Epsilon Theory Professional
If there’s one common knowledge narrative that I think can break over the coming months, it’s But The US Consumer Is Strong! ™.
I’d like to tell you that our Narrative Monitors are not as bearish for May as they were for April.
Yep, I’d really like to tell you that.
The big global risk today is not that the banks are undercapitalized. No, the big global risk today is that banks are unwilling to provide long-term financing for anything. The big global risk today is that we are only in the early innings of a profound deleveraging cycle.
The narrative puts and takes of March (and the resulting market rollercoaster) have coalesced into no puts and all takes. This is about as bearish a set of narrative signals for risk assets as we’ve had in a long time.
I personally thought what Powell said in his presser today was market-negative. But who cares what I think! What matters is how market participants are geared to interpret what Powell was saying, and our narrative machine clearly showed they would interpret it positively. No matter what he actually said.
In commodity markets, crypto markets, and equity markets … we’re all sardine traders now.
I don’t think the proposed Russia sanctions are likely to trigger a systemic financial crisis, and I think Putin’s nuclear saber-rattling is posturing for Ukrainian settlement negotiations. I really don’t see the path to a global crisis here. Famous last words, I know …
The structure of a market narrative isn’t as settled or as constructed as a Hollywood script, but it’s not too far off, either.
We’re in Act Three of the inflation narrative.
I am a shortseller by nature and (former) profession. Like my favorite comic book character, Karnak the Inhuman, my superpower is to see the flaw in all things, which doesn’t exactly make me much fun at cocktail parties but is a (sometimes) valuable skill for a portfolio manager.
So here’s my perspective on what’s happening … one big place where my spidey-sense is tingling and one big place where it’s not.
You know who understands how inflation absolutely wrecks the popular support of any government? The Fed.
You know who doesn’t get it? You know who doesn’t get it AT ALL? The White House.
Today Jay Powell had a press conference, where he had a very simple and well-delivered message: Inflation Is.
Does this mean that we’re off to the races with risk assets? No. Not by a long shot. But for one day at least, Jay Powell and the Fed got ahead of the common knowledge game.
Inflation as common knowledge gives pricing power to consumer-facing companies.
Is the narrative machine of Wall Street powerful enough to create a perceived reality of “transitory” inflation even if that transitory-ness is always 12 months away from resolving itself? Even if the real-world endures high levels of realized inflation year after year after year?
If I had to describe our narrative models of market behavior as simply as possible, it would go something like this: markets climb a narrative wall of worry and fall down a narrative slope of hope.
Except for central bank narratives.
Robinhood has been managed to generate a payday for insiders.
Then again, that’s how our entire world is being managed today. For a payday to insiders.
This note isn’t about our common knowledge of central banks. It’s about the common knowledge within the crowd of people who are engaged in the profession of central banking. It’s about the common knowledge OF central banks. It’s about the one thing that everyone in central banking knows that everyone in central banking knows: you can’t taper and tighten at the same time.
Legacy Monitor Archive (Pre-January 2020)