February 11, 2022

What Is vs. What If

“We are creatures who spend our lives trying to convince ourselves that our existence is not absurd”

-Albert Camus

There are a lot of challenges that impact the capital markets that have been a moving target for decades. In the last century it wasn’t uncommon for investors and traders to apply technical analysis to the broad markets. Counting moving averages and then adopting a formula to determine, probable direction, volatility, and relative condition. And just like the fundamental analysis applied to bonds and stocks the reliance on numerical data was crucial to building on a sound prediction. Now, flash forward and it seems numbers only matter as a competition between competing predictions, those determined through analysis of numbers and those using the impact of words. Welcome to the world of the algochums.

The recent press conference offered by Fed Chairman Powell is a perfect example of how words can move the markets. During the speech, chairman Powell offered a strategy that would tapper quantitation easing (i.e., bond buying) and open the way to increasing interest rates, all in the effort to battle inflation. Well, one of the questions he was asked seemed determined to have him speak in less organized terms. Such as one question asking about his reaction should the yield curve invert. Inverted yield curves (when 2yr yields are higher than 10yr yields) rarely happen, and when they do, recessions are usually brewing from behind. When Chairman Powell used the term “inverted” to answer the question, the markets immediately took his words to mean a more aggressive Fed stand was imminent, all to the joy of the pundit narrative. Friday’s release of monthly Unemployment data was a welcome rise in Nonfarm Payrolls that coincided with Thursdays drop in Unemployment Claims, great! The Participation Rate which has been static since before the pandemic saw a welcome rise and Hourly Earnings continued their move higher, great! So, what went wrong? Well, Hourly earning went higher, but Weekly Hours went lower, leaving many employees less to pocket when earnings are customarily calculated against a 40 hour week. And again, the word “higher” seems more in the determined focus of the media than some pesky math. Another recent example was the release of the Consumer Price Index (CPI) data which showed a strong increase of .6% for January and 7% over the year. Well, the markets felt the pinch from the data, but quickly recovered until James Bullard, the St Louis Fed President, made a comment suggesting the Fed was moving too slow and needed to be more “aggressive”. Almost instantly the markets turned negative and the Pundits and Algochums were on a rampage showing clearly how words win, numbers loose.

My takeaway from all this activity is that the broad indexes are showing less interest in what the Fed will be doing, partially because Chairman Powell was explicit about raising rates, and .25% or .50% is becoming less relevant. In my opinion, once the actual rate increase arrives the markets will respond appropriately, that would be negatively dependent on how much the markets have corrected first, and then waiting to see the outcome of the move (economic slowdown). From there, in my opinion, it would take another event to give the bear crowd something to chew on (Ukraine). This is because the markets are fine with uncertainty, as long as it stems from data (what is) and not from words (what if).

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