Story Stream
recent articles

Wednesday’s Washington Post led with an above-the-fold headline on the right column that read “Inflation report thrashes stocks.” On its face, it’s useful for readers to remember that the very people who write the articles (and their headlines) about the markets are individuals who near monolithically didn’t rate jobs in the equity markets they report on. Please keep this in mind with the headlines in mind. If those analyzing market outcomes truly understood them, odds are they wouldn’t be writing headlines.

Furthermore, it’s difficult to imagine that a “surprising” CPI surprised anyone. That is so because markets are relentless information processors. They’re pricing the knowns, including the prices of consumer goods, all day and every day. Applied to CPI and other constructed measures of what would at best be a consequence of inflation, it’s the height of naivete to presume that the CPI’s numerical outcome wasn’t to a high degree pre-priced. That’s what markets do. They’re a look into the future, which means markets anticipate measures like the CPI all day and every day.

One logical answer to all of the above is that when stocks sold off sharply, the selloff wasn’t a response to the CPI reading as much as it was investors responding to what the Federal Reserve might do in response to CPI. It’s a reasonable reply to any dismissal of the CPI number, but then a 75 basis point hike from the Fed has been the expected number for quite some time.

To the above, some will reply that while 75 basis points was surely priced, the big selloff was actually an expression of investor fear of more than 75. Possible, and also oh please. Really, it’s amazing how many normally serious people drain themselves of any seriousness when the “Federal Reserve” comes up in discussion.

That is so because serious people routinely make the point that government has no resources. They’re right. Government can only give out what it’s taken from us first. Applied to the Fed, it can’t increase or shrink credit. Obviously it can’t. People borrow money for what it can be exchanged for, which means credit is created all day and every day all over the world. The cost of credit and the amount available is a consequence of global production.

Please think about credit with 75 or 100 or 150 basis point hikes from the Fed top of mind. Does anyone seriously think the price it targets prevails? How? The Fed projects its well overstated influence through a U.S. banking system that shrinks by the day as a percentage of total credit. To then pretend that Fed rate fiddling drives the cost of borrowing is just silly.

The simple truth is that markets always have their say, and markets always speak louder and more forcefully than artificial attempts from government entities to control the markets. Thank goodness for that. Figure that the cost of credit is, other than the dollar, the most important price in the world. Imagine if the Fed controlled it. The global economy would forever be in desperate shape. Yet it’s not. It’s a sign that the Fed’s power is much more theoretical than real.

Which brings us back to the stock-market selloff. It’s hard to imagine Fed fiddling that was already a known was the driver of such a big market lurch downward. Which raises a question about what brought on the decline.

A possible clue could similarly be found above the fold on the front page of the same Washington Post. The left column headline read “In Ukraine, Putin is refusing to lose.” Interesting. And it’s interesting because surprise is always and everywhere behind big market moves. See above about markets and the relentless processing of knowns if there’s confusion.

With each passing day the certainty of a Russian victory in Ukraine becomes less likely. This is a surprise simply because it was never imagined by foreign policy types that Ukraine had much of a chance. That it has a chance could be the source of spooked markets given who leads Russia.

Vladimir Putin believes the end of the old Soviet Union was a tragedy. It’s useful to bring up as a way of sensing his mind. Would someone who believes that, who skipped Mikhail Gorbachev’s memorial based on the previous belief, easily fold in Ukraine? It’s hard to imagine. And with it hard to imagine, please keep in mind growing speculation (John Bolton among others) that a nuclear response might be up Putin’s sleeve.

If so, the expectation likely remains that full-scale nuclear war isn’t in the future, but what is the meaning of even a small nuclear conflict? Consider this with the markets top of mind. Markets price knowns and also probabilities. Even if investors don’t think Putin will go nuclear, the mere possibility of a Russian loss and a nuclear response to a loss has to be factored in.

It’s worth considering with Tuesday’s correction in mind. The Fed is a known, and more important, a not very relevant known in a world where credit migrates to opportunity with a simple click of the mouse. Putin is quite a bit more opaque than our central bank, and worse, his actions have the potential to be very damaging.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His most recent book is When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. 

Show comments Hide Comments