Everyone has encountered a “yes-man.”
It’s the obsequious individual at work, loyally attentive to the boss’s demands.
The yes-man’s answer is always yes, even if it goes against their own self-interest.
Other names lobbed their way are sycophant, toady, minion, brownnoser, puppet and leech.
The yes-man doesn’t know how to say no. He or she has always said yes for their own survival, and that’s gotten them this far in life.
Sometimes the yes-man is good for the corporation. But often, too many yes-men leads to ruin.
Recently, Federal Reserve Chairman Jerome Powell became a yes-man. And this sudden change is all that matters in 2019.
Narratives Are What Drive Stock Prices
Markets are driven by narratives. These are the talking points that every financial pundit repeats on CNBC. Or the mantra that every portfolio manager quietly recites to themselves while chasing alpha.
Narratives are the things that spark the 3 p.m. rally, which is often misattributed to a higher power, such as the Plunge Protection Team.
As investors, we need to believe there is something around the corner that’s bigger than today’s news. Especially if today’s news is negative.
This narrative dangles above the heads of investors like a carrot on a stick.
In 2017, this carrot on a stick was the upcoming tax cuts and government deregulation. That led to a 21.69% rally in the S&P 500 Index.
In 2018, the market faced an onslaught of both positive and negative narratives:
China Is Leveling Tariffs on U.S. Goods.
The U.S. Is Taxing Chinese Goods.
U.S. Delays China Tariffs.
U.S., China Close in on Trade Deal.
The Fed Is Reducing Its $4 Trillion Balance Sheet.
Quantitative Easing Is Over. Here Comes Quantitative Tightening
The market was a roller coaster last year because the narratives swung between optimism and devastation.
Concerns over trade wars led to a 10% pullback early in the year. And worries about an aggressive Fed resulted in an even more calamitous 20% pullback to end the year.
Once the ball dropped in 2019, things have been just the opposite.
The S&P 500 licked its late-year wounds and staged an 8% rally to start the year.
Some pundits point to an expected end to the trade war (let’s call it an “impasse”) with China. But that’s not the only thing.
Even more importantly, Fed Chairman Jerome Powell is now a yes-man.
This is a dramatic shift from his posturing just a few months ago when he was hellbent on raising interest rates. He also supported quantitative tightening, a process that would allow the $4 trillion balance sheet to run off without buying more securities.
And this will be the only thing matters this year.
How else to explain the stock rally in the face of projected U.S. first-quarter growth of an abysmal 0.3%? (Granted, this number was impacted by both the government shutdown and the trade impasse.)
Powell is a yes-man!
How else to explain a stock rally as Chinese policymakers set a 2019 growth target to 6% to 6.5%, down from 2018’s 6.6% growth?
Powell is a yes-man!
How else to explain a stock rally as Brexit looms, Italy slips into a recession and an expected euro zone growth rate below 1.5%?
Powell is a yes-man!
Getting to Yes
I recently watched Free Solo, the Oscar-winning documentary about Alex Honnold. He’s the first man to successfully complete the greatest feat in rock-climbing history.
Spoiler alert: Honnold climbs Yosemite National Park’s 3,000-foot El Capitan rock formation with no ropes or safety gear. The documentary details his preparation for the climb in an attempt to explain how he is able to complete this superhuman achievement.
In the film, Honnold frames risk as a combination of likelihood and consequences.
He says: “The likelihood of falling is very, very low. But the consequences? Very, very high.”
After December’s historic sell-off, this is a risk Jerome Powell now understands.
Raising rates might bring on another recession. Or it might bring on an end to the dollar’s global domination, with consequences beyond what this generation has ever faced.
If you understand that framing, you can understand how Powell became a yes-man.
To steal a quote from football legend Vince Lombardi, the stock market “isn’t everything. It’s the only thing.”
As goes the stock market, so goes the economy.
Forget about the polls. The stock market will determine who wins the election in 2020.
It will also determine whether or not Powell will be remembered in history as an effective Fed chairman or a total flop.
President Donald Trump knows this.
Powell gets it now too.
Regards,
Ian King
Editor, Crypto Profit Trader