Was I the only one that got major CMT vibes (not CFA) from Kevin Warsh yesterday?

This passage gave it away for me:

“Financial market prices are probably the most important source of information to guide central bankers. But when all financial markets are doing is reflecting back what we've said then we're taking the most important source of information and we are being blind to it. I'd like us to create a system where those blinders come off. Where markets are following data that they efficiently think is reliable. They'll be watching data, we'll be watching data, they'll come with better information through market prices to us and we can make more informed decisions.”

It was that last line that really did it for me.

I am aligned with Warsh on the idea that there is an enormous amount of information in market prices. That’s due to the phenomenon of The Wisdom of Crowds. I wrote about this idea here, but the general concept is that “the aggregated opinions, estimates, or decisions of a large, diverse, and independent group of individuals are often more accurate than the judgments of any single expert within that group.”

Here’s my read: Warsh is conceding that the collective judgement of market participants across the globe, assuming those participants have diverse opinions, skillsets, backgrounds, time horizons, etc, will be a more accurate guide for monetary policy than any single person's judgement on the FOMC.

In other words, his cues will come from the bond market, not a PhD sitting in the chair next to him.

Three charts for you guys today.

1/ 10-year yield by Fed Chair.

Here’s what stood out to me: since Volcker, the 10-year yield has been lower at the end of every Fed Chair’s term vs where it started (besides J Pow).

2/ 10-Year yield one year leading into new Fed Chairs vs one year after.

I have one takeaway here: we need to consider the absolute level of yields at the start of each term to start drawing comparisons to past Fed Chairs.

Warsh is taking over at a time when yields are elevated relative to recent history, not the full history.

3/ S&P 500 one year before and after new Fed Chairs.

It’s a mixed bag, and keep in mind I only went back to 1970, but generally things look solid after a new fed chair begins.

We have the returns broken out for our advisor clients at Exhibit A.

The average 1-year forward return across all of these instances is 8.0% with an average -17.5% max drawdown along the way.

Some volatility along the way, sure, but overall solid one year out.

That’s all for today. Thank you, as always, for reading. I’ll be back charting for you next week!