DOES FORWARD GUIDANCE BY CENTRAL BANKS REALLY REDUCE VOLATILITY AND CREATE ASSET BUBBLES

Insignia Consultants

New Delhi

Tuesday, June 12, 2018

DOES FORWARD GUIDANCE BY CENTRAL BANKS REALLY REDUCE VOLATILITY AND CREATE ASSET BUBBLES

When I moved into the forex consultancy job and later when I founded insignia consultants, Allan Greenspan was the Federal Reserve chief. Greenspan never believed in forward guidance. During his time, mostly there was an element of surprise in Federal Reserve meetings and press conferences. After Greenspan came Ben Bernanke. He believed in forward guidance. Changes to central bank stance were either conveyed to the markets just before the Federal Reserve meet by Bernanke or some other Fed official. Volatility in global financial markets (due to FOMC meets) were was reduced to zero by Bernanke and later by Janet Yellen. The current Federal Reserve chief also believes in forward guidance. Global central banks generally ape the Federal Reserve and use forward guidance as a tool to curb unexpected volatility.

Volatility and surprise to a certain extent is good for the financial markets. Certainty will result in one way markets. Certainty creates asset bubbles. Central banks never prick asset bubbles. Asset bubbles historically have burst themselves despite central banks desperate attempts to prevent the same.

All trading exchanges need day trading volumes. Buy and forget OR sell and forget is something which is not liked by those associated with financial markets. Brokers need daily trading volumes. Exchanges need volumes growth week on week. States need higher tax revenue from tax levied on trading transaction as well capital gain tax.

Cartelization is very easy in a way markets. Retail investors are the herd with very low risk appetite as compared to hedge fund market. The best example of cartelization is silver. Silver prices moves from $8.40 to $49.82 is less than a year some years back. Retail/herd were invested in silver over $45.00 and never booked profit. The cartel of JP Morgan, Deutsche bank and others continuously sold silver futures which ultimately resulted in silver crash. Rest is history for silver. Even in bitcoins. My last big call to invest in bitcoin was at $1500 in 2017. I have been advising to invest in bitcoin from $800. The BTC cartel and exchanges created media hype from $6000 which resulted in BTC getting listed in CME at a very high price. Retail/herd were buying BTC, hedge funds were selling BTC. Ask yourself did the retail investor make a fortune during BTC crash.

To conclude

Central banks need an element of surprise so that it creates volatility but does create asset bubble. I do not believe in pre-information to the financial markets as I do not like a dull and boring price moves. I also against excess asset bubbles creation. I do expect some surprise from FOMC tomorrow.

More on this after the FOMC meet.

Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, crypto currency, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice. Prepared by Chintan Karnani

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