I have belatedly revived my Youtube Channel, with two videos. The first elaborates on the points I made in my recent post about the state of the world—and my dissatisfaction of it—and the second updates my view on markets in line with points I made here, with a shout out to two other podcasts that I think you should check out; the BIP show and Odd Lots. I will try to do a video once a week, and I will think about uploading the MP3 files for people who prefer to listen, without watching. The point is that it’s impossible to start with an audio file and upgrade to a video, but the other way around is relatively easy. I am not willing to revive my Soundcloud account, though, but I think Squarespace supports an Apple podcast channel. Stay tuned. In any case, you head over to my Youtube channel and subscribe if you’re just interested in that type of content. Alternatively, I’ll post everything on the main blog.
Read MoreAs my previous post can attest, my mind has been focused elsewhere in recent weeks—and I am also preparing a my next long-form essay to boot—but I thought that I’d have a peak at markets all the same. The Fed’s (non)decision on yield curve control came and went without any significant shift. The FOMC has now locked down the funds rate until the end of 2022, at least, more or less in line with what markets were already expecting anyway. That said, the shift to “time-contingent” forward guidance—over 30 months no less—is a significant step. It caps a remarkable transition from a Fed on auto-pilot in late 2018—with the 2-year yield aiming for 3%—to one now “not even thinking about thinking about raising rates.” A lot of water has gone under the bridge since then, but it’s difficult to escape the conclusion that the shift in U.S. and global monetary policy over the past 24 months is fundamental. The idea of a central bank put was born a long time ago, but it’s difficult to imagine a version stronger than its current form. Quite simply, policymakers wonʼt tolerate, and canʼt afford, tightening financial conditions, of any kind, and over any time horizon, however short and temporary. I have spent considerable ink on these pages arguing that this makes the rebound in equities, in the face of a crashing economy, more-or-less reasonable. In fact, it’s normal for equities to exhibit their strongest return-profiles early in the rebound, as a positive function of sharply rising excess liquidity as policy shifts, but also simply thanks to a low base. After all, it has to pay for those with the guts to buy at the lows.
Read MoreI have been warming up to this post for a few weeks, even if what’s being said mostly isn’t me saying it. As I have argued on previous occasions, it has become customary to claim that the world is going to hell in a hurry, and that the only solution to this problem is to tear civilisation down, and start anew. I am on record for rejecting both these hypotheses, though for the sake of argument, let’s say that I concede the former. Let’s say that I accept the premise that the way we’re doing things—capitalism, globalisation etc—is in need of fundamental re-design. What would be the most important prerequisite for such a project to succeed?
I’d argue that at whatever level of society such an endeavour is made, it can only prevail if everyone shares an objective method for sorting fact from fiction, truth from false, and sense from nonsense. Without such tools, any such project, at any degree of ambition, would fail. Luckily, humanity has powerful tools at its disposal for such inquiries in the form of science, technology and epistemology. Coupled with good faith, tolerance, compassion and mutual respect, I think that we could achieve just about anything that we set out to achieve. So, what are our chances? Based on the recent evidence, I’d say; slim to none.
Read MoreThe jury is still out, but I reckon that last week’s price action provided a foundation for markets to finally get an answer to the question that’s on everyone’s mind. The sustained climb in equities, and precipitous decline in the dollar, are interesting in their own right, but am keeping my eyes on the US bond market. The long bonds sold off steadily through the week, a move that culminated with Friday’s curveball of a NFP report—payrolls rose by 2.5M breezing past the consensus of a 7.5M fall—and a further leap in yields. All told, the US 10y rose by almost 30bp last week, to just under 0.9%, and with the front-end more-or-less locked, the 2s10s and 2s5s steepened to 70bp and 30bp, respectively, which is the widest since early 2018. A closer look at the chart won’t really raise any eyebrows. Sure, the curve is steepening, but it’s not like the move is unprecedented, and the curve is still overall quite flat. In the present context, however, last week’s move is a clarion call to the Fed. Will they allow (long-end) bond yields to reflect the deluge of debt issuance, and associated economic rebound, or will they, as some have suggested, put the Treasury market on a “war footing” via a yield cap? In other words, it’s do or die for the decision on yield curve control. Of course, that’s not entirely true. The Fed has been waffling on this issue for ages, and there is no guarantee that they won’t continue to do just that. That said, I have to say that last week’s squeeze in bonds offers a very tasty and clear setup for this week’s FOMC meeting. Will the Fed let long yields run or will they put a lid on them, either verbally, or via an outright YCC announcement?
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