The market’s in a highly unstable state right now. These violent swings show the inadequacy of the standard models that the Fed and other mainstream analysts use.
The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not. Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments like the “efficient-market hypothesis” supposes.
The problem is that the Fed’s models are empirically false. Studies have proven how faulty their models are. The Fed has the worst forecasting record in the world. It’s basically been wrong every year since 2009.
“When He opened the third seal, I heard the third living creature say, “Come and see.” So I looked, and behold, a black horse, and he who sat on it had a pair of scales[a] in his hand” Revelation 6:5
Equilibrium models like the Fed uses basically say the world runs like a clock and occasionally it gets knocked out of equilibrium. And all you have to do is tweak policy or manipulate some variable to push it back into equilibrium.
It’s like resetting a clock. That’s a shorthand way of describing what an equilibrium model is. They treat markets like they’re some kind of machine. It’s a 19th-century, mechanistic approach.
But traditional approaches that rely on static models bear little relationship to reality.
Twenty-first-century markets aren’t machines and they don’t work in this clockwork fashion.
The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system.
The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship. The Fed uses what’s called value-at-risk modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.
As a result of these defective models, the Fed printed trillions of new money beginning in 2008 to ‘stimulate’ the economy, only to produce the weakest recovery in history. Need proof? Every year, the Federal Reserve forecasts economic growth on a one-year forward basis.
And it’s been wrong every year for the better part of a decade. When I say ‘wrong’, I mean by orders of magnitude.
Read the article @ The Daily Reckoning HERE