Cheshire Cat: If I were looking for a white rabbit, I’d ask the Mad Hatter.
Alice: The Mad Hatter? Oh, no no no…
Cheshire Cat: Or, you could ask the March Hare, in that direction.
Alice: Oh, thank you. I think I’ll see him…
Cheshire Cat: Of course, he’s mad, too.
Alice: But I don’t want to go among mad people.
Cheshire Cat: Oh, you can’t help that. Most everyone’s mad here.
[laughs maniacally; starts to disappear]
Cheshire Cat: You may have noticed that I’m not all there myself.
Alice In Wonderland came to mind when I read this:
If I had 1 oz of brains I’d ignore credit, fundies, t/a & all else & go 100% short based on Fed chair having totally lost her fucking mind
— FZucchi (@FZucchi) September 17, 2015
Just to be clear, Fil was not commenting on Fed policy but, rather, the inconsistency of the prattle of the Fed Chair’s response during the Q&A session. It was confusing. The reaction from the market – at least for now – seems to confirm that. It shouldn’t escape anyone that the last two Fed decisions have not inspired the equity markets to rally. The salve that worked for the past many years looks now to be creating a rash of uncertainty. It reminds me of the words of Richard J. Daley during the 1968 Democratic National Convention riots.
The Police are not here to create disorder, they’re here to preserve disorder.
But maybe it’s much more simple than that. Maybe the Fed’s concern over international macro simply reminded the world that central banks, armed with fancy econometric models and past ideas of what creates moderate inflation, economic stability and growth, don’t or, perhaps, can’t work. I’ve proffered for several years that when confidence in central bank policy begins to fail – as they have from time to time through history – the risk premium in equities will increase (e.g lower prices for those unfamiliar.) I’m not sure we’re there yet. I do think we’re heading there. That said, I’d be a fool if I run with that thought with any certainty.
The Council of Economic Advisers wrote in June, and I think it’s the conventional wisdom, that low interest rates across the curve are simply a matter of supply and demand. Be it far from me to argue with Alfred Marshall. The big brained “Conversable Economist”, Timothy Taylor, compares and contrasts that to the release of last Sunday’s release of the Bank of International Settlement’s 85th annual report. He quotes the following from the BIS which addresses debt in emerging markets.
After all, pre-crisis, inflation was stable and traditional estimates of potential output proved, in retrospect, far too optimistic. If one acknowledges that low interest rates contributed to the financial boom whose collapse caused the crisis, and that, as the evidence indicates, both the boom and the subsequent crisis caused long-lasting damage to output, employment and productivity growth, it is hard to argue that rates were at their equilibrium level. This also means that interest rates are low today, at least in part, because they were too low in the past. Low rates beget still lower rates. In this sense, low rates are self-validating. Given signs of the build-up of financial imbalances in several parts of the world, there is a troubling element of déjà vu in all this.
It’s no secret to anyone who follows me that I’ve wondered about such dislocations and the yet-to-be-known upshot from a world awash in easy money.
When I think about all of the potential unknown dislocations from central bank actions I get, how should I say, a little really freaked out. — Old Bull Lee (@davebudge) September 15, 2015
But it’s foolish, too, to take my late-night worries and apply them to investing. As much as I’m concerned about these things, one – by that I mean I – can’t know the future. There’s plenty of Chicken Littles in the world hucking doom and gloom. If history tells us anything, the end of world is much harder to predict than its survival. After all, I’m much more deeply rooted in the thinking of Julian Simon than I am in the neo-Mathusianisms of Paul Ehrlich. You just can’t keep the human race down.
Kyle Bass echoed the BIS’s concerns this week about imbalances in EM though he was sanguine about developed markets. But he did imply that the knock-on effects probably meant slower growth for the DM world. I agree with him. You, however, must know that my agreement with Bass is ultimately little more than confirmation bias.
What conclusion can I draw from this arcane matrix of global interconnectedness? I’ll keep doing what I’m doing – looking for value. But to be clear, I do think that the market is still quite expensive. To that, intelligent people disagree and only foolish people ignore the other side of the argument. Of course I am a fool at some level. I think everyone is. I also know that admission is the first step to recovery.
Charts, charts, and more charts
Paul Tudor Jones was asked once how much of his success was attributable to technical analysis to which he responded “about half.” When asked about what part came from fundamental analysis he said “the other half.”
I’m not one to convince either the FA or TA communities that they might learn something from PJT. As I know from experience, one can’t convert the religious.
Known, as I am, for my mastery of charting I thought I’d share for your benefit – which you’d be a fool to disregard – my long term chart on interest rates.
As the lawyers say, govern yourself accordingly.
Yes, we live in interesting times and things are getting, as Alice said, “Curiouser and curiouse.”