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From the Trading Pits

The Risk of Losing Patience

If Fed Chair Janet Yellen is looking for dovish cover next week, she will not have to look far, as Friday’s U.S. wholesale inflation data was far softer than expected. 

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Yellen will have to somehow counterbalance the strong U.S. jobs market with inflation indexes moving lower.  If history is any guide, she has tended to fall on the dovish side. That said, European Central Bank  purchases have been running far above its daily target and perhaps now it makes sense for the Fed to toughen up its language and keep its target for a June rate hike.

With the March 18 FOMC meeting and Yellen press conference deeply scored on personal calendars across the globe, consensus will focus on whispers about issues including – the “dots” forecast, employment scenario, the central bank’s balance sheet, the persistent strength of the U.S. dollar, Eurozone sovereign yields, and inflation, disinflation, or deflation.

Yet, the big issue – the center ring attraction – will be the potential removal of the word “patient” from Yellen’s guidance strategy.  Never has a word received so much attention and moved me to thinking about, not only why consensus is so stuck on the word but rather, what she could possibly replace it with.

Patience: A Derivative of Suffering

The word patience was made popular by Aurelius Prudentius Clemens, a first-century poet who penned the highly controversial, “Psychomachia” which identified patience as one of the virtues a person needed to practice in defense of the seven deadly sins.

In the Fed’s case, removal of the word "patient" will provide Yellen with the flexibility she so badly needs.

However, will “patient” removal tempt our financial structure into the “deadly vices” as the poem goes?  Below are three of the seven most misunderstood vices and how they might apply to the U.S. central bank.

Avarice – camouflaged as many things as distinct yet different as greediness or stinginess, and one of the biggest failures of reason in the economy of the markets or politics.  The greedy institution – (business or government) does not instinctively know how to direct its passion for possession that is innate to every human being and institution.

Similarly, the miser accumulates wealth to the point of taking it out of productivity – out of circulation. Governments keep grabbing, consumers keep consuming, and big companies keep borrowing “cheap money” to buy back shares or pay dividends – all in the name of “having it all!” Unless you are a large shareholder, the Fed’s policy doesn’t benefit you much.  It’s questionable whether the so-called “trickle-down” effect has helped the majority of us.  It’s time to heal on our own.

Sloth – This vice can be expressed via lethargy or endless activity. Sloth generally occurs by keeping ourselves busy, distracted, and going from activity to activity as way of avoiding the hard work of commitment or devotion.  I can’t think of a better word to describe our current society as we, by and large, seem generally disinterested in real work rather, we are addicted to financial speculation and quick fixes.

Speaking of sloth, monetary stimulus (QE) is both a novel concept and an unproven one however, when placed against the threat of a round of good old fashioned, belt tightening austerity – guess who wins?  What’s ironic is the debate between stimuli versus austerity generally misses the point that neither helps the people most in need. Instead, it’s the one that has the best chance of helping the one not in need.

Gluttony – typically associated with food, gluttony is an idea that dates back to the Greek philosophers to describe a person who singularly focuses on himself and fulfilling his desire.  Perfect capitalism is about market forces allocating capital, not through the inherited power of people or governments.

In reality, it’s gluttonous to subvert market forces rather than embrace them.  Robber-baron capitalism, corporate welfare, generous corporate tax loopholes, and blatant crony capitalism are but a few manifestations.  Endless rounds of QE can’t help but transform the most well intentioned borrower into a glutton – with so much wealth concentrated in financial dealings, the Fed can even justify making policy for them.  Otherwise, who knows what could happen!

I’m halfway through u a trans-Pacific flight when the cabin is dark, quiet, and increasingly cold.  I awaken and know there’s a spare blanket in the overhead bin – yet I choose to lie freezing and awake until daylight.  It wasn’t laziness that kept me from the blanket.  It’s a case of not wanting to brave the litany of the shock of cold, the fumbling to the overhead bin in my attempt.  It was a combination of avarice, sloth, and gluttony that kept me in my seat. Far better to deal with the devil I know.

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