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There's a great TV commercial out right now that reminded me so much of the market narrative that I have to share it with you.
The scene opens with a group of people in a living room playing a game that requires guessing.
The couple shouts out, "It's a small finger – a worm, a dagger…"
The camera cuts to the reason for the guesses. A chart pad is in the front of the room with a teammate drawing as part of a game of Pictionary.
Only the teammate is a sloth hanging on the chart pad easel drawing a line straight down from the top of the pad, oh so s-l-o-w-l-y.
The guessing continues, "Tiny sword? A breadstick? A matchstick?"
The camera cuts to the opposing team who smile and look knowingly at each other, certain that their challengers won't guess in time.
More guessing: "A lamp post? Coin slot!"
Cut to the sloth turning its head slowly to look at its teammates as if to say, "Not even close…"
The guessers say, "No?" and the timekeeper announces, "Ten seconds!"
The final furious cavalcade of guesses, "A walking stick! The Eiffel Tower! Mount Kilimanjaro!"
Then a bell dings and time is up. The guessers grimace and growl in frustration.
The timekeeper announces the right answer – tandem bicycle – to screams of "what?!" as the camera pans to show the sloth still having completed only the short, straight line.
The voice-over comes in and says, "As long as sloths are slow, you can count on GEICO to save you money on car insurance."
But how does any of this relate back to The 10-Minute Millionaire?
Much like the glacial pace of the sloth featured in this commercial, our market narrative is changing.
But very s-l-o-w-l-y.
Let's look at some reasons why the Trump growth narrative has stuck around for so long…
Our Sloth-Like Narrative
When we talk about the market narrative, we are looking at the overarching concept that is helping to drive the markets.
Since the U.S. presidential election, that narrative has been the Trump growth agenda based on three pillars: lower taxes, less regulation, and more infrastructure spending.
Any news supportive of this agenda has sent the markets hurtling up. And very tellingly, any news that has been counter to this agenda, or the Trump administration itself, has sent the market down, but only by small amounts and for short periods.
This has been a very strong narrative, and it persists to this day.
The new narrative that is competing for attention and market reaction is, with apologies to Pete Townsend, the same as the old narrative (the one before the Trump growth narrative), and it again centers on the Fed.
The major narrative before the November 2016 election focused on anything that might encourage or discourage the Federal Reserve from raising interest rates.
The up-and-coming Fed narrative is what I have called the "Great Unwind" – in Fedspeak, it is called normalizing the balance sheet. This new narrative is starting to exert influence – and though it hasn't overtaken the Trump growth narrative, it is growing in importance every day.
Here's the new narrative in brief: As the Great Recession was winding down in 2009, the Fed started adding massive amounts of liquidity (new money) to the market by buying U.S. government bonds and mortgage-backed securities (MBS).
Over many years, this swelled the Fed balance sheet by an amazing $3.5 trillion dollars. That's trillion with a "T."
The Fed will start "normalizing" its balance sheet – which means shrinking it toward the pre-crisis levels. In future updates, I'll dig into how it proposes to do this, but since this action is still some time off, let's focus on how this narrative is starting to exert itself.
A Blended Narrative
Right now, we're seeing something in the markets we haven't seen in a few years – a blended narrative – a major narrative giving way to a sub-narrative that will eventually take over.
Here's where a Venn diagram will help us understand what's happening with the narrative:
As you can see, I expect the narrative to change over time until the Great Unwind is all that matters to the market.
The narrative shift is just moving at a glacial pace toward the Great Unwind. It could take many more months to get there…
While we're in this "in-between" state, let's look at the two key mileposts that will tell us which narrative is exerting the most influence.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.