“The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down a very deep well.”
– Lewis Carroll, Alice’s Adventures in Wonderland
I think we’re way down the rabbit hole right now, and there are precious few ways out…
It hit me when I was snowed in with my kids and watched Alice in Wonderland for the umpteenth time: We’re currently living in a bizarre Wonderland.
I’m sure most of you are familiar with Lewis Carroll’s ode to perception and the absurd. After chasing a mysterious white rabbit down a hole, young Alice follows the rabbit along a series of mind-bending encounters that call everything she thought she “knew” into question. Wonderland throws logic itself out the window.
One of her encounters in particular reminds me a lot of the current state of the Fed-fueled stock market.
Alice finds herself in the realm of a cruel and terrifying Queen, who challenges her to a game of croquet. The catch is, instead of a croquet mallet, Alice is forced to use a Flamingo that keeps fighting and flailing whenever she tries to make a shot.
Needless to say, she doesn’t do so well…
The Queen, however, uses a steady flamingo to take her shots. But she is not a good croquet player, so whenever she takes an erratic shot, the playing cards acting as the “wickets” simply move themselves into the direction of her shot to ensure she wins every time.
The game is clearly rigged in the Queen’s favor.
Such is the relationship between actual, middle-class people fighting through this recession (Alice) and the Queen (Wall Street and Government).
While the middle class is struggling for every dollar it has and fighting an uphill battle on employment and investing, the government and the Fed keep insisting that there is a smooth and fair playing surface.
We’re all winning! Stocks are hitting record highs! Unemployment is finally reaching “acceptable levels” and inflation is practically non-existent!
The problem is that the Fed continues to move its wickets around as we continue to play this rigged game…
So how has the government been manipulating the game?
We can start with the unemployment number — which is “officially” hovering around 5.7%
The government has been cheering each new employment report as proof that the recovery is in full swing. What it hasn’t been telling you is that all of the people who have given up looking for jobs have been completely scrubbed from the official employment numbers. Another sneaky little trick is that if you manage to pull together one hour of work in a week, and get paid at least $20, you’re not counted.
That’s right, if you made $30 cleaning out your neighbor’s garage one day, you are gainfully employed. How’s that for a recovery?
In fact, the labor force participation rate — one of the best legitimate indicators for actual employment — is at the lowest point since 1978. There are a record 93 million Americans who are currently not in the labor force.
Sure, we’re still able to play the game, but we have to do it by bending over backward. Case in point: wage stagnation…
Even if you have a job that pays more than $20 a week, the overall wages during this recovery have been anything if not moribund.
Since 2009, hourly wages in private jobs have increased from $22.00 to 24.22. That is barely keeping up with already low inflation. When you take into account that we are spending more and more in “stealth inflation.” According to the Consumer Price Index Data:
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Food costs are up 3.4%
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Energy services (electricity and gas services) are up 3.7%
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Medical care commodities are up 4.8%
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Medical care services are up 2.4%
This reminds me of yet another scene in Alice in Wonderland (yes, I’ve clearly watched the film a few too many times…)
The Queen of Hearts had a kingdom covered in white roses. We all know that people desire red roses. So what did she do? She made all of her lackeys go around painting the roses red.
I sense a similar feeling when reading these employment figures…
But what does this all mean for the stock market?
“Speak English! I don’t know the meaning of half those long words, and, what’s more, I don’t believe you do either!”
– the Eaglet
As I told you yesterday, we’ve been living in an Alice in Wonderland stock market. Things aren’t quite what they seem…and they keep getting curiouser and curiouser.
Not only are the government and the Fed forcing us to play a rigged game, we’re also being subjugated by the very language the Fed uses to control the market, no matter what it is actually saying.
Fedspeak has always been an inside joke among those in power. Princeton economist Alan Blinder called the Fed’s language “a turgid dialect of English” — a vague and ambiguous way of speaking to ensure a level of confusion in the public so they do not overreact to Fed officials’ remarks.
We have seen this play out in the last few months regarding the Fed’s willingness to raise interest rates. Of course, if Yellen came out and said “we’re raising interest rates tomorrow”, the market would have a massive sell-off in the wake of the panic.
So she has to veil her comments in a clouded fog…
That’s why she has repeatedly said we just have to be patient. But as you well know, patience is a very relative term.
There was a great feature in the New York Times this weekend that dived into Fedspeak by tapping the talents of several linguists. Here’s how linguist Lawrence Solan unpacks that adjective’s baggage. He says that there are three distinctions of the word ‘patience’:
1) Standing in line at Staples to have a copy made
2) Waiting to see a doctor
3) Waiting to get a mortgage approved
From the Times:
But by now it seems clear that “patient” has become a term of art, a word with a meaning specific to the Fed. That’s because the meaning of “patient,” like many adjectives, depends on context.
“Patient” in the first example might mean five minutes. For the doctor, perhaps a half-hour to an hour. For the mortgage, several weeks.
“When have you waited long enough to have been ‘patient’ so you can politely complain again in the doctor’s office, the copy shop or to your mortgage bank? There is no real answer,” he said.
And that is the key… the word means whatever Yellen wants it to mean on any given day. That gives individual investors like you and I pretty much nothing to go on.
“It’s more akin to the language of diplomacy, politeness, tact, innuendo, euphemism, veiled threats and bribes and oblique sexual come-ons,” according to Harvard psychology professor Steven Pinker. “Cases in which the content of a speech act is highly fraught.”
“When the chair of the Fed speaks, she knows that she is not just conveying information about the Fed’s plans, but sending a signal that changes the way that millions of people will behave, and how each will expect all the others to behave.
Investors not only interpret the remarks but try to guess how other investors will interpret the remarks. In that regard, her words are like an oath or a pronouncement of a jury verdict or marriage ceremony, or a prayer or a magical incantation — the mere act of uttering them changes the world. So the words take on formulaic meanings, and she is aware of that fact when choosing them.”
The fact that the meaning of “patient” can vary so significantly depending on context, and even then may be difficult to pin down, can work to policy makers’ advantage.
That advantage is not to be understated. So let’s return to Wonderland with an ex-Fed official to pull all of this together. Former New York Fed economist Richard Alford has made this analogy before, and points out that:
“The Fed’s attitude towards its mandate is closer to the attitude that Lewis Carroll’s Humpty Dumpty had toward words, as revealed in this exchange with Alice:
“When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean – neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
And master the language she has, leaving us to hem and haw about what she means and what the stock market will do in reaction. That leads me to my last — and for investors, most important — takeaway from these overwrought metaphors…
Perhaps my favorite passage from Alice in Wonderland is “The Walrus and the Carpenter.”
Essentially, these two characters have set up an erstwhile Oyster House on the shores of the ocean. But they are in desperate need of the bivalves to stock their restaurant. So they descend into the deep to lure out a crowd of baby oysters to follow them to the surface.
I’ll let Lewis Carroll take it away:
“O Oysters, come and walk with us!”
The Walrus did beseech.
“A pleasant walk, a pleasant talk,
Along the briny beach:
We cannot do with more than four,
To give a hand to each.”The eldest Oyster looked at him,
But never a word he said:
The eldest Oyster winked his eye,
And shook his heavy head–
Meaning to say he did not choose
To leave the oyster-bed.But four young Oysters hurried up,
All eager for the treat:
Their coats were brushed, their faces washed,
Their shoes were clean and neat–
And this was odd, because, you know,
They hadn’t any feet.Four other Oysters followed them,
And yet another four;
And thick and fast they came at last,
And more, and more, and more–
All hopping through the frothy waves,
And scrambling to the shore.
Remind anyone of investors following the Fed to record high stock prices? Let’s finish the poem…
The Walrus and the Carpenter
Walked on a mile or so,
And then they rested on a rock
Conveniently low:
And all the little Oysters stood
And waited in a row.“A loaf of bread,” the Walrus said,
“Is what we chiefly need:
Pepper and vinegar besides
Are very good indeed–
Now if you’re ready, Oysters dear,
We can begin to feed.”“But not on us!” the Oysters cried,
Turning a little blue.
“After such kindness, that would be
A dismal thing to do!”
“The night is fine,” the Walrus said.
“Do you admire the view?“It seems a shame,” the Walrus said,
“To play them such a trick,
After we’ve brought them out so far,
And made them trot so quick!”
The Carpenter said nothing but
“The butter’s spread too thick!”“I weep for you,” the Walrus said:
“I deeply sympathize.”
With sobs and tears he sorted out
Those of the largest size,
Holding his pocket-handkerchief
Before his streaming eyes.“O Oysters,” said the Carpenter,
“You’ve had a pleasant run!
Shall we be trotting home again?’
But answer came there none–
And this was scarcely odd, because
They’d eaten every one
So that begs the question: are individual investors simply oysters being led to the slaughter?
When the Fed raises rates, will it wipe out all the ill-gotten gains we’ve seen over the past six years of this Wonderland bull market?
Time will tell, but I’ll send you off with one warning…
While we oysters count our stacks of pearls
And cheer both to and fro…
When the Walrus comes to feast
We’ll be the last to know…
Godspeed,
Jimmy Mengel
Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow’s Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he’s brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor’s page.
