What if everyone is wrong?
That’s a lyric from Sheryl Crow’s “Letter to God” on the 2005 Wildflower album.
The context for Ms. Crow was the great existential question, “What happens when we die?” I’m writing about market structure and, by extension, economics.
Photo 22765657 / Sheryl Crow © Sbukley | Dreamstime.com
God, market structure, economics. They’re intertwined. But we’ve made economics God. Unless you’re on TikTok. Then god is entertainment.
I digress.
In this context, I’d change those opening five words to six. What if the data are wrong?
Which data?
All of it, in a sense. What data determine shareholder value for public companies? I wrote about that last week in a widely read post called The Odds, about the collapse of active stock-pickers.
I think most public companies would be startled to know that Active Investment plays little role in shareholder-value. But because most are unaware of the data, companies go on doing things that have no real value.
What can be known is already known, no matter what companies do or say. I’ll give you two examples. Data for Home Depot (HD) shows investment abruptly ended at December options-expirations last year, and hedge funds had big short bets after January options-expirations.
The data were already known then. HD plunged yesterday.
Walmart (WMT) didn’t. It had rising Demand ahead of earnings and falling Supply. Diverging Supply and Demand, all other things being equal (ceteris paribus, the lawyers say), produces rising prices. Of course, WMT data also show just 1.4% average daily moves.
Supply/Demand divergence also characterized the Pandemic economy.
Which brings us to the economic data. The great debate raging everywhere is Soft Landing, Hard Landing, No Landing. Sounds like a Joni Mitchell song.
Nope. It’s actual economic theory. Emphasis on theory.
For those who’ve been on TikTok (you’ll never get that time back), let me explain. Some think the reversal of the Great Economic Supply/Demand Divergence that occurred in the Pandemic will result in a crash. A hard economic landing.
Some say the Federal Reserve is piloted by experts who’ll bring this ungainly but beautiful albatross of consumption called the USA fluttering onto neatly galloping spindles.
Still others claim that we were circling for a landing but we can call it off, there’s plenty of fuel, we’ll stay airborne, gliding over the event horizon. Economy’s fine.
The outcome depends on a universal fact: Whether the data are right.
A couple weeks ago, the US Commerce Dept claimed the economy generated over 500,000 jobs. Nobody took a headcount. That’s a model that spits out some data.
I don’t know what’s going to happen. But I know this. You can’t look at stock markets, bond markets, and arrive at a clear conclusion.
So in our remaining time, I’ll give you two thoughts. First is common sense. It’s like the common law, the jurisprudential cornerstone of the republic. It’s the stuff we know to be true. The benefit of hindsight. Good judgment. Call it what you will.
We know this to be true. The planet freaked out in an irreparable way in the Pandemic. The damage is monumental, untold. People stopped working. We lived and gambled and played on fake money. Demand surged, supply vanished, prices soared.
The politicians tried to blame everybody else including consumers, the Russians, the nebulous “supply chain.”
Stocks skyrocketed, consumption mushroomed, businesses hired, investors invested.
If something cannot last forever, it will stop. Stein’s Law.
Common sense suggests there’s at least a probability of an equal and opposite reaction. And it doesn’t matter what the data say. What if they’re wrong?
So that’s one thought.
Second, market structure, the mechanics of the stock market, is one beautiful thing, if nothing else. It’s a reflection of every input.
Everything that’s known.
And Demand (with a Capital D to describe the act of buying) faltered in May 2021. You can see it in the data, right or not. The market didn’t lose its inertia – that from the laws of motion – until November 2021. And it didn’t fall apart then. It just stopped rising.
The gap? Six months.
Since then it’s been slowing down. For fourteen months. Like a hurtling missile out of fuel. The gap between Cause and Effect vexes humans because our attention spans are short. Like TikTok.
Here’s the kicker. Between Aug 2020 and Jan 2022, a year ago, Supply – the stock market has a supply chain called Short Volume – trailed the trend. It was rising but behind the rate of change in Demand.
From Feb 2022, it’s been above trend. Flagging Demand, rising Supply. And all of the market’s records for excess Supply – ever – have been set since Sep 2022.
And the market is more Short than Long. It has more Supply than Demand. That fact reflects every input. All that’s known.
That’s the condition as a landing, or not, looms. And the long windup to it gives me unease as we line up on approach. Smooth? Touch and go? A conflagration?
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