August 26, 2015

559 words 3 mins read


Something weird happened in the stock market today.

Yesterday I blogged about the stock markets. I’d been up early to see what was going on in Europe and Asia. I was watching US futures, too.

I decided to write about what might happen. And I told you about Ben Hunt, my favorite economics writer. Ben combines remarkable knowledge of game theory and psychology with his genius in finance and economics.

I also declared the end of the Golden Era of Central Banker:

There’s good news in all this loss. First, stocks were overpriced. At some point, they will bottom out and it will be time to start buying. Second, the Golden Age of the Central Banker seems to be over. And that is very good news.

And I attributed the phrase “Golden Age of the Central Banker to Ben.

Well, today I was tickled to find a new note from Ben in my inbox. But Ben says my call on the Central Bankers is too early:

I see very little weakness in either the US growth story (best house in a bad neighborhood, mediocre growth but zero chance of recession) or the Narrative of Central Bank Omnipotence. Do I think that the Fed is being stymied in its desire to raise short rates in order to reload its monetary policy gun with conventional ammo? Yes, absolutely. Do I see a significant diminution in the overwhelming investor belief that the Fed and the ECB control market outcomes? No, I don’t. Trust me, I’m keeping my eyes peeled (see “When Does the Story Break?”), because in many respects this is the only question that matters. If this story breaks, then in the immortal words of Chief Brody when he first saw the shark, “You’re gonna need a bigger boat.”

(BTW, do yourself a favor and read When Does the Story Break? One of the best lessons in narrative and common knowledge ever.)

If Ben says the narrative of central bank omnipotence is unbroken, I believe him. And I read his warning of how ugly things will get when that story breaks, I shudder.

But based on the time Ben’s email hit my inbox, I’d say he wrote it–or edited it–this morning while the DJIA was up over 300 points. By the time I read it, the DJIA had closed down 205. It was biggest intraday rollercoaster since Lehman.

And then I read this on Business Insider:

By my reckoning, most investors already have little faith in the political leadership of many developed economies. But there has been a deep faith in the ability of monetary policy to both lift asset prices and, ultimately, generate an adequate inflation rate over the medium term.** If investors start to doubt that – and the decline in break-even inflation rates suggests concern (Exhibit 8) – then things could get significantly worse**.

And, from the same BI article:

The bull market is not over even if the unusual characteristic that was the powerful driver for price-to-earnings expansion is probably over, namely the power of zero rates and central bank/government ability to distort or manipulate the markets.

Look, Ben Hunt’s forgotten more about game theory and narratives and markets than I’ll ever know, so I’ll accept that the fat lady hasn’t sung the end of the Golden Era of the Central Banker.

But I hear somebody humming.