The I Ching and the FED
The Fed tries to counterbalance the economic cycles. Yet it is still subject to its own seasonality. And it is the Fed’s seasonality the one we must pay the closest attention. There is no such thing as a soft landing and as investors we should never fight the Fed. It has the power to slow the economy and destroy vast amounts of wealth if we do not get out of the way. Because it is an act of pride to deliberately slow down the economy as well as to deliberately create unemployment to fight inflation, the Fed’s actions are usually accompanied by dire consequences as all acts of pride are, none of which affect those who create it.
We as investors must always prepare for the worst even if it never comes. For instance, the famous concept of two stumbles and a jump tells us to buy after the Fed decreases the interest rates for the second time because usually the market jumps after the second interest rate cut. That is the classical point of entry because it signals the beginning of the YANG cycle, when the Fed is desperately trying to flood the market with liquidity to jump-start the economy. But usually within a year the Fed has to start increasing rates to sacrifice the economy for the sake of inflation. This is the start of the YIN cycle and a clear signal for us to go on the defensive. We must assume the Fed is going to overshoot, as they usually do, and create a hard landing forcing it to once again decrease the rates and start the YANG and YIN cycle all over again.
Much like in Reflexivity, on one side is YANG where the Fed holds an idea of what the perfect economy should be. That ideal is Heaven. It is an economy full of “classic economic concepts” with inflation around 1%, unemployment around 5%, GDP around 3%, a stock market growing at a “reasonable rate”, and any other concept the members of the Fed might “see” as acceptable.
On the other side is YIN, the real world, full of greed and fear and with quite a different perception of what a “reasonable rate” of growth should be. The real world is Earth. As the Fed executes its plan, it affects the real economy and its markets. And as the economy and the markets react, they in turn begin to affect the Fed’s perception of the economy and the markets.
And on and on they go, affecting each other without a clear notion of what the other is doing or going to do. To hear the Fed’s Chairman speak in a language designed to confuse the investors is frightening. But to hear him say he is proud of his ability to deliberately mislead investors and even make fun of it, as he has done in front of Senators on numerous occasions, is horrifying. The investor begins to realize that both, the man who has the power to improve or destroy the economy, and the CEOs and investors, will never really know what the other is thinking. Worst, the investor begins to think the Fed is out to deliberately make him poor, to lower the “wealth effect” so that he may consume less and avoid an inflation which is not present yet.
When the Fed begins to raise the rates it might be acting on a solid perception. But as it continues to increase the rates, in spite of the fact the most prestigious CEOs such as Jack Welch, ask them to stop – then the Fed is going into a “flawed perception” territory. The Fed is clearly moving from Heaven and Lake (the Great YANG) to Fire and Thunder (the Lesser YIN). The flaw in perception is based on the fact the GDP is at 8.5% and the unemployment rate is at 3% and classic economics will not allow for this scenario. It does not matter that this new growth might be due to the end of the Cold War, the fall of the Soviet Empire; the fact people are making mobile phones instead of guns. The Fed must choke the economy and make sure all “excesses are purged from the market”. Increasing the rates for almost a year and maintaining the rates high for almost another year definitely puts the Fed in YIN territory with its “flaw in perception” at its peak. Now the Fed is on Earth and Mountain (the Greater YIN) as its arrogance increases. But now the Fed’s cycle is about to turn, as arrogance turns to fear. It is time for the Fed to ask itself when its policy turned from a real concern to fight inflation to a malicious intent to punish the market for its irrational exuberance.
Now the opposite side of the cycle starts, as their wish to cool the economy and create unemployment becomes a reality. The Information Age has made sure every CEO knows what the Fed wants, or at least a perception of what it might want. The CEOs have begun to make the Fed happy by providing it with the same unemployment it so desperately wanted. Now, the unemployment is over 6%, the GDP is in negative territory and the Fed would give anything to go back to the same irrational exuberance it so arrogantly disdained. The Fed is facing a recession, the same recession it tried to avoid but which as usual ended up creating.
The Fed will desperately begin to pump liquidity back into the economy. Inflation is no longer a concern but rather deflation together with the same recession and the same unemployment the Fed so arrogantly set out to create. The Fed is now in Water and Wind (the Lesser YANG) as it will overshoot on its measures by pumping too much liquidity and creating the conditions for the next boom to bust cycle. There is always the danger, as in the case of the Bank of Japan, that the investor, after losing vast amounts of wealth, might lose his confidence in the Fed and view with suspicion any changes in monetary policy aimed at prompting him to invest.
A flaw of perception accompanied by arrogance is a recipe for disaster because it does not allow for any margins for errors. And Mr. Murphy always shows up. Just when the Fed thinks it turned the economy around, a tragedy occurs. Whether they come in the form of wars, financial crisis or terrorists’ attacks, they always tend to turn a bad situation into a desperate one.
One of the scariest thoughts is that synchronicity (Carl Jung’s concept on which he believed the I CHING is based) points to the notion that Mr. Greenspan will practically bring the U.S. economy down to its knees. Like the owner of the Titanic, who said that not even God could destroy his ship, lived to see how his words perfectly synchronized with the sinking of his ship; so Mr. Greenspan is destined to see the harsh criticism he made over the actions of the Fed of the Depression years perfectly synchronize with his own inability to manage the economy.
Back in 1959, Alan Greenspan wrote: “Once stock prices reach the point at which it is hard to value them by any logical methodology, stocks will be bought as they were in the late 1920s – not for investment, but to be unloaded at a still higher price. The ensuing break would cause a panic psychology that cannot be summarily altered or reversed by easy-money policies.”
This synchronicity becomes even more probable if we take in consideration his ominous biography called Maestro. Just as he is getting praised for a wonderful job, which perhaps does not properly take into account the crashes of ’87, ’91, ’94 and 2000, he might not escape the synchronicity of creating a super crash. I pray this will not be the case. However, the most ominous part is that the Hexagram associated with the U.S. equity market for this period is number 26 or The Taming Power of the Great.
Hexagram 26 represents a very powerful supernatural force few CEOs or Central Banks can manage. If you do not believe its power just ask Cisco’s CEO to describe his “once in a 100 years flood” comment, or Hewlett Packard’s CEO to describe her “somebody turned off the light” comment. Even though Hexagram 26 included a beautiful line in the fifth position called “the teeth of a castrated hog – good fortune,” referring to the good fortune we had for the ‘98 and ‘99 periods, the overall context is one of the Taming of a Great economy with its subsequent renewal a few years later. Synchronicity requires one must pay attention to everything because anything or anyone might hold the key to one’s next move.
