It is now just as important to understand the source of financial and economic information as the information itself. Otherwise, if you are an analyst who examines the data you could go mad. This is because when you scratch the surface of the information and try to reconcile the data with other reports, very little seems to check out any more.
In previous blogs we have talked about the widening gap between two narratives. The central banks have a clear agenda and these days will go to incredible lengths to promote their viewpoint. However, after nearly 7 years of massively missing their interest rate forecasts, all on the high side, this looks like an agenda rather than a genuine and valuable guide.
The difference between these two paradigms only seems to get wider. So much so that the chairman and CEO of Gallup is not going to take it anymore. He says plainly, “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”
Last weeks article went into detail on several other areas where the central bank narrative seems to be falling apart:
The data continued to align with this thesis earlier in the week. However, there are certain data points when there is an opportunity to reset opinion back towards the central bank narrative. Over the last 6 months or so it is clear that the key events in this regard are GDP announcements, Non Farm Payroll days, and of course central bank announcement days.
For example there was enormous hype about the 5% GDP number for Q3 in the US, that was played for days in the media and emphasized by the Federal Reserve. However, before long it is very easy to show that this was once again sound and fury signifying very little, as David Stockman does here:
As the paradigm gap continues to widen this battle of the narratives is becoming more violent, as the central banks become ever more desperate. This is now becoming a main source of market volatility.
Where does this all end? Well the central bankers already know the “King Canute” syndrome. That is why the Federal Reserve’s own Charles Plosser recently said:
“The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems. It can try for a while but the problem then is that it’s only temporarily effective, and when you can’t do it anymore you get the explosion yesterday in the Swiss market.
One of the things I’ve tried to argue is look, if we believe that monetary policy is doing what we say it’s doing and depressing real interest rates and goosing the economy and we’re in some sense distorting what might be the normal market outcomes at some point, we’re going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We’re not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can’t do this forever. And that’s going to cause volatility and disruption.
…I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen.”