From the mailbag:

How does one apportion the market effects of the three-body problem between the narrative effects of central bank purchases versus the direct capital flows of central bank activities? And does the distinction matter?— @Hals_Ego

I don’t have a strong methodology here, but my best guess is that the Narrative effect on markets is an order of magnitude greater than the direct capital flows impact. Certainly when it comes to the equity market I’m very comfortable saying that, with a slightly reduced Narrative share for the UST market and a more reduced Narrative share for the MBS market.

I’m comfortable saying this because even in late 2013, Ben Bernanke was saying that the Fed’s Narrative effect on markets (what he referred to as “communication policy” and is more commonly called “forward guidance”) had already dwarfed the direct capital flows impact of QE. This was in his valedictory speech at the end of his second and final term as Fed chair. Amazing what people will cop to in their final public speech – i.e., George Washington and “no entangling foreign alliances” or (my personal fave) Dwight Eisenhower and “beware the military-industrial complex”. I mean, when freakin’ Dwight Eisenhower is telling you to watch out for the military-industrial complex …

Of course, the Highlander example (there can be only one!) of Narrative market impact dwarfing direct flow market impact is Mario Draghi in the summer of 2012 with his “whatever it takes” speech followed by his “let there be OMT” speech. It’s a ratio of Narrative/direct-flow market impact that will never be topped because the Narrative saved the euro and the European banking system (that’s not an exaggeration) and there were ZERO direct flows from the mythical Outright Monetary Transactions “program” that Draghi kinda sorta made up out of thin air.