Two main bulletpoints from this last week or so:
- The Janet "Lower for Longer" quote which is from her Brookings institute blog post. (Please read)
- The Artemis Capital "Water in Markets" post which was from July but is all over the place on twitter recently. Again, also please read and watch the intro video from David Foster Wallace's commencement speech.
The horror starts in this section:
The FOMC should consider a number of approaches
- Longer term asset purchases
- Interventions to directly target longer-term yields (Similar to BOJ's yield curve control approach)
- Negative nominal interest rates
- Raising inflation target
- Adopting price or nominal GDP targeting
- "I have argued that asset purchases worked and should remain in the Fed's toolkit"
"Right now it's just a notion, but I think I can get the money to make it a concept, and later turn it into an idea"
This whole post comes back to the macro short VIX / long equities concept that Janet posts like this are the bullish case. Bulls and bears can agree that the Fed doesn't know what they're doing and econ concepts don't apply to the Amazon era, and they're probably right, but that doesn't change the mechanical fact of markets being augmented by policies/ideas like this- a theoretical buyer of last resort, a force whose only job is to stabilize USD with more theoretical resources than every other trader/algo/fund combined because they set monetary policy, they control the parameters of the game. Everyone else is just a player in the game. Yes the whole thing can blow up like every past civilization but in that corner case the opposite trade will have no payout either, the game ends and all your internal game expertise ends with it.
Tying into this was the "Water in Markets" post above, which articulates part of this bear case being the liquidity crisis that will destroy the market, and yes I agree there is a definite liquidity crisis- I don't even think that is arguable given the price, volume, and spreads in February. That being said they have to contend with such statements about liquidity sources of last resort which happened in 2008, and what they want their "crash" to look like. What ceiling do they want on SPX? IE if their option position is looking for a 50% decline for their 100x return, what if they get more than they wished for, if the liquidity crisis fully blows up the USD and their 100x payout is worth nothing? So if you want a 'constrained' crash just for P/E and every 'value' metric to go back to a unanimous 'buy' range, just for SPX to go back up, then how is that different from just being long SPX now, like the passive funds they are worried about.
The water metaphor goes to yell at the liquidity-oblivious passive funds (and they are), without pointing out the point that their 'target crash' dream is its own 'water' and they don't want to splash too far out of that where the USD ends. They don't really want to reconcile true 'end state' behavior in a math/limit/series sense.
That being said the "water in markets" and the original DFW speech are both fairly high level and appreciated, but even then they don't go on to address the hole in their argument, which is kind of unavoidable. Once you use the "reality as water" metaphor/argument, then you also kind of have to reconcile the theoretical "water" of your worldview, which is in this case a bigger crash/repricing, but not TOO big! Then that would be a bigger pond to splash out of.
Any rebuttals from anyone? Assuming I'll just lose another few followers...
