A Day In The Life

I’m sympathetic to “Wow ’em with big numbers” analysis. I really am. There was a point in my own life when my job was to wow ’em with big numbers (or, more accurately, to wow people with big numbers someone else calculated).

In the post-financial crisis world, and especially in the post-COVID environment, though, I think we’ve reached the point of diminishing returns when it comes to tallying up large numbers in order to implicitly suggest policymakers (and the world in general) may have gone crazy.

This exercise is prevalent in sell-side research, and it does serve a purpose. It’s important to stay apprised of how far afield we are when it comes to central banks suffocating price discovery, and so on. But it feels a bit like documenting James Harden’s stat line during the regular season. That is, yes, there’s something wholly extraordinary about a point guard putting up what, during some months, are Wilt Chamberlain numbers, but we’re all desensitized to it. And we’re tempted (or at least I’m tempted) to ask, “So what?”

For example, in the latest edition of the bank’s popular “Flow Show” series, BofA’s Michael Hartnett documented “a day in the life” of markets and policymakers, in order to make a point about… well, about how big these numbers really are.

Over the past six months, “central banks bought $10 billion of bonds every day, the US federal government spent $20 billion every day, global stock market cap grew $73 billion every day [and] US bond & stock issuance averaged $20 billion every day,” he remarked. The figure (below) is indicative.

Big numbers. (“Loud noises.”)

What can we really say at this point that’s meaningful? Not much, I’d suggest. Or at least not when we confine ourselves to orthodoxy and “conventional wisdom.”

At some point over the past dozen years, something “should” have gone horribly wrong. (With distorted markets I mean. Plenty has gone horribly wrong in the world more broadly.)

And yet, nothing really has. There have been tantrums, yes (not just in US rates, but in bunds and JGBs too, although the latter are now almost totally moribund, beaten into submission by the BOJ). And there have been blowups, sure (on some accounts, the Archegos debacle was among the largest flameouts in history). And there have been too many fragility events to count (the implosion of the VIX ETN complex in February of 2018 being the most high-profile example).

But considering the unfathomable scope of policy intervention, the structural instability of modern markets and the complete disappearance of price discovery, it’s a miracle the system hasn’t suffered a seizure epic enough to collapse the entire house of cards. And for good.

Or maybe it’s not — a miracle, that is. Maybe we’re simply realizing the implications of what’s been true all along. Namely that because all of this — stocks, bonds, money and markets in general — are ultimately just figments of our imagination, the rules that govern them are by definition arbitrary and subject to revision at our discretion. There are no “consequences” because that word makes no sense in the context of a game we created and control.

For instance, it’s very difficult to reconcile the notion that the absence of price discovery and the muting of market signals is guaranteed to end in disaster with a chart showing periphery bond yields in Europe since Mario Draghi’s famous “Whatever it takes” pledge. How extreme does policy have to get before what was “guaranteed” to “end in tears” manifests in actual crying? How long does something that “surely won’t end well” have to persist before the unhappy ending finally comes?

People shudder at that kind of thinking. Not because it “enables” bad policy. Policymakers don’t need to be “enabled” in their ongoing quest to eliminate the business cycle, just like I didn’t need to be “encouraged” to buy a bottle of scotch a decade ago.

Rather, people get chills when someone suggests what I suggested (above) because it casts doubt on the “realness” of the reference points that give our lives meaning, and it lays bare the absurdity inherent in most of what we do every day.

The pandemic served as a reality check on multiple fronts. Most obviously, it was a reminder that humanity isn’t prepared to contain a highly transmissible virus. The implication was (and is) that if COVID-19 had a mortality rate on par with, say, the hemorrhagic fevers, we’d be living in a state of pseudo-anarchy by now.

Beyond the terrifying prospect of mass extinction, the pandemic forced developed nations to effectively simulate entire economies, an experiment which, by and large, was successful. Indeed, it’s ongoing.

It also irreversibly altered the way we think about everyday things. Consider television and, specifically, business television. Suddenly, your favorite anchor was reporting live from their own living room, which somehow didn’t look like you thought it would. That was bizarre, but even more bizarre was the realization that, at some point, you subconsciously decided what color couch a complete stranger probably had.

Meanwhile, the analysts who used to appear in-studio were likewise weighing in from their homes, and it suddenly dawned on you that they don’t wear business suits when they’re sitting at their own kitchen table.

And speaking of business suits, once we all got used to nobody on TV wearing one, it was strange when, a few months back, everyone went back to the studio in a suit. You may have asked yourself odd questions like, “Why did we bother wearing those in the first place?”

And then, logically, “What even is a ‘suit?’ For nine months, we didn’t wear them. Now they just seem like costumes. Are we all just wearing costumes? If so, why are they so damn bland? If we’re all going to agree to wear matching costumes to work, shouldn’t they at least be something more fun?”

For the Donnie Darko fans out there, recall the rabbit’s rejoinder when Donnie asked, “Why are you wearing that stupid bunny suit?”

This time last year, everyone (including myself) was busy characterizing the pandemic environment as a kind of facsimile. Maybe the pandemic was nature’s way of reminding us that, in fact, almost everything about our “real” daily lives is little more than a simulation — some game we created, complete with costumes and makeup, in order to inject meaning into an otherwise meaningless existence.

Central banks can buy $10 billion of bonds every day because both central banks and bonds are part of a game we created and control. There are no natural limits because neither of those things (“central banks” and “bonds”) exist in any real sense. What is a “central bank” or a “bond” (or the “United States”) out of context? Nothing. A rock was an objective reality long before language came along and named it. A “bond,” by contrast, is just a concept that will cease to exist the very second we cease to be alive and conscious.

Now, let’s all put on our costumes and get back to — how did BofA put it? — “a day in the life.”