This is the market-negative side of the Central Bank Omnipotence coin, which turns bad macro news into bad market news. On Monday we had bad macro data on the heels of the Fed establishing a focal point of $10 billion in additional Taper cuts per FOMC meeting, a clear signal that monetary easing is decelerating on a predictable path. That’s the scenario we’ve enjoyed for the past few years, particularly last year, and it’s the scenario that our political, economic, and media “leaders” are desperate to preserve. The Goldilocks scenario today is macro data that’s strong enough to keep the Self-Sustaining US Growth Narrative from collapsing (ISM >50 and positive monthly job growth) but weak enough to keep the market-positive side of the Central Bank Omnipotence Narrative in play. But today Goldilocks has nothing to do with inflation. It’s a zombie, as all powerful Narratives are, so it will return one day. The Inflation Narrative is, for the foreseeable future, dead because there is zero wage inflation, which is the sine qua non for an Inflation Narrative. But I’m in a business where the path matters, and I can’t afford to make a guess about where the world may be in 5 to 10 years and just close my eyes. If you want to buy your inflation hedge and protect yourself from the ultimate wealth-destroyer, go right ahead. But it’s the Narratives that I care about for trying to predict market behaviors, not the Truth with a capital T about inflation. I know, I know … our official measures of inflation are all messed up and intentionally constructed to keep the concept of “inflation” and the Inflation Narrative in check. Inflation is … well, let’s be straight here … inflation is dead. Over the past few years the Goldilocks scenario has changed. That’s when growth is strong enough so that there’s no fear of recession (terrible for stocks), but not so strong as to whip the flames of inflation (not necessarily terrible for stocks, but sure to provoke Fed tightening which is terrible for stocks). How do Narratives of growth and monetary policy come together? Well, there’s one combination that the stock market truly and dearly loves – the Goldilocks scenario.
But make no mistake, the Common Knowledge information structure of this market is that Fed policy is responsible for everything. If the Fed is decelerating its easy money policy, the market tends to go down. If the Fed is not decelerating an easy money policy (what we’ve taken to calling the Taper), the market tends to go up. It means that all market outcomes – up and down – are determined by Fed policy.
Just remember that this Narrative does NOT mean that the Fed always makes the market go up. The latter – Central Bank Omnipotence – is something I’ve written a lot about, so I won’t repeat all that here. Regardless of what I believe or what you believe, though, it IS, and it’s not going away so long as all of our status quo institutions have such a vested interest in its “truth”. Probably yes (technological innovation, shale-based energy resources) and probably no (global trade/currency conflict, growth-diminishing policy decisions). It’s what every politician, every asset manager, and every media outlet wants to sell you. We have two dominant market Narratives – the same ones we’ve had for almost 4 years now – Self- Sustaining US Growth and Central Bank Omnipotence. To understand this, I sing the Epsilon Theory song, once more with feeling … it’s not the data! It’s how the data is molded or interpreted in the context of the dominant market Narratives. What we want to understand is what makes investors either react badly to bad news like on Monday or rejoice and “look through” bad news like on Friday. Or rather, it’s an explanation that predicts nothing, which means that it’s not an explanation at all. Why? According to those same media arbiters, investors were now “looking through” the weak data. But then the market was up more than 2% last Thursday and Friday (and another 1% this Tuesday), despite a Friday jobs report that was more negative in its own right than the ISM number by a mile. Disappointing ISM number, car sales, yada, yada, yada. Why? According to the WSJ, CNBC, and all the other media outlets it was “because” investors were freaked out (to use the technical term) by poor US growth data. The market was down more than 2% last Monday.