Markets

Phil Connors.

"This is pitiful."

I’m probably the only commentator whose daily musings are read by a fairly sizable contingent of people willing to admit this, but the vast majority of what you consume in terms of financial “news” throughout the week isn’t “news”.

Rather, chances are what you read on any given day (either from mainstream financial media outlets or from alternative portals like this one) is just yesterday’s story recycled. Sure, you’ll get a couple of fresh soundbites from some market maven and if you’re lucky, you might get some incremental information, but generally speaking, you wake up each and every day to read a paraphrased version of yesterday’s stories which were themselves rewrites of the previous day’s articles.

This is especially true in an environment where you have a set of recurring market narratives and “key” stories that readers are convinced need to be updated on an hourly basis, whether that means torturing a throwaway line from a Fed official until it finally agrees to serve as the anchor for a 500-word article on inflation or cobbling together three quotes you extracted from “sources close to the negotiations” into a “scoop” on a prospective trade deal.

That’s probably not too painful an exercise for a reporter that’s writing one story a day or for an alternative financial news portal that employs three or four people, but for your friendly neighborhood Heisenberg who, you’re gently reminded, produces 99.9% of the content you read in these pages singlehandedly, it is exhausting.

Some mornings, when I sit down to write a summary of what went on overnight (after finishing my coffee and cigar on the back deck, naturally) I feel like Phil in Groundhog Day when he finally gets fed up with regurgitating the same newscast.

 

Every morning it’s just: “Once again the eyes of the market turn to tense negotiations between Bob Lighthizer and a Chinese delegation led by Vice Premier Liu He, and…. blah, buh-blah, buh-blah ” 

Or some derivation thereof.

But more important than how soul-sucking this is for someone like me, who vastly prefers real analysis and meaningful discourse to content for the sake of content, is the extent to which this daily recycling effort perpetuates an already manic news cycle and thereby facilitates and encourages hair-trigger trading by humans and machines (and definitely not in that order). For example (and this is from Friday, when the headlines from Trump’s Oval Office meeting with Liu He were rolling in):

As a reminder, almost nothing material for markets came out of that Oval Office photo op. That meeting served only one purpose: it was fodder for late night television and for satirists like myself.

People and machines are trading on headlines that shouldn’t be headlines – reacting to stories that aren’t stories. The effects of that might not be all that pernicious in moribund weeks like last week, but as JPMorgan’s Marko Kolanovic spelled out explicitly in December, when liquidity is thin and sentiment is sour, it can be brutal. Recall the following excerpt from a note out early last month documenting the collapse of confidence that played out in December:

Already fragile sentiment was undermined by political uncertainty from the US administration, the December FOMC meeting, a slowdown in economic data, and a viciously negative news and social media cycle. These developments brought a large amount of selling from mutual fund investors in an environment of poor liquidity.

Critically, that “viciously negative news and social media cycle” served to amplify the political uncertainty by making it seem as though every, single soundbite and/or development, no matter how immaterial, was somehow a “story” in and of itself.

The same thing happened with the December Fed meeting. There is a strong argument to be made that the balance sheet runoff story was no more important in November and December than it was previously, but thanks to the nexus of news coverage and social media (with the most poignant example being Donald Trump’s “50 Bs” tweet that drew the nation’s attention to a WSJ Op-Ed that exactly nobody on Main Street would have read otherwise), market participants became convinced that something was suddenly different – that now, balance sheet runoff was a reason to dump risk assets en masse, as opposed to the previous state of affairs where QT simply served as an extra tightening impulse that acted to curtail risk appetite gradually, over time, by reducing top-down liquidity and pushing up rates.

This dynamic is a price discovery killer at a time when price discovery is already severely impaired by years of monetary accommodation and epochal shifts in market structure which, very much contrary to what some proponents of HFTs (and also defenders of the active-to-passive revolution) will tell you, has made markets extremely fragile.

Mercifully, liquidity has improved in the new year amid the broad risk asset rally and the dovish pivot from the Fed (followed by the FOMC’s global counterparts). Here’s a quick look at updated versions of Rocky Fishman’s liquidity monitors:

Liquidity

(Goldman)

As you can see, “improved” is a relative term these days when it comes to bottom-up liquidity. That is, it won’t take much in the way of a volatility spike to put us right back into the same situation we were in December.

With that in mind, have a look at the following chart from SocGen:

ECNIVsVol

(SocGen)

That red line is the bank’s “US Economic News Indicator” which they define as “news articles on US economic growth strength as a percentage of all news articles.” The grey like is just 1-year vol. Here’s an excerpt from the SocGen note that contains that visual:

In the striking chart on the cover page, we link US equity volatility with our Big Data proprietary economic newsflow indicator for the US (US ECNI). The sharp loss of economic momentum justifies comparisons with 2000 and 2007 and makes us think that calls for recession look increasingly credible (SG: 1H20). In this sense, the message from our indicator matches the signal from the inversed yield curve (1y forward UST) or from the NY Fed probability of recession in the US based on UST spreads. The question that we raise here is about the consequences for volatility. Is this a countdown to higher volatility or a premature signal?

Normally, this is where I would say that you should take newsflow-based indices with a grain of salt, but that kind of begs the question here, doesn’t it? This entire discussion is about the extent to which news (and, specifically, the steady stream of repetitive headlines that now proxy for “news”) is leading to manic trading against a backdrop where price discovery is already diminished and liquidity is impaired. Throw in the highly efficient social media echo chamber and you’ve got a recipe for the type of dynamic that prevailed in December.

Finally, I would again remind you that when all of the above is in play, you are almost guaranteed to lose track of reality, acting instead on what you think is “news”. The problem, as ever, is that once enough people get caught up in that self-referential insanity loop, their collective decisions manifest themselves in real economic outcomes which the same media outlets and online portals then use to write still more stories, and around we go (see here and here for more).

Of course when things do start to fall apart again, all of your favorite journalists and widely-followed finance Twitter “heavyweights” will act like they have no conception whatsoever of their own role in all of this, even as the very tweets in which they profess to be innocent serve as evidence of their guilt.

And as for me, I’ll be left to pull another Phil Connors. “This is pitiful. You’re hypocrites. All of you.”

15 comments on “Phil Connors.

  1. Steve says:

    Don’t know if The Donald can drag this out to “A really Great deal” in October of 2020. Have to admit the mileage is piling up on this one

  2. Anonymous says:

    More questions, few answers. Had trouble reading between the lines. We can’t play the market, the market “plays” us.

  3. Chuck Ponzi says:

    Yo H Man here’s a clue, chill out. I love your stuff but some days you crank out so damn much that I hate to wade through it.

    Less is more so turn down the volume. Both you and your readers will benefit from fewer and less verbose posts.

    • I’ll write what I want to write, when I want to write it. If you don’t want to read it, don’t click, homie.

      There’s a clue for you.

      • Anonymous says:

        Mr. Heisenburg, You’re not being nice. We were taught in school that we should always show respect to others. And we should graciously accept constructive criticism, shouldn’t we?

        • Seriously? Anyone who has followed him for any length of time knows him for his witty sarcasm and for pointing out the obvious. I think “Mr. H” writes not because gives a shit about what anyone thinks, nor does he need the money from our subscription fees.

          I am fairly certain he writes because:

          As a form of entertainment for himself.
          He got tired of the futility of debating with amateur investors on other investing sites along with dealing with the site “editors/mediators’.
          He knows his knowledge/insight combined with his writing style can benefit many people if they choose to take the time to learn over time.

          I was completely lost when I first ran across him on seeking Alpha and continued to be so after I began reading his posts here. I hung in there and over a period of months I began to learn. I credit and thank the man for teaching me a ton about macro-econ and investing in general.

          • monkfelonious says:

            I would like to add that the very first comment I made over at SA regarding his entering that venue was something along the line of “Nothing tradable here”. Now, what was really stupid about that comment is that I’m not a trader! Mea culpa. But there was something that I was attracted to, mostly derived from his ability to convey in colorful ways. Then slowly, over time, the switch flipped and a light was cast over things that though were right in front of me, I could not see. it’s all about flavors. He can make the bitter sweet and the sweet bitter..

    • Anonymous says:

      Strongly disagree

    • Anonymous says:

      I agree with your statement. More people should speak up. However, the Heis apparently does not take criticism very well. But he sure likes to dish-it-out !

  4. Anonymous says:

    Excellent piece!

    Trump is the master of creating “news”. Break something or create chaos (NAFTA, immigration, NK, Euro autos, China Trade, Fake news, victimism, etc) then “solve” it (USMCA, Wall, summits, tariffs then removal, tariffs then removal, his alternate “facts” or reality, etc).

    If anyone took a step back no real progress really is ever made. It is like taking your neighbors window out, saying “hey you have a problem, your window is gone” then putting the window back in. Ummmmm ok, what improvement is there????

    But it creates a lot of ummmm “news”.

    SAD!!!!

  5. George says:

    Sometimes all the answers wind up being questions in the end….H….writes for entertaining others with his thoughts. There are times in this market ,boring as it can get, when the can is being kicked down the road ,as it is…..that practicing his creative writing style seems more to his liking than other options…Voila’

    • yes, my “other options” are not good ones. I don’t have a long list of kosher “hobbies”. A reversion to the historical Heisenberg “mean” would be bad news.

      • George says:

        Get your meaning ….Now if it were Me I would be out there fishing… Montana this winter is pretty much as it’s reputation would seem to outsiders snowy and cold… Thanks for keeping your fans ( and me) relatively sane and engaged….

  6. Bas says:

    The algos check out/pull liquidity when they don’t know wtf is going on. Price is the ultimate indicator, so if the market moves, it makes sense they pull out as they think “maybe we’ve missed something.” To the detriment of market microstructure to be sure, but that’s the reality.

    I would expect this to improve when they are recalibrated to account for the heightened vol BS. We’ve been out of low vol regime for quite some time now, so maybe that’s a contributing factor to improved liquidity; the low vol days have rolled off the look back period.

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