine deficit with regards to market performance, but also took a page directly out of the impotent political and central banking playbook in the sense it was completely reactionary and incredibly hastily put together.

Make no mistake about it: Siegel was likely booked in that slot, that morning, on CNBC because everybody knew Sunday night that the market was going to be in for a rough ride. And while Japan crashed 12% the night prior, the NASDAQ was still only indicated to be down about 5% in the morning and never once tripped a circuit breaker in trading all day Monday. And so, it would have been an uncomfortable day and the market would have gone down, but that’s the nature of markets and prices: they go up…and down.

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Even if you think the market is headed lower in the short to medium term, as I do, I can’t help but sit back and laugh this week as the market has stabilized, volatility has fallen, and panic—both in the U.S. and Japan—has subsided for the time being.

Guy Adami said it brilliantly on Monday when he proclaimed that rate cuts weren’t some magic salve for the market. For a man who holds court at Wharton and is probably just a couple of feet away from classrooms where they’re holding game theory classes, I’m stunned that Siegel didn’t appear to even consider the idea that an emergency rate cut could inject even more panic into the market and, as Guy Adami noted, would make the Yen carry trade causing this shit show to begin with, worse.

At least for the week, it was a lesson that markets sometimes have to shake out and will stabilize on their own.

When you watch Siegel’s appearance on CNBC, the panic dripping off him is palpable. He looks like me, mid-filling, in a dentist chair: squirming, uncomfortable, likely perspiring heavily. And as anybody who has traded before knows, when you panic, you overtrade. And when you overtrade, you make things worse and you lose money. The Fed is already forecasting its rate cut for September and has taken great care to do so, which is why an emergency cut on Monday would have been “overtrading” and likely just would have made things worse.

I give credit to Jerome Powell for remaining quiet on Monday and keeping a steady hand — though if markets had gotten ugly Tuesday, who knows what would have happened.

Regardless, it always stuns me to see PhD economists and often times financial news anchors who are supposed to be the voices of reason and understand the nuances of the bowels of the economy better than anybody, slip into visible panic.

If you want to claim that Austrian economists and people who don’t believe in modern monetary theory are “wrong” all the time because the market is going up, that is a fair criticism that we have to take. But at least when the proverbial shit starts to hit the fan a little bit, we are geared up and prepared, as well as informed, instead of defecating ourselves and then trying to fulfill the impossible task of wresting control of a multi-trillion dollar market system from the hands of free market participants — all in the name of capitalism.

On Monday, in a mid-day note, I wrote that I was starting to take off some of my volatility long that I had mentioned weeks prior. I also mentioned that “I think the Fed is doing the right thing not riding the rescue right away this morning, but also think markets need to come in further. I don’t think this is going to be a one day issue.” I still believe this, and I continue to think more volatility will be ahead. I don’t think this week’s rebound will hold, and I believe market sentiment and psychology has shifted legitimately from the “soft landing” narrative to more of a “cover your ass” narrative.

This week, the United States had two extremely ugly bond auctions: a 10-year auction on Wednesday and a 30-year auction on Thursday, both of which tailed by more than three basis points.

If you don’t know what that means, you can check this article out for a primer on how Treasury auctions work for people with short attention spans. 

Rates up, rates down, rates the same—it all doesn’t matter. The gears of the economy have run out of oil and will soon be grinding to a serious halt, in my opinion. I expect home prices to continue to fall and asset prices to be not too far behind, all as a result of 5.5% rates on the largest debt bubble in history. I still believe that the Fed will be put in a position where they do act in an emergency manner, even though this week wasn’t it.

I still think the market is going to see more volatility ahead and force the hand of central bankers to hastily lower rates and quantitative easing, despite the fact that they will be far too late to make a difference and a deflationary avalanche will already be rolling down the economic hill. Is this the absolute most asinine way to do things? Yes, it is. But at least when it happens, us Austrians will have expected it, as opposed to taking to national television to prove to the world that not only are we incapable of thinking outside of the box we were educated in, but we are constantly, every day, in need of a “fix” of low volatility and picture-perfect markets, the same way a gambler at the horse track needs his last ten cent superfecta ticket to come in.

I think it’s a fair trade: we’ll let them be “right” by calling us a broken clock that is right twice a day, and in exchange, we will be prepared for when the markets are “working” and “not working” with our dignity intact — which is more than I can say for some “experts” that took to television on Monday morning.

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