The Mystery of the Dots

In the spring of 201- I had not seen Mr. Sherlock Holmes for more than four years.  My medical practice, which had been booming a few short years previously, was somewhat lacklustre since the epidemic of pecunia refrenata had driven so many out of the City.  Although my small roster of regular patients was sufficient to keep me in modest comfort, I often cast a wistful thought back to the days when I shared Baker Street rooms and the occasional adventure with my friend.

Holmes, meanwhile, had won global renown for his ingenious solution to that infamous affair with the QE2 and QE3.  The crowned heads of Europe regularly consulted him on matters of international importance, and he had even become something of a sensation in the gutter press.  I thought that some day he might come to call on me between cases, but sadly he never seemed to have the time.

One Wednesday afternoon in late March I had an appointment with one of my occasional patients, an elderly fellow named Mr. Jartholomew Axgrind.  This gentleman  possessed a shock of white hair and walked with a stoop, but boasted a wiry physique that would have flattered a man two decades his junior.   Cantankerous at the best of times, he was in a particularly foul mood that afternoon for someone so well-preserved as he, refusing to even let me apply a stethoscope to his surprisingly muscular chest.

"My dear sir!" I exclaimed, "if you do not wish me to examine you, perhaps you should find another doctor to consult!"

"Harrumph," he muttered, seizing his battered greatcoat and striding towards the exit, "perhaps I will.  But Watson," he said, pausing at the doorway as his voice strengthened into a familiar tone, "do you think he'd be interested in helping me with a case?"

"Holmes!" I cried, as Axgrind's stooped figure straightened to form the familiar rigid bearing of my friend.  "My dear fellow!  How have you been?  But do you mean to tell me you've been Axgrind all along?"

"I see the last few years have not dulled your powers of observation, Watson," he replied, shaking my hand warmly.  "Indeed, I took on the character of the ill-tempered Mr. Axgrind to afford me the opportunity of looking in on you every so often."

"But Holmes, why the ruse?   You know you were always welcome here!"

"Of course, Watson, but would Mr. Axgrind's fee have been as welcome if offered as charity?"  It was true that Axgrind's pecuniary generosity had always seemed a stark contrast to his irascible character, and that the income from his quarterly visits had been vital in maintaining the practice as a going concern. 

"Ah, yes Holmes, well I am very thankful indeed.  But what's this you say of a case?"

"Watson, my friend,  I received a very interesting telegram this morning that reminded me of a few all of our old adventures.   Tell me, what do you make of it?" he said, handing over a folded slip of paper.   I took it and read the message:

"Deuced if I know, Holmes.   What's this nonsense about moving dots?  I can make nothing of it, I'm afraid."

"Capital, Watson!" exclaimed Holmes.  "Scintillating!  Every single item of importance has eluded your observation."

"How so?" I inquired, wondering what even so brilliant a detective as Mr. Sherlock Holmes could make of such a cryptic message.

"As I mentioned, I received this cable this morning.  Observe, Watson, that it has been sent from Washington, DC in America.   It was, composed, therefore, in the middle of the night by the sender, this Yellen.  Who sends a transatlantic message at that hour?   Someone who is agitated in the extreme and cannot sleep, and finally resolves to consult a higher authority.   Note also that Western Union offices are closed at that time of night, and yet this person was able to access a telegraph.  That, combined with the sender's location, is suggestive of somebody that is highly placed within official circles in America.  Finally, the mention of the importance to the world economy implies that the sender is involved with business or finance of some kind.  I can think of eleven possibilities, but the one that seems most likely by far is that the sender is an official with the Federal Reserve, America's central bank."

"Genius, Holmes!  Now that you mention those things, they seem obvious."

"They are, if you know how to look."

"But what of the dots?" I asked, stroking my moustache. "You haven't mentioned them."

"Facts, Watson, we need facts!  Speculation without them is a sure path to error.  Fortunately, this Yellen has arranged transport to London and will be at 221B Baker Street at 11 am sharp tomorrow.  If you'd do me the honour of sitting in on the meeting, I am sure that we'll both find the experience stimulating."

"Naturally, Holmes!   Nothing would delight me more!"

"And now, what do you say to a nice side of mutton and a glass of claret at Rules?"

I awoke the next morning with something of a sore head.  Holmes had regaled me over dinner with stories of his adventures since I had last accompanied him, and also described the contents of his latest monograph- volatility forecasting in the context of a zero lower bound.  A glass of claret became a bottle, and one bottle became three before we stumbled out onto Maiden Lane and made our way to our respective quarters.

Mrs. Hudson welcomed me warmly when I rang the bell at Holmes' Baker Street chambers and ushered me into the sitting room at five minutes to eleven.   The famous detective appeared lost in thought and silently gestured at me to take a seat, which I did in one of the comfortable easy chairs that flanked either side of the settee.   I knew from long experience not to disturb my friend's reverie; such was the intensity of his concentration that any attempt at conversation on my part would have proven fruitless.

At 11 am sharp, the bell rang and Mrs. Hudson ushered our visitor up the stair.

"Ha!" muttered Holmes.   "A small person, as the fourth stair barely made a creak!"

This deduction was proven correct when our client entered the room.   Standing barely over five feet in height, a bowl of white hair surrounded a jovial-looking, red-nosed visage.   She (for our visitor was indeed a woman) looked much as one might picture the wife of Father Christmas, barring the fact that her attire was drab and gray rather than merry and red.

"Please have a seat, Ms. Yellen," said Holmes, gesturing to the sofa.

"Thank you, but I prefer the chair," she replied in a voice that sounded more appropriate to a Brooklyn deli than a London sitting room, and installed herself on the seat facing mine.

"Now madam, what can we do for you?"

"Well, Mr. Holmes, in December I received a strange diagram on my desk at work.  I didn't know what to make of it, for it seemed like something a child might draw as a doodle while talking on the telephone.  In speaking with my colleagues, it seems as if they all received a similar image at the same time as I did.   It was quite a sensitive period at the office as we were focused on- well, the details are not important, but starting to wind down a big project that had been an important part of our working lives for more than a year.

"No one paid much attention to these diagrams, which seemed quite meaningless.  Indeed, our target customers seemed thrilled that we were winding down our project, and things couldn't have gone much better...."

"Do you by any chance have a copy of this diagram, madam?" interjected Holmes.

"Certainly, Mr. Holmes.   I know how particular you are about evidence, and I can swear to you that this diagram is exactly as it was when it appeared on my desk."   She took a small sheet of paper from her handbag and passed it over to Holmes.   He studied it silence for a minute then handed it to me.  It looked like this:

As I handed it back to Holmes, Ms. Yellen resumed her story.  "A couple of weeks after we received the diagram, however, things started to go a bit wrong.  My boss become agitated, and the value of our most important product started to decline against those of Japanese and European competitors.   Our stock price fell sharply in early January for no reason at all.  Worst of all, our Chairman abruptly left his post at the end of that month, leaving me in charge.

"For a while after I assumed control, things seemed to return to normal.  The value of both our products and our share price rose again, and everyone seemed fairly happy despite the fact that snow had disrupted a lot of production over the first few months of the year.  While this meant that I couldn't hire as many people as I might have, on the whole things were looking pretty rosy as recently as a few days ago.

"Then, I received this on my desk."   She fished into her handbag once more, retrieving a half-eaten knish and putting it on the end table.   She then plucked a second piece of paper from the bag and handed it to Holmes.

He peered at this paper for a full ninety seconds, then compared it with the first one for another minute or so.  "What do you think, Watson?"

"Frankly, Holmes, it borders on the grotesque.  I confess I can make heads nor tails of these little dots, save that they appear to be a bit higher in the second diagram than in the first.  If anything, it reminds me of the adventure of the dancing men, which if memory serves also involved America."

"Yes, and with tragic consequences, if you'll recall, Doctor.  Tell me, Ms. Yellen, has anything untoward happened since you received this second diagram?"

Our client sighed and slumped in her chair.   "I'm sorry to say that it has, Mr. Holmes.   Although my colleagues have once again claimed that these dots can mean nothing, and that there is no significance in their movement, as soon as we got the diagrams, things have started turning south again.  This time, it's the value of our bonds that have plummeted.  I mulled over the problem for a considerable period but could come up with nothing to do, so thought I had better consult an expert- you."

"Very interesting, very interesting indeed, Ms. Yellen.  I am much obliged to you for bringing this  curious matter to my attention.   Allow me to think on it for while, so I suggest you return here at the same time tomorrow.    In the meantime, you might wish to see the sights of London.    I hear Threadneedle Street is very interesting these days."

As Mrs. Hudson ushered our guest downstairs, Sherlock Holmes looked at me with a glint in his eye.   "This is a real corker, Watson, at least a two pipe problem.  Be a good chap and fetch me a copy of the Financial Times and The Economist  from the corner shop, will you?"

While strolling on the familiar stone of the Baker Street pavement, I found myself wondering what meaning Holmes could possibly find in those bizarre, and quite possibly sinister, dots.


To be continued.....
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Click here for comments
April 14, 2014 at 1:15 PM ×

All those dots will begin to drop the closer the supposed day of reckoning gets. The brain trust at the Fed will remain overly enthusiastic right up to the point that they can no longer deny the reality of the hobbled global economy.

April 14, 2014 at 2:07 PM ×

Well, taking a view from my chair now, I'd say it's just another distraction from the point of putting in a couple days of serious analysis into the situation.
Let's face it, we've made it this far after such an disastrous choice of innovative investment instruments which of, do you really think a game of poker dots is going to bring down the house?
The rational Sherlock Holmes might be better to not read the papers and cancel future planned involvement with clients that have a propensity to amuse even the grumpiest of critics in regard to their choice of investments in real estate and space travel.
No, Watson had the right idea , just wait for the right opportunity to walk right on in through the front door...poor Watson, he'll always be a romantic at heart, he must have some viking in him! :)

abee crombie
April 14, 2014 at 3:10 PM ×

lol, nice post.

Perhaps we should take a stab at Draghi's dilemma as well.

"I have a bazooka in my pocket I can assure you", summer 2012. " The Euro will not fall apart"

"Hey, I really have a bazooka, and I may use it, so depreciate my currency you hounds" Spring '14

April 14, 2014 at 3:36 PM ×

" Someone who is agitated in the extreme and cannot not sleep,"

I thought here is a typo.

A good story and eagerly waiting for the end.

Macro Man
April 14, 2014 at 3:39 PM ×

Doh! No matter how many times you reread something....

Dismal Scientist
April 14, 2014 at 4:03 PM ×

Love your work. It is good of the Fed to give everyone in the equity markets no reason to go to work until after the St Leger, this early in the year. Who'd be a broker ? Death by a thousand cuts...

April 14, 2014 at 8:53 PM ×


April 14, 2014 at 9:41 PM ×

OK, so the dots (distribution of rates expectation) moved a smidge higher. In the next episode (spoiler alert!) they go lower again, after people realize that if they were to go higher, it would violate the Fed's primary mandate, which is to avoid asset deflation at all costs. And they all lived happily ever after.

April 14, 2014 at 10:31 PM ×

Wow, the activity has really picked up here lately. I am grateful!

Respectfully, all incredibly knowledgeable market wizards,

What about the end game? With wordings from ECB that seemed like an impossibility just two years ago it seems that we are only in the very beginning of the new monetary regime. If we are still guided by established inflation figures there is QE many years to come. How can one be negativa any asset class in that environment? Real assets will after all be the least dirty shirt and since no shirt is allowed to fail/depreciate, real asset classes are a pretty nice catch.

What am I missing?

April 15, 2014 at 7:19 PM ×

Daring Insider Post, but now that it is public I'm going all-in on Threadneedle Street futures, and thank you profoundly for finding a way to put my three daughters through college!