Is it time for the stopped clock to be right?

A reader asks: Is it time for the stopped clock to be right?

Archer responds: When Galileo embraced Copernicanism in the early 17^th century he wasn’t wrong, just “early” in Wall Street parlance. He was subsequently forced by the Pope to recant, kind of like Mr. Market makes today’s masters of the universe reconsider their earnings estimates for the S&P 500, and their seemingly never-ending predictions of a recession.

This latter has been a topic of much discussion for the better part of the last 18 months. Those early recession forecasts have proven to be useless; the economy has continued to add jobs and to expand. But like a stopped clock they will one day be right. Is today the day?

The Fed is doing its part to make it so, talking up interest rates, talking down the market. As noted before, all the accompanying focus on the central bank is a little over the top. Still, attention must be paid. And there is one thing that is demonstrably true: keep interest rates high enough for long enough and a recession will ensue. How that will play out is anyone’s guess.

Not everyone is buying the Fed’s schtick, however. A Bloomberg Surveillance headline had it like this, “’Data Dependent’ Means the Fed has no Clue.” The next-day Yahoo Finance headline put it differently: “Rates staying ‘higher for longer’ means at least through 2026 for the Fed.” But this says more about the necessity for catchy headlines than about Fed policy. The end of 2026 is more than three years hence; anybody remember “Team Transient,” that all-star gathering of Fed governors, economists, and the Treasury Secretary? How did that work out?

Backing up a second, is the Fed right about inflation? Is it moving up? How far and how fast? Oil has been a problem of late, with a barrel of crude now going for over $93, up from around $80 at the start of the year. Has oil ever sold for more than $93 a barrel, you might ask? Of course. It traded for nearly $150/barrel in 2008.

But for markets the absolute is less important than the relative – and, most significantly, the direction and speed of change. For the moment, oil is moving in the wrong direction (even as other inflation indicators are mostly moving down).

So there are two levels of conjuring going on here – first by the Fed trying to make sense of that subset of economic indicators it believes to be determinative and, second, by Fed watchers, trying to make sense of the Fed. It seems unlikely that there’s much better than a random distribution of rightness among the hundreds of Wall Street forecasters engaged in this effort.

During the early days of Covid a refrain surfaced among politicians and other officials that we are “following the science.” Bloomberg science columnist Faye Flam put paid to this bit of phraseology, writing “that isn’t a policy, it’s a slogan.” Ouch. The same could be said of “data dependent.”

Long term market watchers will note that what is considered market-moving data is forever changing. Sometimes it’s the price of oil; sometimes it’s an unemployment number or a sleeper candidate like the Baltic Dry Index. For that brief moment, markets revolve around a single point, and then move on. It’s a fickle world.

Nearly 2,000 years ago Ptolemy looked up and, based on the data available to him, saw a geocentric universe. Copernicus had new and better data and saw something else. Galileo brought a telescope to the task and saw further and deeper. The Webb Telescope goes further still. But even a view back to the dawn of time won’t tell you where the bond market will close tomorrow.

A.I. anyone?

Woof.