Goldilocks And The Dog That Didn't Bark

Tyler Durden's picture

Submitted by Ben Hunt of Epsilon Theory

Det. Gregory: Is there any other point to which you would wish to draw my attention?

Holmes: To the curious incident of the dog in the night-time.

Det. Gregory: The dog did nothing in the night-time.

Holmes: That was the curious incident.

      -- Arthur Conan Doyle, “Silver Blaze”

Goldilocks And The Dog That Didn't Bark

The market was down more than 2% last Monday. 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. Disappointing ISM number, car sales, yada, yada, yada. 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. Why? According to those same media arbiters, investors were now “looking through” the weak data.

Please. This is nonsense. Or rather, it’s an explanation that predicts nothing, which means that it’s not an explanation at all. It’s a tautology. 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. 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.

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.

The former is pretty self-explanatory. It’s what every politician, every asset manager, and every media outlet wants to sell you. Is it true? I have no idea. Probably yes (technological innovation, shale-based energy resources) and probably no (global trade/currency conflict, growth-diminishing policy decisions). 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”.

The latter – Central Bank Omnipotence – is something I’ve written a lot about, so I won’t repeat all that here. Just remember that this Narrative does NOT mean that the Fed always makes the market go up. It means that all market outcomes – up and down – are determined by Fed policy. If the Fed is not decelerating an easy money policy (what we’ve taken to calling the Taper), the market goes up. If the Fed is decelerating its easy money policy, the market goes down. But make no mistake, the Common Knowledge information structure of this market is that Fed policy is responsible for everything. It was Barzini all along!

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. 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 the Fed tightening which is terrible for stocks).

Over the past few years the Goldilocks scenario has changed. Inflation is … well, let’s be straight here … inflation is dead. 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. I get that. But it’s the Narratives that I care about for trying to predict market behaviors, not the Truth with a capital T about inflation. If you want to buy your inflation hedge and protect yourself from the ultimate wealth-destroyer, go right ahead. At some point I’m sure you’ll be right. 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. The Inflation Narrative is, for the foreseeable future, dead. It’s a zombie, as all powerful Narratives are, so it will return one day. But today Goldilocks has nothing to do with inflation.

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. 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. So they will.

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. This is the market-negative side of the Central Bank Omnipotence coin, which turns bad macro news into bad market news. And so we were down 2%. And so the Powers That Be started to freak out. Did you see Liesman on CNBC after the Monday debacle? He was adamant that the Fed needed to reconsider the path and pace of the Taper.

And then we had Friday. Honest to God, I thought Liesman was going to collapse of apoplexy, what my Grandmother would have called a conniption fit, right there on the CNBC set. The Fed MUST reconsider its Taper path. The Fed MUST do everything in its power to avoid even a whiff of deflationary pressures. Heady stuff. By 10 am ET that morning the WSJ was running an online lead story titled “U.S Stocks Rise as Focus Returns to Fed”, acknowledging and promulgating the dynamic behind bad macro news driving good market news.

It’s not necessary (and is in fact counter-productive from a Narrative construction viewpoint) to switch the Fed trajectory 180 degrees from Taper to no-Taper. What’s necessary is to inject ambiguity into Fed communication policy, particularly after the non-ambiguous FOMC signal of two weeks ago that led directly to Monday’s horror show. The need for ambiguity is also something I’ve written a lot about so won’t repeat here. But this is why Hilsenrath and Zandi and all the rest of the in-crowd are writing that the Taper is still on track … probably. Unless, you know, the data continues to be weak. What you’re NOT seeing are the articles and statements by the Powers That Be placing a final number on QE3, extrapolating from the last FOMC meeting to a projected QE conclusion. And that’s the dog that didn’t bark. It’s the projection that Yellen won’t be asked about in her testimony; it’s the article that won’t be written in the WSJ or the FT. Is the Taper still on? Two weeks ago the common knowledge here was “Yes, and how.” Today, after a stellar bout of Narrative construction, the answer is back to “Yes, but.” That’s the ambiguous, “data dependent” script that Yellen and all the other Fed Governors now have the freedom to re-assert.

If I’m right, what does this mean for markets? It means that our default is a Goldilocks scenario between now and the next FOMC meeting in mid-March. It means that bad macro news is good market news, and vice versa. If the next ISM manufacturing number (no one cares about ISM services) is a big jump upwards, the market goes down. Ditto for the February jobs number. If they’re weak, though, that’s more pressure on the Fed and another leg up for markets.

Place your bets, ladies and gentlemen, the croupier is about to spin the roulette wheel. Pardon me if I sit this one out, though. My crystal ball is broken.

If I’m right, what does this mean for the real world? It means an Entropic Ending to the story … disappointing, slow and uneven growth as far as the eye can see, but never negative growth, never an honest assignment of losses to clear the field or cull the herd. That’s not my vision of a good investment world, but who cares? I’ve got to live in the world as it is, even if it’s a long gray slog.

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NOTaREALmerican's picture

Government + bullshit = politics
Morals + bullshit = Dieties
Craft + bullshit = splatter art
sex + bullshit = romance

Bullshit makes the world go `round.    It's how humans compete and reproduce.

Looney's picture

Bitc... errr... CuntZ!!!

Oh, and Dear ZeroGirlZ, this is not about you, your anatomy, or your state of mind  ;-)


Ness.'s picture

And you're so full of it, you've got it coming out of your ears.

0b1knob's picture

We all know what happens to that little dog later...


nmewn's picture

I voted for Hope-n-Change and all I got was a dog dry humping the Feds leg ;-)

gwar5's picture

BHO: Dog tastes like chicken.

Al Gorerhythm's picture

What are his intentions? Careful Muttly, you've seen what he's done to the rest of us.

Yen Cross's picture

  The Fed. can take all the legs up it wants.  Deminishing returns are already in play, which is why the Fed. is reducing the amount of new cash into the system. ( please don't confuse this new cash reduction with liquidity. ex; reverse repo, and swaps agreements)

spastic_colon's picture

one more thing....there will be NO "1929 like" event, we are past that.  we are into the 1940's and beyond....ZH even posted awhile ago a chart showing the amount of stimulus now compared to WWII and we are past that number.  I would love to see a large reversion, unfortunately it's not going to happen, the best (and worst) we can hope for is a 1980's style nikkei.

max2205's picture

Why does everyone want the future charts to match some time in history.   1929 had no match.  1987. 1997 2001 2007.   


The only chart pattern that matches is 1984 - 2001...but dont listen to me

Johnny Cocknballs's picture

Its not a tautology.

It's just good old fashioned horseshit.

Son of Captain Nemo's picture

Judging from the picture those dogs must be looking pretty good to Barry these days.

I think he's making a statement to Mooch after she started seating them at the dinner table!

fonzannoon's picture

Clouseau: Does your dog bite?

Hotel Clerk: No.

Clouseau: [bowing down to pet the dog] Nice doggie.

[Dog barks and bites Clouseau in the hand]

Clouseau: I thought you said your dog did not bite!

Hotel Clerk: That is not my dog.

Son of Captain Nemo's picture

No they don't belong to Barry. They belong to Mooch but Barry is getting a little more desperate given the approval ratings and lack of friends these days, so he's looking to find a way to let off a little "steam".

nmewn's picture

Ya always gotta ask the right questions in the right order ;-)

Son of Captain Nemo's picture

I believe those are "standards"... Aren't they?

Big dogs.

Johnny Cocknballs's picture

You know, all this bowing to the market and policy and forward guidance as to the speculators playing the markets instead of doing productive work.


How about the fundamentals?  We continue exporting jobs while importing both too many legal immigrant tech sector workers and unskilled illegals who cost taxpayers millionsm. Downward pressure on wages, now hours, eroding test scores and a remoreseless kleptocracy that threw the American middle class overboard 40 fuckin years ago, a financial sector adding sham value and sham gdp while robbing the productive capacity of the future so they can buy overpriced homes to rent to the former owners whose pensions are about to be jacked to keep the fiat-for-assets swap game going a bit longer to really make sure the country is not just raped but bleeding from its ass.


Fuck articles like this. The markets are so gamed by the banks the information in the public domain means fuck all.   the house always wins.












buzzsaw99's picture

God that was long winded and meaningless. Jan 22 TNX top 3.02. Jan 22 the S&P started down. If you want to know when to get short all you have to do is watch treasury rates. The day the stock and bond markets dive together the anti taper will be the very next day. It ain't rocket surgery.

4shzl's picture

Hunt sounds like the smartest guy in the room to me -- which, given the intellectual level of this particular comment thread, is not saying much.

lakecity55's picture

That is not a dog in the picture. It is a gay midget in a costume, ready for action.

SgtShaftoe's picture

Ben makes excellent points, however comparing today's environment to remembered history is, I think not entirely correct.

I think Ben is correct in the short term, to possibly medium term. However, long term, it will end in tears.

The more players you have in the game, the more randomness is introduced into the environment. The United States is losing global credibility, monetarily, militarily, in foreign policy, and in terms of public trust. When the two relevant powers were the USSR and the USA, manipulation of systems works pretty well, but in the modern world, trying to manipulate anything is like herding cats. It has diminishing returns. Randomness and super large organisms don't go together well.

Net: "Dinosaur, meet comet." "bubble meet pin." (insert your own analogy here)

Being Free's picture

Ben,  You need to challenge your assumptions, [ ...what makes investors either react badly to bad news like on Monday or rejoice and “look through” bad news like on Friday...]

You assume it is a population of "investors" (rational?) that are moving the "markets".  Prove it.

max2205's picture

TPTB will do ANYTHING to keep this shit on a 45% angle...ANYTHING.. its too late to let up without detonating the derivatives

Wahooo's picture

You risk up and take on personal debt. Seriously, this opportunity won't last forever. And why won't people do it - because they're still gun shy.

Downtoolong's picture

Seeing the market react so violently to taper, more taper, less taper is already a sad confession that the Fed rules it all, and that counterfeiting (er printing) massive amounts of money must remain the status quo.

How insane is that? Well, let’s not overlook that even if the Fed triples the size of its present $10 B/month taper, it will still be printing enough new money to purchase the entire market cap of the top ten U.S Corporations in about 18 months.  

Stanley Lord's picture

Ben writes too much, nothing in the article and too much trouble to get a nugget.