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‘This Can’t Be What They Had In Mind’: Reflexivity On Parade
I've been on (and on) about the Fed's financial conditions reflexivity problem.
The dynamic is easy enough to grasp. I'll briefly recapitulate.
The Fed needs financial conditions to remain a semblance of tight in order to coax the inflation genie back in the bottle, but not so tight as to make a hard landing (or a recession) a foregone conclusion either through too much demand destruction or some manner of financial crisis.
When financial conditions tighten such that the odds of an "accident"
When I was about 12 my mom was cast in the thrall of an encyclopaedia salesman and she bought a set. I read them all, cover to cover. One of the things I never forgot was a picture of a guy standing next to his record catch, a 970 pound Bluefin Tuna he caught on 20# test line. I spent years trying to figure out how that was even possible. Finally, one day I was talking to a deep-sea fisherman and I asked him how it was done. He told me the trick was to watch the line. It gets wet and the water sheets on it. When the pressure on the line rises as the fish strains it, the surface tension starts to break and the water goes from a smooth coating to a series of beads. The guy told me that when those beads appear, the line is about to break and one has to back off. This little factoid turned out to be instrumental in making me a bunch of money over the years. I can be a little mouthy when I try to tell truth to power and once one of my biggest clients VPs asked me how I kept from getting fired. I told him the fisherman’s technique and explained that his boss had several tells that were my beads on the line. I used these to tell me when to back off. As I read this post I wondered what are the exact beads that Powell and his mates use to keep from breaking the line as they tread the path to the FC result they seek. There are, no doubt, a number of indicators that have no bearing, so what are the real critical metrics that tell Powell when the line is about to break?
Trump yelling at Powell through Twitter (and in person) was one “tell” that told him when to deep-six letting the market move on “autopilot” to reflect asset values more accurately. Covid triggered his Trump-related PTSD and he went so far as to buy AAPL bonds to placate Trump. Since then, Powell is terrified of a stock market sell-off and bond market chaos. Someday he may implode during a press conference. It’s hard not to feel sorry for him b/c he’s so twisted in knots mentally and emotionally.
Agreed. Those press conferences are painful for him as well as anybody who has to listen to all that.