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Calling A Top In The Narrative Of Central Bank Omnipotence

Tyler Durden's picture




 

Submitted by Ben Hunt via Salient Partners Epsilon Theory blog,

Actual conversation as I left a client meeting with a Salient colleague last Friday and we checked our phones...

Colleague:

Wow, looks like the jobs number was pretty terrible.

Me:

Hey, that’s great.

Colleague:

Yep, stocks and bonds are rocking.

Subtitle for this week’s email: “At This Point You Just Have to Laugh”. In every important respect, the Fed and the ECB and their brethren are no longer central banks at all. They are Ministries of Markets, no different from a Ministry of Industry or – even more eerily similar – the Ministry of Culture you would find in most European governments.

I spent the past week in Switzerland, meeting with old friends and making some new ones, and just like my recent travels in the US there was one overwhelming sentiment. No one doubts the omnipotence of central banks. No one doubts that market outcomes are fully determined by central bank policy. No one doubts that central banks are large and in charge. No one doubts that central banks can and will inflate financial asset prices. And everyone hates it.

Among those investors and allocators with the freedom to flee public markets, the interest in private market opportunities has never been greater. Among those investors and allocators trapped by mandate diktat in the Alice in Wonderland world of public markets, the resigned desperation has never been worse. It’s a quiet desperation in Zurich – a Teutonic stare at the floor and a wrinkling of the mouth – more obvious in Geneva with a Gallic shrug and a full-faced grimace. But’s it’s all the same emotional response to the Bizarro markets in this, the Golden Age of the Central Banker.

At this point the Narrative hegemony is complete. There’s no longer even a cursory bow to the idea that fundamentals matter. Earnings seasons come and go in the financial press with hardly a murmur. Over the past six months I can count on the fingers of one hand the financial press headlines that recapped the market day by saying that stocks went up or down “because” of company fundamentals. Six months ago I was writing in insurgent fashion about the “New Goldilocks Economy” constructed not on actual fundamental data but on how that data was interpreted through the lens of central bank policy. Today it’s a so-what-else-is-new article in the WSJ. A year ago I would meet with the occasional true believer in the power of central bank Narratives and the poverty of fundamental analysis in an environment of profound political uncertainty, but it was always against a dominant backdrop of “synchronized global growth” or “stock-picking is going to work again, just you wait and see”. Now everyone is a convert to the Narrative of Central Bank Omnipotence. Wherever I go, anywhere in the world, I am preaching to the choir when I deliver my sermon.

So I’m calling a top. Not a top in markets, because I honestly have no idea what’s going to happen next. But I’m calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief.

It’s a top because the cracks are starting to show and widen. A Narrative architecture can sustain amazing structures, much like the flying buttress allows Gothic cathedrals to soar, but ultimately it can only bear so much weight. Draghi’s language last Thursday was sloppy. His pitch was uncharacteristically poor as he sang his lullaby to the Red King. I think he’s bitten off waaaay more than even he can chew, a point I’ll review at length next week. As for the US, the Central Bank Omnipotence Narrative is actually counterproductive for equity market price levels at this point. Because we are such well-trained monkeys, we act by reflex today to buy-buy-buy whenever a headline of Central Bank activism surfaces, but the training starts to work the other way when the tightening starts in earnest and the Fed reserves hang out there unresolved, like the mother of all lead balloons draped around the long end of the curve. Remember what an inverted yield curve looks like? Ain’t a pretty sight. But draining the reserves could look even worse. Damned if you do. Damned if you don’t. And the equity market caught in the middle.

It’s a top because – like a Ministry of Industry or a Ministry of Culture – a Ministry of Markets and its dirigiste control of the human animal’s social behavior ultimately fails. Maybe not a failure in the sense of apocalypse and ruin (although sometimes), but a failure in the sense that The Next Big Thing never comes out of a Ministry. They have their successes, sure … some grand program or triumphant announcement … but they’re only successes because we are TOLD they are successes. Since when has a Ministry of Culture sparked great art? Since when has a Ministry of Industry sparked great commercial advancement? Ministries are well-meaning. Ministries are the darlings of the professional intelligentsia that controls the organs of the State and Media. Ministries are wonderfully effective instruments of social control. But neither art nor commerce nor investment comes well from on high.

It just doesn’t stick. The most powerful ideas in human history always come from below, not from above, and markets (and elections and revolutions) are the transmission mechanism of the idea engine. Watch out above!

An inflection point in the market Narrative doesn’t alter market price levels directly. It alters the informational structure of markets (for a refresher course on what I mean, see “Through the Looking Glass”). It alters the market’s response pattern to future signals and events. That’s why I think it’s silly to predict end of year S&P 500 levels or engage in any such crystal ball gazing, because I have no idea what will happen next. But whatever pops out of the woods next (and somehow I doubt the global economy is walking down a primrose path), I think that using an Epsilon Theory perspective based on information theory and strategic behavior can help me react quickly and appropriately, which is what I mean by Adaptive Investing.

I don’t know what the catalyst for The Next Big Thing will be, although I have my suspicions. Maybe it’s a realignment election in Italy or the US. Maybe it’s China saying whatever the Mandarin equivalent of no mas might be. Maybe it’s a liquidity seizure in the repo market or some other unanticipated structural market failure. But whatever it is, we’re no longer at a point where additional State intervention can claim additional Narrative firepower. It’s like buying a stock that has no short interest and where all the sell-side analysts are rabidly positive. No thanks! Just as a short seller today is the marginal buyer of your stock tomorrow, so is the skeptic today the convert tomorrow. There are no more skeptics. To update Milton Friedman’s famous quote, we are all Bernankians now. Or rather, we all have to profess our Bernankian faith through our market behaviors even as we privately yearn for the Old Gods of greed and fear and the Old Languages of value and growth. And that’s the inflection point. From here on out I’m a seller of the Central Bank Narrative of Omnipotence and Control, and I’ll be writing about what that means for portfolio construction and risk management here at Epsilon Theory.

 

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Mon, 09/08/2014 - 18:26 | 5195499 blindman
blindman's picture

the school of global fascism might take exception
to any question of their essential and total
authority, as they slide down the slippery slope
of insanity they have designed.
.
anyway .....

Mon, 09/08/2014 - 18:55 | 5195585 X.inf.capt
X.inf.capt's picture

these bankers still have ALOT of power...

enough to destroy economies...ruin peoples lives....

instigate wars where millions die...

and make a profit from both sides...

Mon, 09/08/2014 - 19:46 | 5195720 Hubbs
Hubbs's picture

Concisely put.

Mon, 09/08/2014 - 19:56 | 5195755 chumbawamba
chumbawamba's picture

The proper title is Minister of Fuck Me in the Goat Ass.

I am Chumbawamba.

Mon, 09/08/2014 - 22:03 | 5196139 philipat
philipat's picture

Just for clarification, is the accompanying picture of John Cleese or Obumboy on the Golf course??

Mon, 09/08/2014 - 19:39 | 5195682 Kirk2NCC1701
Kirk2NCC1701's picture

More like the "Ministry of Silly Walks".

Mon, 09/08/2014 - 18:27 | 5195502 blindman
blindman's picture

Fleetwood Mac - Stop messin round (feat. Paul Butterfield) LIVE
https://www.youtube.com/watch?v=_2p2cs36FYM&index=10&list=UUA1hpLkuFEE6G...

Mon, 09/08/2014 - 18:29 | 5195506 NoDebt
NoDebt's picture

"Since when has a Ministry of Culture sparked great art?"

Never, but what's the point?  We're not asking central banks to come up with fantastic new ideas.  We're asking them simply to make stocks go up forever in an orderly and predictable manner so that we can all be rich (well, some of us anyway).  The Ministry can't do this simple thing for us?

Mon, 09/08/2014 - 19:26 | 5195645 Otto Zitte
Otto Zitte's picture

They do inspire WB7. And every comedian, ever. 

Mon, 09/08/2014 - 18:48 | 5195511 Cognitive Dissonance
Cognitive Dissonance's picture

"I don’t know what the catalyst for The Next Big Thing will be, although I have my suspicions."

I read Ben Hunt and always enjoy his perspective. And maybe I haven't read him long enough to hear his answer to this question. But why does everyone think that when the 'collapse' comes it will be 'the' collapse? Has anyone deeply pondered what comes next other than 'just' another fiat iteration or even a return to some type of 'rigid' standard?

When things become dicey many people will BEG the PTB to keep it afloat....including willingly handing over half their 'money' for the false promise the other half will be 'safe'. That drama can, and in my opinion will, be repeated several times until the final fleecing is complete.

Desperate people do desperate things.....including those on the short end of the fiat beating stick.

Mon, 09/08/2014 - 20:31 | 5195887 rum_runner
rum_runner's picture

I'm with you, mostly.  The dollar by itself will just change shape.  It has evolved substantially over time as it is.. off the gold standard, fractional reserve lending invention, Greenspan's "sweeps" programs, etc.  If the US really finds itself against the wall it will pull a rabbit out of the hat.  This isn't to say there won't be hardship, market crashes, and depressions, but I dont' foresee the market causing society to go off the rails.  

There will be winners and losers but the show will go on.

The real shit is the drought in the West, depleting resources, disease spreading (ebola, that coughing virus that's getting kids), and the gradual disillusionment of the populace coupled with a corrupt and self-empowering government.

Whichever president is in power, blue or red, they'll do whatever is necessary to "keep America on track."

Those waiting anxiously for World War Z will have to wait a little longer yet unless they live in areas that already have nothing to lose (Ferguson, etc).

Mon, 09/08/2014 - 20:38 | 5195907 petkovplamen
petkovplamen's picture

Desperate people do desperate things.....including those on the short end of the fiat beating stick.

 

 

Exactly. Thats why all this stuff is going on in Europe with Russia.

Mon, 09/08/2014 - 18:41 | 5195549 kaiserhoff
kaiserhoff's picture

I think the pic is from the Ministry of Silly Walks skit on Monty Python.

Whatever it is, if makes more sense than the Fed.

Mon, 09/08/2014 - 18:59 | 5195593 q99x2
q99x2's picture

Nicely written article.

Mon, 09/08/2014 - 19:07 | 5195594 malek
malek's picture

No, this might be an interim maximum, but the absolute maximum (within this fiat iteration; hattip CD) will only be reached shortly before the purchasing power collapse of their respective fiat currency.

Mon, 09/08/2014 - 19:00 | 5195599 blindman
blindman's picture

some to think about .
.
08 SEPTEMBER 2014
The Corporate Media In America: Orwell Rolls Over In His Grave
"The American fascist would prefer not to use violence. His method is to poison the channels of public information. With a fascist the problem is never how best to present the truth to the public but how best to use the news to deceive the public into giving the fascist and his group more money or more power.”
Henry A. Wallace
.
"Do remember that dishonesty and cowardice always have to be paid for. Don't imagine that for years on end you can make yourself the boot-licking propagandist of the Soviet régime, or any other régime, and then suddenly return to mental decency. Once a whore, always a whore."
George Orwell
http://jessescrossroadscafe.blogspot.com/2014/09/the-corporate-media-in-...

Mon, 09/08/2014 - 19:17 | 5195624 WillyGroper
WillyGroper's picture

I found that this morn from another source. 

Set my hair on fire!

Is it any wonder the public is so damn brainwashed? They simply cannot fathem the degree of evil that has taken control. 

I'm hoping with all the damage done from these MMR vaccines that the mothers of autistic children that have now been condemned to a lifetime of diapers will come out with pitchforks & torches. I was aware of the alleged tetanus vaccines in Thailand spontaneously aborting 8 mo viable fetus', but only just aware of Rick Perry's mandated gardisil causing premature ovarian failure & throwing young girls into menopause. It's being advocated for boys now. I guess their nads will fall off. There's no end to this madness.

Didja catch this one?

I think Jesse posted it after I'd stumbled upon it from another source also. 

Mon, 09/08/2014 - 19:59 | 5195769 Professorlocknload
Professorlocknload's picture

Maybe it doesn't matter what "belief" in the Fed's power does, because at first, like now, it's all voluntary. When the Fed loses it's grip, compliance will be mandatory.

Then, as in the USSR, Maoist China etc. it will take multiple generations before Central Planning finally runs it's course, and destroys all semblance of a market system.

Call a top, fine. But the time line might run decades long from here to the bottom.

Mon, 09/08/2014 - 20:08 | 5195795 Youri Carma
Youri Carma's picture

Morgan Stanley Sees Decade-Long Expansion on Easy Money
8 September 2014, by Simon Kennedy (Bloomberg)
http://www.bloomberg.com/news/print/2014-09-08/morgan-stanley-sees-decade-long-expansion-on-easy-money.html

I would call it over the top.

Mon, 09/08/2014 - 20:39 | 5195912 saveUSsavers
saveUSsavers's picture

Of course! They are second behind Goldman selling BABA pig

Mon, 09/08/2014 - 20:14 | 5195827 eddiebe
eddiebe's picture

Glad you find this amusing Tyler, it's hard for me to come up with a good laugh about all of this, puite the opposite.

Mon, 09/08/2014 - 20:37 | 5195902 petkovplamen
petkovplamen's picture

But I thought ONLY Communists have central planned economy. Have I been told lies???? HA! 

I just wonder, when was the last time people here on ZH think USA was a *real* Capitalist "free market" economy? 1972? 1965? 1912? When?

Mon, 09/08/2014 - 20:38 | 5195908 saveUSsavers
saveUSsavers's picture

The ALIBABA underwiters are PROPPING MARKETS, FOOLARSES HERE CANT SEE THAT?

Mon, 09/08/2014 - 20:47 | 5195938 AdvancingTime
AdvancingTime's picture

Many people work hard for their money and even harder to save a bit of it but are lulled into complacency when it comes to protecting it. One of the saddest thing to witness is someone who has worked so hard loose all their money when an investment turns south. This reminds me of the story about how many people describe going bankrupt, slowly at first then quickly at the end.

This market has far exceeded the upside expectations of many bulls while the economy has languished and in many respects failed to regain all the ground lost since 2007. The question I put forth below is, are we reaching the turning point?

 http://brucewilds.blogspot.com/2014/09/the-turning-point-may-be-soon-upo...

Mon, 09/08/2014 - 21:13 | 5196022 buzzsaw99
buzzsaw99's picture

the stock market level isn't the result of market forces it is quite simply a policy decision. nobody is selling, prices are determined by tiny odd lots being traded back and forth between co-located computers. there is no market, there is only old yeller.

Mon, 09/08/2014 - 21:19 | 5196041 Keltner Channel Surf
Keltner Channel Surf's picture

Instead, it appears we're fast approaching a top in the top top-callers.  

(Dr. Suess, if alive, would be a toppity-top bank strategist)

Tue, 09/09/2014 - 07:36 | 5196831 esum
esum's picture

well....... i have a silly walk and i'd like to obtain a government grant to help develop it....

well.... i have a solar panel factory whose output costs 3x the chinese ... 

well..... i have a windmill ... that makes a lot of noise and will cost a fortune to maintain

well... i have a mirror array.... that not only generates heat but can blind pilots

well.... i have an electric car.... that can go 30-60 miles depending on the temp and also bursts into flames

well..... i produce a car that is guaranteed to get recalled and kill hundreds....

well.... i want ex-im money so i can invest in petrobras so it can compete with our own taxpaying oil companies

well.... i want money to buy rail cars for my railroad since i lost coal due to enviromental fabricaitons... and there will be lots of spills and loss of life and property...

well.... i dont want any money and i want to build gas export infrastructure, lng gas carrierss, oil pipelines, refineries, chemical facilities and employ a few million folks with real good paying sustainable jobs that will have a multiplier effect through the real economy...  

 

 

Tue, 09/09/2014 - 14:04 | 5198363 Stay Frosty
Stay Frosty's picture

What's that quote from King Lear:  The worst is not, so long as we can say “This is the worst.” 

Has the worst even begun?  Are we in some pre-worst condition?  Seemingly in perpetuity at this juncture to be sure.  All fretting and pacing in Hamleteque fashion (keeping with the theme).  I truly don't want to see the post-worst state, yet waiting for blow, real or imaginery, slight or life-altering is driving me insane.  And as a wise ZH poster once comforted to me: "You will go mad, waiting for the insanity to end." 

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