Anemic growth remains the Goldilocks scenario for markets, not so cold as to make for a recession but not so hot as to take the Fed out of play for “emergency” monetary policy implemented on a permanent basis. Good real-world news is bad for markets, and vice versa, because that’s the dynamic that impacts Common Knowledge around the Fed. The market is in a tough spot right now, as good news will not make the market go higher (Fed stays on the tightening path) and bad news can make the market go lower if it’s really bad news (or if the Fed gives more signals that they’re tightening regardless of how bad the news gets).
This tough spot is made even tougher by both a market fatigue with Fed jawboning (excuse me. communication policy) and a growing sense, fair or not, that the Yellen Fed is kind of flailing around right now. The dominant Narrative by a mile is still Central Bank Omnipotence, where the Fed is responsible for all market outcomes, but there are definitely signs of a growing counter-Narrative, one that I call “The Incompetent Magician“, that bears close watching. The Incompetent Magician Narrative is a story that’s very dangerous for markets, because it’s a story of loss of control. This is what makes private sources of liquidity dry up, this is what makes for a deep bear market, and this is what would drive gold into the stratosphere. The Incompetent Magician Narrative has been around for decades, usually resting deep in the depths of counter-cultural media and the like, sort of like a flu virus that can lay dormant for years within an animal population. Over the past few weeks, though, I’ve seen a few outbreaks of this virus, or at least a strain of the virus, within mainstream media. Nothing to be concerned with yet, but like I say.something that bears watching.
W. Ben Hunt, Ph.D.