Monday, October 02, 2006

An Informed Peek Behind the Curtain

John Hussman's wide-ranging discussion is, as usual, well worth the time.

In addition to his reflections on the recent rally, Dr. Hussman nails one of my pet peeves about the mythology surrounding the Fed (my experience has taught me the Fed follows the market, not the other way around).

The dog might bark when the mailman walks by, but nobody thinks that the barking is what brought the mail. Likewise, it's important to recognize that Fed actions can be correlated with economic events without causing them. If you want to argue causation, you've got to articulate the actual mechanism between cause and effect; otherwise you're just being superstitious. As I noted in our latest Annual Report, the Fed is a lot like a little boy who waves his arms whenever he hears music playing, so people come to believe he's actually conducting the band.

Keep this piece handy the next time everyone and his brother is on Fed Watch.


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