The Fed, Part 7: So The Mechanic Can’t Scam You

I want to shine light on comments I made over a year ago about Silicon Valley Bank and Federal Reserve actions in The Fed Part 3. Insights that were both useful and correct. I want to explain why you should care about the information in this Fed series.

This series isn’t just autistic refutations of Fed power with no application. I know what I’m doing looks like macro commentary, but really it’s not. What I’m fundamentally doing is systematizing monetary frameworks to help you navigate the economic world more reasonably, on your own, and without obsessing over a central bank that doesn’t deserve to be feared, but mocked. There was utility in the analysis I gave that was mostly ignored in favor of hysteria, but usefulness is rarely found in thrilling headlines and doomsday predictions.

If You Know Basics About the Engine, the Mechanic Can’t Scam You

Once you understand how a system works, you can better comprehend what’s signal, and what’s noise. Emphasis on noise. If you plan on being an investor for more than one bull cycle, avoiding mistakes and losing money is more crucial than good decisions and making money. Investing is an iterated game: you need to survive first, prosper second (you can’t achieve the latter without the former, anyways).

You should always look down before you look up. It’s good for success that you seek quality information; but it’s better for survival that you avoid bad information.

My Fed series is rooted in helping you avoid bad information.

If you know nothing about cars and the mechanic tells you “your flux capacitor has too much gastric bloat and needs to be oxidized, that’ll run you $2k”, you don’t know you’re being manipulated. The “expert” told you something, and you can’t spot beguiling bullshit if you don’t understand basics about the engine.

The ‘mechanic alpha’ here, so to speak, isn’t that you can make money from knowing how a car works, it’s that you can avoid losing money by understanding when you’ve encountered misinformation. Even if you don’t know enough about cars to fix them on your own, if you know there’s no flux capacitor, you just saved $2k.

I don’t think anyone is knowingly lying about the Fed. The Ron Paul/Balaji contingent obviously mean well, as does the rest of the based alliance of anti-central-bank bros who treat the Fed like a religious institution. I consider them allies with a severely misplaced sense of respect.

I’m also confident Jerome Powell and Co. genuinely believe they control the price of information with buttons. Everyone candidly worships the Church of the Latter Day Saints of the Federal Reserve; I’m not claiming “conspiracy”, I’m saying “false god”. This is not the first time societies have believed collective falsehoods and ascribed deity powers to men. Our rain dances are just more dignified now.

Crypto is building a new financial world, and while DeFi is generally excellent at approaching finance from a first-principles perspective that seeks to understand the “how?” as much as the “why?”, it has resoundingly failed at being even a little inquisitive and suspect about the Fed and monetary policy efficacy. DeFi takes all the assertions the government institution makes at face value just as much as TradFi does. That’s Fed religious capture for you. Eventually, the industry of autistic engineers will notice that car engines don’t actually run on loud press conferences, asset swaps, and “forward guidance”.

It isn’t based to say “End the Fed”; it’s demonstrating how thoroughly owned and controlled people are by flamboyant illusions. I highly encourage you to read The Fed Part 1, Part 4, and Part 5 to get a sense of what I’m talking about. I also want you to understand that my claims are not the aggressive ones, THEIRS are.

With great positive claims comes great evidentiary responsibility. You prove a positive (you can do something), not a negative (you can’t do something). This series is mostly me doing what I shouldn’t have to: proving negatives.

Why did we never ask for proof that they control the thing? Religious capture is a hell of a drug, and it especially works when you think you’re impervious to it.

Macro Commentary and Falsifiability

Macro commentary is overwhelmingly well-meaning but unactionable opining. Macro takes are basically this: someone connects a constellation of indicators they find relevant and paints a narrative. If that narrative aligns with your priors, you like it; if it doesn’t, you don’t.

The narrative may be accurate, but it’s almost never precise enough for you to make money off it… consistently. Emphasis on consistently. Broken clocks are still right twice a day, and the guys that have predicted 758 of the last 3 recessions don't count. Off the top of my head I can think of two guys that have consistently used macro analysis to make correct investment decisions: Soros and Stan Druckenmiller. I’m sure there are others, but they’re an extremely rare breed who don’t need to sell you macro editorializing, because they’re out using their uncommon gift to make money.

Macro is… macro, which means you’re taking high-level variables and trying to predict the outcomes of a massive economic complex adaptive system from them. “Based off these 5 indicators I’ve selected, this series of emergent behaviors and 3rd-order effects will occur, impacting the price of XYZ”…. this is not what human brains are designed to do, well.

Macro commentary is seductive. It presents as sophisticated under a thick layer of complexity. It often portends something big is coming. Something big is coming…. someday. When will it come? How? Any way to time it for a trade? Unclear. But… it’s coming. Be cognizant of unfalsifiability in financial punditry.

Those who need ad impressions must hyperbolize for attention, because without drama you wouldn’t give them their clicks. Financial media always needs something to obsess over, otherwise we can't pretend there's an Emergency Current Event ™ that occurs weekly.

Macro commentators — with paying subscribers whose living depends on having something smart-sounding to say — can't say "Hey very little that happens actually matters, you should just go for a walk no one will care about this in a week."

Macro often stops just short of giving you a conclusion that could definitively show its veracity. You’ll frequently find nebulous takeaways with no firm ETA. This is how most macro guys keep an audience: they’re never exactly wrong, because they rarely give a prognostication that can be understood to be definitively incorrect. Be cognizant of unfalsifiability in financial punditry.

I’m not disparaging people genuinely trying to make more sense of the world. Jeff Snider, Lyn Alden and the like are legitimately insightful and share interesting, informative stuff. They do a great deal of systematizing and provide fantastic educational frameworks.

What I take issue with are the macro tarot card readers, and there’s always a Very Big Deal ™ happening that you MUST know about! Those who chronically, emphatically promote panic-inducing and/or Fed-worshipping ideology, don’t educate, rile everyone up, then the scary thing passes, you forget about it, and they never lose credibility and keep peddling fear porn. Chicken Littles. I would broadly place most everything CNBC and ZeroHedge put out as fitting into one of these buckets.

My Fed series is not this. Not only is it falsifiable — because it’s intensely literal and operationally minded — I would describe the whole essence of it as “let’s make all this as mechanical and falsifiable as possible”. No more Ron Paul doomsday platitudes or Davos-tier fanfare. It’s time we started being radically “prove it” minded about central bank claims and transmission mechanisms for them.

Do you accept that the car propels itself with the flux capacitor? No? Good. When it hits you that Fed interest-rate control is the “flux capacitor” of finance, I hope it instills a sense of disgust about the incompetence of this institution and how misplaced your reverence for it was. Like learning your loyal wife was cheating the whole time; I went through something similar myself during this realization.

I’m trying to be as factual and methodical as I can, deconstructing monetary claims to show how misled the “Fed is god”-isms are. I’m demonstrating how to systematize your understanding so you can observe things on your own. Learning to fish. I’m telling you how the engine works so when the FOMC mechanic lies to you about their “money printing” or “lowering interest rates”, you know better.

My uncontroversial ask is that you hold this institution to just an ounce of an evidentiary standard. After you hear the “what?” ask “how?”.

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