Domino Theory


Some people really get into dominoes. Here, for example, is a link to a 30-minute video of falling dominoes. No music. Just dominoes. For 30 minutes. It’s had close to 10 million views.

I’m not THAT into dominoes, but I am into figuring out what’s next for changes in the Fed narrative and how that impacts markets.

To recap, three weeks ago I published a note called The Old Man and the Sea, where I set out my belief that the narrative connection between monetary policy and any actual impact on the real economy had been diminished to the point of non-existence. Common Knowledge (what everyone thinks that everyone thinks) still made for a powerful connection between monetary policy and market impact, but it seemed to me that Common Knowledge on real world impact had disappeared.

And then last week I wrote in Coal Mine, Meet Canary that I thought the recent dislocations in overnight repo were a sign that the Fed had lost its credibility as a non-political actor, that these emergency actions showed a loss of market faith in the stated price of money. My question was where this mistrust in the stated price of money would show up next, and my guess was HY credit.

Here are two quick updates on both notes …

First, here’s the overall Central Bank narrative map for September. What’s useful here is to look at the individual clusters or topics within this overall map of all the talk around Central Banks. What you’ll see is that there are really only two clusters that are focused on the US real economy (both on the lower left of the map) and they are on the periphery of the overall map rather than being central clusters. That’s the crucial attribute for interpreting an NLP network … centrality and size of the clusters … and the large, central clusters are about the market economy rather than the real economy.

Beyond looking at the clusters and sub-narratives within the larger Central Bank narrative map, we can also highlight articles that are relevant to specific search queries regardless of which cluster they fall within. We call this “attention”, and it shows us how much drum-beating is happening on a topic within a larger narrative. It’s like using a dye or a marker chemical in a microscope slide or a radiological study, so that it highlights the cells or tissues of interest. In this case, we set up queries to highlight the “cells” that are talking about real economy stuff (business investment, mortgages, consumption) within the Central Bank map, as well as a queries to highlight the “cells” that are talking about market economy stuff (equity and bond returns).

Here’s the attention visualization of real economy topics within the overall Central Bank narrative. Detached, sparse and barely there.

On the other hand, here is the attention map within central bank narratives for equity and bond returns. Strong and central to the entire network.

The takeaway, then, is that narrative drum-beating for Central Bank impact on the markets is still VERY strong, while there’s next to ZERO narrative attention being paid to Central Bank impact on the real economy. That disjuncture is (IMO) the critical aspect of how media coverage of the Fed is going to play out in markets over the next 12 months.

And then here’s the update on where this dislocation in Fed credibility is bubbling up. A friend on the sell-side sent me this chart yesterday, and I thought it was worth passing along to you. This is a slow-motion train wreck in the levered loan market.

The mistrust is spreading …


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