"This Is The Power Of A Crowd Looking At A Crowd... And It's A Bitch"

Tyler Durden's picture

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

Le roi est mort, vive le roi!
-- French proclamation as coffin of old king is placed into burial vault of Saint Denis Basilica.

The throne shall never be empty; the country shall never be without a monarch.
-- English Royal Council on death of Henry III in 1272, proclaiming Edward I king even though he didn’t get the news until months later.

Every time I thought I'd got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I've never caught a glimpse
Of how the others must see the faker
I'm much too fast to take that test
-- David Bowie, “Changes”

What we’re witnessing right now in US markets is a shift in the Narrative structure around Fed policy, and it’s hitting markets hard because the Narrative structure around the Fed as an institution has never been stronger or more constant.

As more and more generally positive US growth data comes out, most recently in last Friday’s jobs report, the Narrative around Fed policy is shifting from “The Fed will keep rates low forever and ever, amen” to “the Fed is on rails to raise rates sooner and more than you thought”. And that’s a real bummer if you’re long this market, particularly in a momentum or high-beta name.

A Narrative is just another name for what game theory calls Common Knowledge, which for my money is the most powerful force in human society. Common Knowledge is what topples governments, builds cathedrals, and starts (or ends) wars. It darn sure moves markets, particularly in a period of extreme global political fragmentation and stress, as we last saw in the 1930’s and before that in the 1870’s. As Keynes noticed (and successfully traded on with his own investments), market sentiment is driven by the creation or dissolution of Common Knowledge, and you can’t play the Game of Sentiment well if you’re not focused on it.

Common Knowledge is not just public information. It’s public information that everyone thinks that everyone thinks. It’s a signal that’s broadcast publicly by a powerful “missionary” like Yellen or Draghi or a Famous Investor on CNBC or a Famous Journalist in the WSJ, so that we all know that we all heard the message. And if we think that everyone else has heard the message, then the rational behavior is to act as if the message is true, regardless of our private beliefs or observations. This is the Emperor’s New Clothes...each of us can see with our own eyes that the guy is naked, but we’re not really looking at the Emperor. We’re looking at the crowd. Each of us is looking at all of us, and all of us know it.

So when the WSJ tells us that the Friday jobs report was good and strong, when Jon Hilsenrath tells us that this jobs report keeps the Fed “on track”, when Fed Governor Bullard tells us today that Fed actions have been “sufficiently aggressive”, when Janet Yellen tells us that she has a schedule in mind for raising rates...well, those are powerful public statements by incredibly influential missionaries. This is what creates Common Knowledge. We all heard these statements, and more importantly we all believe that everyone else heard these statements, too. So now we will all start to act as if the statements are true for Fed policy, no matter what we privately think the Fed will do or not do, and that behavior becomes a self-fulfilling prophecy, a snowball rolling downhill, as more and more of all of us start to believe that this is what all of us believe. This is the power of a crowd looking at a crowd, and it’s a bitch.

What we’re not seeing – and this is why the Narrative shift in Fed policy intentions is hitting the market so hard – is a change in the underlying and more fundamental Narrative that has controlled global markets for the past five years…the Narrative of Central Bank Omnipotence. I’ve written about this a lot (here and here, in particular), so I won’t repeat all that, but the Common Knowledge structure around the Fed and other central banks in general terms is that the Fed is responsible for market outcomes. It’s not that the “Fed has got your back” or that the Fed will always make the market go up. It’s that the Fed is large and in charge. Central bankers giveth, and central bankers taketh away. That’s the Narrative of Central Bank Omnipotence.

It’s become fashionable of late to say that the Fed doesn’t have as much impact on markets today as it has in recent years. This is, I think, an entirely wrong-headed reading of the game-playing in markets today. Or more charitably, from a game-theoretic perspective there has been zero evidence of a diminution in the underlying Common Knowledge belief structure that the Fed and its brethren are responsible for market outcomes. On the contrary, as these last few days and weeks and months suggest, a belief in the Fed as the ultimate arbiter of markets has never been stronger. The modern Goldilocks market environment is growth strong enough to avoid outright recession, but weak enough to keep the Fed in play. Whenever (and wherever, as this dynamic has been mirrored in Europe, China, and Japan) signs of strong growth and thus diminished central bank support have emerged, markets have sold off. It’s only when growth falters and the drumbeat of increased or continued central bank support re-emerges that markets recover. When real world good news is market bad news, and vice versa, then rest assured that the Narrative of Central Bank Omnipotence is alive and well.

This Common Knowledge belief structure around the institution of the Fed is like the Common Knowledge belief structure around the institution of the monarchy in feudal Europe – incredibly powerful, phenomenally resistant to change, and imbued through popular belief with the power to determine economic outcomes. The Narrative around a particular Fed policy or Chair or regime will change and shift, just as the particular monarch sitting on a throne changed over time. But the underlying institution and its ability to shape the world through its core or existential Narrative changes much more slowly. Importantly, it’s the maintenance of the institution – not the maintenance of any particular king or any particular set of policies – that’s crucial for social control. That was true in 13th century England and 18th century France, and it’s just as true in 21st century western democracies with central banks.

Bottom line:

“don’t fight the Fed” is a reflection of the institutional power of the Fed and the Narrative of Central Bank Omnipotence.

It cuts both ways. You don’t want to be short anything when the Fed is easing, and it’s hard to be long anything when the Fed is tightening. The crowd is picking up on a shift in the easing/tightening Narrative and is beginning to act on that by selling, just as they acted on prior market-positive shifts in the easing/tightening Narrative by buying. Different monarchs; same monarchy.

What’s to come? More of the same, I suspect. Good real world news is bad market news, and vice versa, for as far as the eye can see. Why? Because the crowd is not going to fight the Fed.

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fonzannoon's picture

what a completely backwards analysis. the fed said things are good and there will be growth and they will have to raise rates and the market said "BULLSHIT". So much bullshit that growth stocks have been dumped and people have started to pile into bawnds and everyone in the SPY is staring nervously at the nasdaq, wondering if 2.6% isn't so bad after all, especially when it might be 2% next week. so yeah....basically the opposite of everything this guy said...

CrashisOptimistic's picture

People don't leave stocks.

They were never in them.

Computers were.

SheepDog-One's picture

Right, who will computers sell all their stocks to? It's like they built a nice booster rocket, and it did its job getting up, but in their haste they forgot to install the parachute.

chumbawamba's picture

Right.  I'm not a finance fag but isn't this the time when the really smart ones put on some shorts?

As in, don't let your parts dangle when there be sharks about?


I am Chumbawamba.

stopthejunk1's picture

Actually, no. Smart people do not use shorts. Time works against shorts, and smart people know that the market can be "wrong" longer than you can remain solvent.

fonzannoon's picture

I don't mind the junks, I'd love for someone to speak up.

7 junks = 7 pussies until someone speaks up.

Yen Cross's picture

    Hey Fonz, I think the world of you, and value your input.

fonzannoon's picture

Thanks man, Same goes both ways.  I see there are a pile up pf junks. I'm willing to take my medicine. Wish someone would speak up. Sometimes I think people just junk anyone who dares disagree with what is fed to us.

Yen Cross's picture

  Fonz, I find it ironic that the Fed. was worried about rising rates when they stopped/reduced asset purchases.  In reality they are worried about how levered the bond market is.

 It's starting to make sense now. Bernanke the Chairsatan he was, thought he could scare the market into "higher rates" meme when in reality he was worried about the (10x long) bond market getting rehypothecated when equities sold off after the punch bowl got taken away. He's a fucking elitist/bankster pandering scumbag!

  Roll the "guillotines" Bitchez

KickIce's picture

You guys need to get a room.  :)  I didn't junk you but I have no problem with the analysis; I don't think many are paying attention to fundamentals but everyone seems to hang on every word that comes from the Fed.  Imagine the market impact if they said they were going to cut all QE.  The way I look at it is the Fed will only be wrong once (which is what makes them so tough to bet against) but when they are finally proven wrong it will be a doozy.

StychoKiller's picture

The Fed's been wrong at least one time in the past (with help from FDR!)

hobopants's picture

Not to be an ass, and I readily admit that you're knowledge of finance is far greater than mine, but don't you think your focus on just recent market performance may be a little too narrow? I thought the article did a fair job of articulating the general environment we've been in the last five years. 

Mainly that people know that it's bullshit, but are trading not on their common sense and instincts, but rather their preception of what they think other people are going to do, which is reinforced by the FED and MSM. This recent stuff I just interpret as cracks starting to show and maybe (hopefully) a shift in the narrative.

Up arrow from me simply for the fact that I've learned alot from your posts over the last couple months.

fonzannoon's picture

You would be an ass by not speaking up. There is no point in throwing a junk or a greenie out there unless you feel pretty strongly about something and are willing to speak up about it.

I think the author missed the whole point. The fed laid out a scenario in Yellen's first meeting. There is growth, the economy is expanding, things are doing well enough that they can exit stimulus and they wll eventually raise rates. If the author was correct, and everyone was in lock step accepting this as truth, the opposite of what is happening would be happening. So, while I agree this is all being played out over a short period of time, I am using the same time frame the author has (not 5 years, but since the last meeting where Yellen said 6 months after QE ends, rates rise) to argue that the market has done the exact opposite of what the fed expected.

hobopants's picture

OK, I see where you're coming from. I don't think the Fed can simply dictate the market's actions by fiat either. I do think that the author was right in pointing out that the real game maker is the indivdual's preception of what other people hold as common knowledge, and that the fed can influence this to a great degree.

I've also noticed that where as bernanke was artful in his vagueness when forcasting future moves, Yellen blundered right off the bat by throwing out that time frame of 6 months. I think he knew that If you are influencing markets indirectly via the mechanism above, the key was the management of sentiment more than the policy itself. By leaving things up for interpertation you allow the masses to attribute their own meaning to your words, and often they do so by counting on the best case scenerio.


fonzannoon's picture

fwiw the only thing I took from the 6 month blunder was that it was the most orchestrated, least authentic, blunder I have ever seen. It was totally scripted. For what reason I have no idea.

hobopants's picture

That's a perspective I hadn't considered. If true I wonder if it somehow plays into the ongoing HFT witch hunt and dark pool closures. They seem to be positioning for something big.

Fire Angel's picture

The above is one of the best conversations I've seen in the basement in recent years. Green arrows all around. 

I logged in just to click +5 on this article. I think these Epsilon Theory folks are great. 

2 cents. Fire Angel

stopthejunk1's picture

The computer are the agents, not the owners, dimwits.

Every share of stock in circulation has a human owner, by definition. Doh.

Vampyroteuthis infernalis's picture

Retail is dead. Nothing left but the big boys fighting over the fiat crumbs.

Sabibaby's picture

"so yeah....basically the opposite of everything this guy said..."

I think the point was that people are realizing the market isn't actually based on anything other than fed intervention, that IS the market. So the only way it's going to go back up is if the fed intervenes, not if the economy is doing well.

TheGardener's picture

Bitch appointed is fall guy. Gender police PC version soon to follow, me not authorized to comment.

But off the record : not even the metrosexuals of NYC can read her gender nor tribe so leaderless they shudder
"swamped into their own ghetto where they could rip off each other at leisure" and would do well at their tasks if given clear orders by their criminal instructors. Which they will get not, they will get the blame as always, because this kingdom is about to fall ... run Levy run , the Levees
are breaking...

Toolshed's picture

I greatly prefer the saying:


LetThemEatRand's picture

END THE fucking FED is good too.  But yours is better.

Redneck Hippy's picture

Reality is that vast majority of Americans don't know who Janet Yellen is, and only a tiny minority has a clue what the Fed does.

Truther's picture

move along now, go back to sleep. Nothing to see here.

Fucking Fedtards

ebworthen's picture

^ This.

And even if they know - their savings are trapped in 401K's/IRA's and Pensions.

They are forced to commit to the long term, to row in the belly of the ship with chained ankles.

Mr Giggles's picture

Butt what are you buying BITCHEZ Just finance with no promise to pay. Shit ill buy me own poo that ill make me richer.

fonzannoon's picture

I wonder if the bernak still wakes up in the middle of the night screaming NIRP!!!!

i_call_you_my_base's picture

I'm sure Bernanke sleeps soundly and dreams of his next $100K speaking engagement.

Grande Tetons's picture

I think Benny dreams that he is chasing rabbits. 

bluskyes's picture

We'll see what he charges next year, and what his excuse is for raising his prices faster than the official rate of inflation.

SheepDog-One's picture

It will be a bummer when $100,000 is about the price of a diet coke.

NOTaREALmerican's picture

Nice article.    No graphs,  all psychology.   

mkhs's picture

I only read Penthouse for the articles, not the...errr, I mean Zerohedge for the articles, not the chart porn.



MillionDollarBoner_'s picture

Nice avatar...King Crimson, if I'm not mistaken ?:O)

StychoKiller's picture

"Blood rack, barbed wire,

Politicians' funeral pyre, innocents raped with napalm fire;

twenty first century schizoid man..." -- 21st Century Schizoid Man

Bryan's picture

Policy has come down to this:  Say whatever it takes to keep the sheep moving in the direction we want.

StychoKiller's picture

Has it ever been any different?

debtor of last resort's picture

The FED will have to fire up crowdfunding then.

BrigstockBoy's picture
Extraordinary Popular Delusions and the Madness of Crowds - Charles Mackay


Worth a read...

taketheredpill's picture



Take a look at the % Change during this "Recovery" in:


1) Inflation

2) Real Median Income

3) Population Participation in Food Stamps Program


Compare these to previous cycles and there is no Recovery.  You can pick other macro indicators (not Unemployment Rate) , same result.


Fed is ending QE because it's not working.


Guessing the next Fed experiment will destroy the Dollar and screw foreign debtholders.

Peter Pan's picture

The recovery is deinitely there. The problem is that it is confined to the verytop of the one percent of the population.

Mark123's picture

Fed is just a regional office of European banking cartel, and that banking cartel controls the financial system (and govenrments).

The bankers won, the British and American experiments with a government for the people lost.

What follows will be rough on honest folks all over the world, as we are left exposed to the worst elements of society.


realWhiteNight123129's picture

Salient has a problem:

When you have the belief in the Fed which has never been stronger, and reaches peak, what happens with the Fed?


In other words, what Salient just described is that the confidence in the Fed has peaked!!!!


NOTaREALmerican's picture

He does say that too.   But the confidence is always there in the backgrounds and when things get "bad" the Fed shows itself again reenforcing its powers.    The Fed is the Emperor. 

MrPoopypants's picture

Keynes's beauty contest.

GooseShtepping Moron's picture

Fonz is right - this analysis is completely ridiculous.

I have never heard a single person argue the claim that central banks control market outcomes, and that includes the likes of Steve Liesman and Paul Krugman, who are generally in favor of the Fed doing all it can to help guide the economy. Believing that the Fed has a role to play is, of course, very different from believing that it has a decisive role, that it alone ultimately determines whatever fate the nation enjoys, for good or for ill.  It's true that economically aware individuals today are excessively focused on policy, including Fed policy; but that it becasue the policy side of the equation has presented us with an enormous question: What are you going to do and when? Nobody can act until they understand what the policy is going to be. The gigantic experiment in QE has to be unwound someday, and such unwinding will necessarily be accompanied by significant changes in behavior. This is the biggest variable complicating business decisions today, and for the present it is an agonizing unknown.

Does that mean that people have "bought in to the narrative that the Fed determines market outcomes," or does it mean that we are anxious for a resolution to something so that we can have a market outcome? - Something which policy, and it alone, is preventing from happening, and which therefore garners special attention?

Remember, a fact is not a narrative. When the price of oil goes up, that is a fact. My belief that this price increase is caused by secret price gouging between oil majors is a narrative (in the absence of further evidence). Similarly, BTFD is a strategy that works in a quantitative easing regime; that is a fact. The belief that "the Fed controls market outcomes" is a narrative, and not a very convincing one at that; certainly not one that has claimed any widespread devotion. It is a category mistake to conclude that traders acting with an anxious eye on Fed policy implies their belief that the Fed is some economic Sun God. They are simply doing what they have to do under the circumstances.

Facts, and narratives, are skittish things. Relating the two by means of some "synthetic a priori," for lack of a better term, involves observation, reason, prudence, insight, and perhaps other ineffable qualities which cannot adequately be named. To explore that area with sympathy and skill is task of a genuine economist.

P.S.- And I really must reiterate my protest against the words "monarchy" and "feudalism" being casually tossed around as terms of opprobrium. The shallowness of this type of thinking is really too much to take, as if human beings only learned how to be happy in 1789. This kind of "narrative" - Whig History, as I call it - is an atavism from the French Revolution, the flysheets and pamphlets of which were written and printed largely in England precisely to undermine French strength. To put it in contemporary terms, France as Ukraine and England as the USA; the French Revolution as an instigated slave revolt - Who has the eyes to see it so? And it was precisely feudalism and monarchy that this revolution overthrew, and so ushered in the horrors of the modern age.