Perceptions of Future Fed Policy Driving Asset Prices
Why is this issue of the Report entitled the Federal Reserve Report? We chose this headline because the Fed is apparently now the driver of supply and demand of gold and silver. Or at least it’s what speculators in gold and silver expect will drive the decisions of the hoarders, whom the speculators are trying to front-run.
Economist John Maynard Keynes, in a rare episode of getting something right, described a hypothetical beauty contest held by a newspaper as an analogy for speculating in the stock market. The paper publishes a hundred pictures, and to enter to you vote for the 6 which are the most attractive. Whoever picks the most popular wins a prize.
‘It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.’ (Keynes, General Theory of Employment, Interest and Money, 1936).
On Friday, the Bureau of Labor Statistics released its jobs report. 151,000 jobs were added in August. This was very disappointing. So naturally, speculators furiously bid up everything from stocks to junk bonds to gold and silver.
Wait. Bid up? Naturally?!
Yes. If the economy is slowing, then the average person expects the Fed to backpedal from its promise to raise interest rates. And if rates aren’t going up, then the quantity of money will expand. And the average person expects the prices of assets to go up with the quantity of money.
The price of silver went up about 3%.
This post was published at Acting-Man on September 5, 2016.