Peak Absurdity, Or, “A Sad Commentary”

It’s always dangerous to call a top in absurdity (“peak absurdity”, if you will), but if we’re not close to it by now when it comes to flip-flopping Fed predictions then we don’t know what peak absurdity might look like.

As Richard Breslow put it last week:

“Every market trading in lockstep is a legacy symptom of the financial crisis that benefits no one but computer algorithms.”

“The transmission mechanism from one piece of localized data to financial conditions all over the globe just doesn’t work that fast. If at all. And it creates false, even ridiculous, narratives purporting to describe how the world has suddenly changed. Until the next economic factlet requires an entirely different interpretation.”

That’s about as concisely as it can be put. And we love the term “factlet” - because that’s what most of this is, “factlets.” Take yesterday’s ISM number for instance.

(Chart: BofAML)

Folks we’re sorry to have to invoke a cartoon character but to quote Family Guy “Oh my God, who the hell cares?”

Don’t get us wrong, it’s not like the ISM print doesn’t matter, but it is, as Breslow says, “a factlet.” The idea that one ISM print should influence anything is patently absurd. Just look at this Google news screengrab:

Note the Bloomberg headline: “First factories…” Is that news? How many times have we said manufacturing is not coming back. We’re going to quote Breslow again because this is a perfect example of what he’s talking about:

“The transmission mechanism from one piece of localized data to financial conditions all over the globe just doesn’t work that fast. If at all. And it creates false, even ridiculous, narratives purporting to describe how the world has suddenly changed.”

(Chart: Bloomberg)

And now, the Street is attempting to adapt to that reality by trying in vain to keep up with the machines. Case in point: Goldman today. Hell, it wasn’t four days ago that the bank raised its odds of a September rate hike to an absurd 55% after the NFP number. Well all it took was one “factlet” to change all of that. To wit, from Hatzius and crew:

“San Francisco Fed President John Williams advocated for raising rates “sooner rather than later”, but offered no new clues on whether the committee will be ready to act on this month. His speech followed today’s non-manufacturing ISM index, which dropped sharply to 51.4 from 55.5 previously. As a result of the ISM miss and lack of clear signal from Fed officials, we are taking down our odds of a hike at the September 20-21 FOMC meeting to 40% (from 55%).”

Pardon us, but: Are. You. Serious?

How do you even calculate that? One ISM print and some vague commentary from Williams and somehow that translates to 15 points on September rate hike odds? That’s a complete guess with no basis in anything that even approximates mathematical analysis.

Now look, if you want to forestall a hike because China has just thrown the entire global financial system to the wolves with a record devaluation (i.e. what happened last September), that may make some measure of sense. But we’ve gone from justifying not hiking rates because the Dow fell 1,000 points on Black Monday last year, to justifying no rate hikes because of one ISM print.

We’ll close with some of the latest commentary from Breslow:

“Central banks that cultivated and encouraged irrational exuberance as their main transmission mechanism of monetary policy are now hopelessly caught in its infinite loop. Seemingly feeling the need to continue doing more of the same, no matter the efficacy.”

“Too many investors now believe, or hope, there will be no policy reversal for the balance of their careers. They explain the world in terms that justify the status quo. It’s become their world view and they’re sticking with it and hope to get out of town before the market gets trickier.”

“It’s a sad commentary, that the term was actually coined by two psychologists in the 1990s studying faults in human decision-making.”

A “sad commentary” indeed.