Following the Consensus in These Markets Won't Work

(Bloomberg View) -- The “consensus opinion” is often wrong in financial markets because, generally, it is like reading a headline in that it fails to consider a broader context. If you wish to win at the “Great Game,” then “think it through” is the correct path rather than jumping on any bandwagon.

Consider that the markets are pricing in a December interest-rate hike by the Federal Reserve with 100 percent certainty, based on the implied probability of federal funds futures contracts. And yet, the Commerce Department said today that its core personal consumer expenditure index rose just 1.4 percent in October from a year earlier. That's the same as in September and far less than the 2 percent level desired by the Fed.

In testimony before Congress this week, Fed Chair Janet Yellen expressed a strong concern that the central didn't really understand why there is so little inflation. My theory is that inflation has not accelerated because all of the $21.7 trillion in “pixie dust” money that central banks have sprinkled into the world economy has gone into the markets and not into goods and services. The Fed and its brethren miscalculated badly.

In recent speeches, Fed officials Neel Kashkari, Charles Evans and Lael Brainard have warned along with Benn Steil, the director of international economics at the Council on Foreign Relations, that a rate hike in December could be a mistake if the inflation data is weak. I peg the odds at 50/50, but regardless of what policy makers decide we are coming to the end of the Fed's so-called “normalization,” assuming the Senate confirms current Fed Governor Jerome Powell as the next Fed chair to replace Yellen. The Trump administration will find nothing positive about raising rates when it's trying to move the economy along. Somehow -- and quietly -- this will be communicated to the people at the Fed.

In any event, the old Fed is certainly not going to be the new Fed, as Powell takes over and others are nominated to fill key roles. For example, President Donald Trump on Wednesday nominated Marvin Goodfriend to be a Fed Governor. Goodfriend, according to news reports, has been critical of the Fed's buying of mortgage-backed securities as part of its post-crisis asset purchases. He has also said the Fed should limit its purchases to Treasury securities except in very limited circumstances. In one notable treatise, he argued for negative interest rates. He stated that this is a way to give central banks more flexibility to combat crises, rather than having to resort to bond buying after rates are cut to zero. No one on the current Fed's board, to my knowledge, has ever argued for such a position.

Consensus today does not mean consensus tomorrow!

Another area I am dubious about is oil. The consensus view has pushed prices higher recently, but I am not sure this continues much longer. Russia and OPEC have done about as much as they can to curb their production, but shale oil production is not retreating. Bloomberg News reports that U.S. net imports of crude and refined products are at a record low, while U.S. gasoline exports and crude production have hit their highest levels ever.

When the world's largest consumer becomes one of the world's largest exporters, then a reversal is in progress. We are on our way to this, and I caution about believing OPEC's propaganda that prices will head even higher. Many OPEC producing nations are in serious economic trouble, as their social programs cost far more than their oil revenues. It is a time bomb waiting to explode. The recent crackdowns in Saudi Arabia are far more about the nation recapturing wealth than any made-up story about graft and corruption.

Politicians are forever handing out questionable data and strong opinions in an attempt to mold the consensus view. A skeptical eye is often required to find the truth. It is funny, you know, how many politicians never want you to find it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Grant is a managing director and chief strategist at Hilltop Securities.

To contact the author of this story: Mark Grant at mjgrant@bloomberg.net.

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net.

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