In September 2015, just a few weeks after the latest incarnation of Black Monday, Deutsche Bank’s Aleksandar Kocic described the Fed’s new reaction function as the removal of the “fourth wall.”
The FOMC, by admitting that international financial conditions were indeed part and parcel of the committee’s reaction function, had effectively acknowledged the crowd’s participation in the play unfolding on stage.
No longer were investors mere “observers” with no ability to “alter,” they were participants and they knew it.
Here’s an excerpt from Kocic’s 2015 note:
What we now have is another data point which outlines the contours of the Fed reaction function. Fed’s communication strategy, it is becoming clear, is an equivalent of what in theater context is referred to as Removing the fourth wall whereby the actors address the audience to disrupt the stage illusion — they can no longer have the illusion of being unseen. An unalterable spectator becomes an alterable observer who is able to alter. The eyes are no longer on the finish, but on the course — what audience is watching is not necessarily an inevitable self-contained narrative. The market is now observing itself from another angle as an observer of the observer of the observers.
Or, to use a hilariously apt pop culture reference, “I know you. You know you. And I know that you know that I know you.”
The fourth wall analogy forever made me a fan-o-Kocic, so to speak, and on Sunday, Aleksandar is out with another fantastically metaphysical market metaphor, which I’ll excerpt below and leave you to ponder.
Via Deutsche Bank
Why is there something instead of nothing? This question, which dominated intellectual debates for centuries, acquired a status of a bona fide ontological paradox. At the end, it was resolved by properly understanding the concept of Nothingness: Nothing is no longer seen as an empty void, but as an infinite wealth of potentialities, a portent of all possible realities. There is always something going on, but the balance is being repeatedly restored. Things appear only when the balance of the void is disturbed — they exist essentially by mistake.
For many years, status quo seemed to be the only option — the change was as necessary as it was politically impossible. However, in the end, the paradigm supported by status quo collapsed under its own weight. Balance could no longer be restored. A change emerged out of status quo — nothing turned itself inside out: A long period of complacency turned practically overnight into a high adrenaline, fast-paced environment.
Initial expectation was that change would cause a move in the right direction and improve things. The connection between the change and improvement looked simple and the path straightforward. However, when viewed at higher resolution, the path from the first essential steps to the final stages of stimulus has become much more complicated and contentious. While in the short run we could see some signs of caution and skepticism, in the long-run, the likelihood of disappointment in our view remains considerably higher than the market is willing to price in.