Forward Guidance Cold Turkey Comes With Withdrawal Symptoms - But The Patient (Investor) Always Recovers

1. On Wednesday last week, Bloom (BE US Equity) reported $0.78 in single quarter EPS. That was better than expected, and they raised revenue guidance for 2026. Nearly every one of Bloom’s operating metrics is growing at 3-4x year on year. If you think as I continue to do that the AI capex juggernaut rolls on, & that Bloom could earn as much as $10 per share in 2027 then at around $160-$162 Bloom was available at approximately 16x estimated 2027 earnings. So, I bought more. My thesis on Bloom is simple, hopefully not too simple: the stuff works; demand is off the charts; and neither the United States nor any other (c.f. South Korea) major AI country is likely to meet its objectives without Bloom’s support. What could yet go right?
   
   
2. Whether it be the Hunts in silver, Hamanaka in copper, Alan Bond, LTCM, John Rusnak (2002), the NAB FX options idiots (2004), Amaranth (2006) or any number of fools during 2007-2008 markets eventually sniff out the weakest link: then clean them out at the absolute bottom or top, depending which way the weak link is positioned. We can now add Aschenbrenner to the list. His fund’s name, Situational Awareness, could be a title of Nassim Taleb’s or someone’s next behavioural finance book. As hard as it is to do, please try to distinguish between Aschenbrenner’s AI thesis (still solid), and his risk management (channelling Sam Bankman-Fried). Whomever took down Aschenbrenner’s public equities book just made a small fortune - and I suspect you’re reading this. Well played.
   
   
3. When investment is in progress it constitutes actual aggregate demand in the economy; when it has been completed, it constitutes potential aggregate supply in the economy. What should happen in monetary policy if apparently attractive investment opportunities present themselves, and, then, what happens if the appropriate monetary policy is not in fact pursued?
   ‘Appropriate monetary policy’ means ensuring that the real interest rate is at its natural level. Not neutral, R-star or other such confections: the natural level.
   As David Laidler wrote in 2003: ‘A voluntary decision to save by households is simultaneously a decision to consume at some time in the future, while a decision to invest by firms is simultaneously a decision to supply consumption goods in the future, and the rate of interest is the crucial relative price that coordinates these choices. Only so long as the market rate of interest is equal to the natural rate of interest does it accomplish this and create a state of what is usually called monetary neutrality’. So what? Well, as Laidler continued: ‘A coordination failure with respect to the intertemporal allocation of resources occurs because a relative price, the interest rate, is set as a disequilibrium value by the [central] banking system. The longer it continues, the greater is the imbalance between firms’ capacity to provide consumer goods in the future and households’ desire to purchase them, an imbalance that is matched by a shortfall in firms’ current demand for consumer goods [e.g. the price of GPUs]. But continue it will, so long as the crucial intertemporal relative price [the rate of interest] remains at the wrong level.’
   
   
4. We have over three decades deviated so, so far from any concept of a natural interest rate. The repeated, preferred central bank usage of ‘neutral’ is an implicit admission of that. Amidst this colossal AI and national resilience investment boom, any attempt to rediscover that natural rate (e.g. very substantially higher long-term nominal and real yields) must be extremely painful for markets by extension, painful for consumption. Other than Warsh’s courageous, nascent, and possibly stillborn communications experiment I see zero political will in any major economy to rediscover the natural rate of interest. Quite the opposite: given what the rediscovery of the right balancing, natural rate of interest implies for asset prices (a lower clearing price), no policy maker wants to attempt it. They are too scared.
   
   For all my macroeconomist readers and clients, this will sound harsh but it seems to me modern macroeconomics is essentially useless for providing guidance on either what should happen next or what will happen next to get us out of this mess. I applaud the macroeconomist community for continuing to try, but it reminds me of a fly inside Wittgenstein’s fly-bottle, buzzing frantically from one wall of the bottle to another in a futile attempt to escape.
   
   
5. One of the truly wonderful policy makers (he was always much more than just a central banker) I have interacted with over the decades is the now retired Peter Praet. We bonded during 2007, over both a shared birthday and his incredible, almost unique understanding (amongst his peers) of the plumbing, policy, and politics. A great man.
   
   Back in 2013, Peter wrote something on forward guidance: the Odyssean element had to do with the central bank’s disclosure or clarification of its monetary policy strategy. Through its Delphic element, forward guidance gave information about the central bank’s perceptions of macroeconomic fundamentals. There is nothing wrong with moving away from forward guidance. Nothing.
   
   It is about time we stopped being spoon (F)ed. However, to go from Odyssean or Delphic forward guidance to – literally – 'a blank piece of paper’ within a month or two probably requires better communication than we have seen thus far.
   
   
6. It is clear Warsh would like a mulligan on his terrible press conference, as he and his fellow members offer nervous guests on the first tee at The National (Augusta): rather than slicing it towards the pro shop, or duck hooking it towards the ninth fairway he might hit a controlled fade down the lefthand side.
   
   Cue outrage from the commentariat and cue a regrettably smarmy Twitter post from me.
   
   I really regret this post, but I won’t remove it. I want it to serve as a permanent, public reminder to myself of the expensive bid-offer between thinking fast and thinking slow.
   
   As the late, great Kahneman would remind us we should aim for less of the former, more of the latter. Nevertheless I typed: ‘After today’s performance, we’re probably another point away on the long bond from “no guidance” pivoting to “intra-meeting panic leaks”. Standby. Capitalism is a bully. The chief bully’s - Mr Market’s - innate nature is to create fear in those that don’t show enough fear. Hazing the new kid is tried and tested: delivering a word salad gains no respect’.
   
   
7. Thinking fast: ‘Warsh has no idea what he is doing, what a fiasco. Total clown’. No, no, no. Feels great to say or think that, even if only venting, but do not fall into that ‘thinking fast’ trap.
   
   Thinking slow (these words may sound familiar to clients): ‘Central banks have gone from price makers in a low inflation world, to price takers in a world driven by the AI and national resilience investment boom. Policy rates should be a bit higher. How much higher, we do not yet know but the Fed should at least remove 2025’s insurance cuts. Why are we having a hissy fit over necessarily higher long-term nominal and real yields? We should continue to focus on the fundamental, which isn’t whether Warsh guides us, or not: it is whether this AI Capex boom continues’.
   
   And the numbers suggest it will.
   
   
8. What can Warsh now do? He knows he made a mistake. There is no problem forgoing forward guidance on expected moves in interest rates—it is not necessary when policy is above the zero lower bound and it can be too constraining on markets and the Fed (see 2021, for example.). But Warsh needs to articulate how he’s seeing the economy, including why the nine members thought keeping rates unchanged was consistent with getting back to their 2% target. His refusal to take on that question despite being asked several times, to acknowledge that the rise in rates he touted embodied expected tightening, and his hints that the inflation goal post might be moved, all raised questions about his understanding of what might need to be done to restore price stability and/or his determination to take the hard steps.
   
   
9. Nevertheless, the situation is recoverable at the upcoming Jackson Hole gathering. Warsh is a very smart guy – ask him. Sure, he can talk about his beloved task forces, but somehow, he also must convince markets that he’s willing to adjust policy to achieve stability and what he and the FOMC are looking at to make that judgment. Some softer U.S. economic data in the near term may also give him some breathing space.
   

So what?

Despite a dreadful opening effort, I am keeping an open mind about Warsh: are you?