Royale With Cheese

Although Friday’s jobs miss may help growth stocks stabilize in the near-term, recent weakness in some of the frothiest corners of the market could be a harbinger.

“[The] crash in new economy stocks relative to old economy [is] reminiscent of [the] 2000/01 post-bubble price action,” BofA’s Michael Hartnett said, in the latest edition of the bank’s popular weekly “Flow Show” series.

On Thursday, I noted that Cathie Wood’s flagship fund suffered a half-dozen consecutive daily outflows. At the same time, the IPO ETF logged an eighth straight losing session.

The figure on the left (below, from BofA) speaks for itself. Hartnett sees an analogue.

The “good” news, Hartnett wrote, is that the “Fed [is] determined to stoke Wall Street exuberance and Main Street inequality” while ignoring “future systemic risk consequences.” The Fed, he went on to say, “has been tech’s best friend for the past 10 years.”

That former claim is a somewhat controversial assessment to the extent it conflates what the Fed would describe as collateral damage (they wouldn’t use that term) with an intent to deliberately engineer a more unequal society.

While it’s entirely fair to suggest that the Fed should read the proverbial writing on the wall when it comes to the rather obvious side effects of ultra-accommodative policy on financial asset prices and the read-through for the wealth divide (familiar figure below), stating that the Fed is “determined” to “stoke” inequality is a bit much.

The better way to put it might be to say that if I eat McDonald’s four times every week and I keep gaining weight, there’s a sense in which I’m “determined” to be unhealthy.

But nobody eats McDonald’s because they’re “determined” to die of a heart attack. People eat McDonald’s because they’re hungry, in a hurry or both, and if they don’t stop, obesity can be an unhappy side effect.

If you become obese and can’t kick your “Royale with Cheese” habit, you might well be indicted in the court of public opinion for being obstinate in pursuit of an untimely death, but your doctor, assuming she isn’t totally bereft when it comes to bedside manner, isn’t likely to walk into the examination room and say “Bob, you’re determined to die. Quarter Pounders have been your best friend for a decade.”

Still, Hartnett’s point is duly noted — and then some. Indeed, I spent my pre-dawn hours Friday complaining about what, to me anyway, came across as an especially obtuse financial stability report, which found the Fed feigning something like ignorance at the connection between monetary policy and a handful of the more egregious manifestations of market exuberance in 2021.

At the end of the day, though, I think it’s important not to suggest that technocrats and public servants are engaged in a deliberate, malicious, systematic attempt to undermine Main Street. We’ve seen where that kind of narrative can lead.