Mind the Cup

uncertainty, the Fed, blame games, and breaking patterns

Dec 29, 2022

some reflections on macro and true micro - podcast and youtube up soon

This was the year that everything went backwards - things didn’t work the way that we thought they should work, things did work the way that we thought they shouldn’t work, and any priors had to be thrown out the window (along with ego).

A lot of the emphasis this year (and rightly so!) was on inflation - managing inflation, battling inflation, investing through inflation, etc. It was about carving a path through the ordeal, and policy became about managing emotion through data.
“How is everyone feeling” was a core question as we thought about *everything* - fiscal and monetary policy, political decision making, stocks and bonds.

Legislation is hard, but mood is cheap, as Alex Williams said.

However, the mood of this year was wonky!!

A lot of systems are (and have been) fragile. So when supply chains got tested, when the labor market flipped, when mortgage rates skyrocketed, the promise of This is How It Will Be was broken. And this is largely a consequence of underinvestment, lack of maintenance, lack of modern infrastructure.

What happened with Southwest is emblematic of a lot of the problems we faced this year.
It was a system that worked until it didn’t, reliant on understaffed and overworked labor, and focused perhaps a bit too heavily on the fiduciary responsibility of returning capital to shareholders.1

And of course, there is nuance to that - and that’s the other thing. We as a !!Society!! have no patience for details, no mind for “well perhaps” - we simply choose to rage.

We exist in a system that encourages us to be reactive, not proactive, and that is clear in how discourse is carried out. A large part of our aversion to nuance is a lack of inner contemplation in a larger context.
There is no room for reflection, we aren’t mindful of how the world reacts to us, rather, we are focused on how we react to the world.

And that aversion to nuance shows up in how we interact with the economy (and each other). As Leonardo da Vinci once said “the greatest deception men suffer is from their own opinion." There’s also this quote attributed to Nyogen Senzaki -

“Like this cup, you are full of your own opinions and speculations. How can I show you wisdom unless you first empty your cup?”

There’s a lot of fingers to point here about our respective cups, and I’ve written a lot about it (sorry!) - trust has evaporated through social media platforms and misaligned incentives, and those same platforms have enabled echo chambers. We have lost trust in institutions, and thus have lost trust in the stories told by said institutions as Martin Gurri wrote about in The Revolt of the Public.

There’s been a lot of other motives for loss of trust too - the way that the economy is meant to function just stopped working! There is no slack anymore, no “cheap labor'“, and uncertainty has become a primary emotion in a lot of aspects. Cheap credit was the underlying force for a lot of economic functioning - but in a high rate world, that model doesn’t work anymore.

And that’s the issue. The cup overfloweth. But maybe not in the way we want.

The Federal Reserve

The Fed’s job is mostly to manage expectations, to largely make sure that inflation expectations specifically do not become unanchored. To refill the cup, so to speak.

The labor market and price stability translate largely to financial conditions and narrative, which the Fed manages through their tools of forward guidance, rates, and the balance sheet. And this is a tough job! It’s nudging things around to make other things happen, a game of dominoes with the intent of playing chess. As Ben Bernanke said in 2003

“Ambiguity has its uses, but mostly in noncooperative games like poker. Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.”

The Fed’s goal is to get people to stop paying attention and to get markets in agreement. “Rational inattention” is what Jerome Powell called it. They do not want inflation to be at the forefront of your mind, because then, it can spiral. Expectations become unanchored and their job becomes a lot harder.

And this is important - the Fed is a core part of the attention economy - they are the main influencer.

Their livestreams are widely watched, their product reviews focused on with rapt attention, and their TikTok dances explaining that “the labor market has to go down so inflation can recover” go viral.

Inflation creates uncertainty, which is why we hate it. Inflation also captures the fleeting eye of the consumer because it impacts most decisions they make, which is why the Fed hates it.

Inflation, Zoomed In

The causes of inflation are wide and varied - deglobalization, tightness in labor markets, sky high energy and commodity prices, WFH trends, etc.

Supply bottlenecks were a huge component of inflation - “inflation in the U.S. would have been 6% instead of 9% at the end of 2021 without supply bottlenecks.”
Easing supply is the core solution to fixing the inflation that we have, but like any influencer, all the Fed can go is talk. They can’t go out there and move boats on the water, they can just nudge things in that direction.
And of course, supply chains bleed into other things - import prices rose, which got passed off to consumers, and wages had to rise too, which were also passed off - at a much higher rate than pre-pandemic
Monopolies also created some issues, with industry concentration amplifying all sorts of inflationary pressures

We’ve relied on textbook fixes for problems that are far outside the bounds of any metric that can be studied. The problem is, going back to the Bernanke quote, the Fed’s tools are ambiguous in the context of real world narrative - the Fed is shrinking their balance sheet and raising rates with a rough idea of where the neutral rate is and a general idea of the impact of shrinking holdings - but like, no real concrete path, just sort of a guess on what will work.

It’s all “let’s see what the vibes are”. Financial conditions will reflect that, labor market will tell the story eventually, and that’s that. It’s odd - perhaps an outdated technology that should be updated in conjunction with fiscal policy. Inflation is pervasive, and the Fed’s treatment plan should be bolstered by additional toolsets.

There is also an important thread to pull on in terms of the blame game. Many people deny themselves autonomy and say that their faults are because of the actions fo the Fed. The Fed reacts to data, as do investors - but there is still agency for many to allocate capital productively. Throwing your hands up and yelling “the Fed is the bane of my existence” is fair to the degree that yes, they have HUGE influence.

But so do you.2

The Individual

There’s this quote by Rebecca Stead in Goodbye Stranger where she asks

Who’s the real you? The person who did something awful, or the one who’s horrified by the awful thing you did? Is one part of you allowed to forgive the other?

I think about the Fed’s precarious position between a rock and a hard place often. Their toolkit is ultimately limited to managing demand through yelling at the stock market and influencing hiring patterns of employers, so people ultimately spend less money to with the main goal of getting inflation down.

In everything, there is an underlying dichotomy, a friction between how things work and how they could be, and it feels like we are nearing the edge of things working.

There have to be alternatives in place. Our technology is old and outdated, our systems need to be upgraded. On a macro scale, this is where uncertainty comes in - if things break, can they be fixed?
Human ingenuity is one of the most powerful resources we have - and uncertainty can be a fuel as we navigate new normals.

On a micro level, the beautiful thing about uncertainty is that it is also possibility and opportunity. Creativity and courage can shape uncertainty. As Voltaire said “uncertainty is an uncomfortable position. But certainty is an absurd one”

We spend a lot of time thinking about the individual in context of the larger story - but we often don’t think highly enough of ourselves. Individual actions are what shape the world that we live in. But we discount that.

As I said earlier, we often don’t think about how the world reacts to us. We don’t think about our footprints in the snow, we don’t think about the power of a kind word or a smile. We think that we are small, diminutive, not nearly powerful enough. This is perhaps a silly example, but Erich Fromm wrote about the concept of love in The Art of Loving. In he said

Love is not primarily a relationship to a specific person; it is an attitude, an orientation of character which determines the relatedness of a person to the world as a whole, not toward one object of love. If a person loves only one other person and is indifferent to the rest of his fellow men, his love is not love but a symbiotic attachment or an enlarged egotism… One does not see love as an activity, a power of the soul… This attitude can be compared to that of a man who wants to paint but who instead of learning the art, claims that he has just to wait for the right object and he will paint beautifully when he finds it.

Love is an action, a way that we exist in the world rather than a relationship. Everything that we do is a way to exist in the world, and the ripple effects of that are undeniable. At risk of becoming trite, one more from Goethe -

“A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents and meetings and material assistance which no man could have dreamed come his way. Whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it. Begin it now.

This year was defined by uncertainty. And in many ways, that uncertainty will never go away. But this year was also a year to recognize that the world does react to us - and we can shape that reaction in many ways.

Mind the cup.

Thanks for reading.

These are some of my favorite articles from this year.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Listen, I get it. A CEO has a responsibility to create shareholder value. But these companies will not function in *the long term* if every dollar is spent on buybacks and dividends.

Grain of salt! Obviously no individual can match the power of the Fed on average, but on the margin a lot of interesting things can happen

Kyla’s Newsletter

Discussion about this post