There is an aspect that gets lost in the sauce on occasion. The fed risk free rate specifically measures or capitalizes the risk of the US Government as an ongoing enterprise. More broadly, it capitalizes the expectation of risk tomorrow by discounting it to today. The zero interest rates policy held by central banks deliberately skews the capitalization of risk. There cannot be a day where the risk tomorrow (expressed as the e term) is less than the risk today. One is know. The other expectational. The entire enterprise of zero interest rates destroyed savers and bond holders in the economy and forced capital into the equity markets, vastly expanding them, sending indices up and giving the appearance of gains. I hold mixed feelings on the entire enterprise as duplicitous policy.
Thanks again for another great article. Instability is surely in the headwinds.
Your footnote regarding the definition of money reminded me of a great book, one of my favorites on money/finance, titled “The Natural Law of Money” by William Brough 1896. It’s incredibly insightful and evenly technical, like your articles. I believe you would enjoy this read. If you wish to check it out here is a link to a free pdf version: oll.libertyfund.org/title/brough-the-natural-law-of-money
As always, looking forward to next week’s piece. Have a good week.
JDEVO, Thanks for reading - I will have to check out this book! To be honest (and perhaps I shouldn't be sharing) I haven't read many books on monetary policy or finance in general (though I have a degree and professional experience in finance). I'm sure there is so much great stuff out there that could enhance my own understanding, and improve my writing here. Thanks for sharing.
In general, is there an advantage to having a small number of experts guiding the economy through their decisions (such as The Fed setting interest rates)?
Or is it normally better to have markets, in the sense of vast numbers of transactions by small economic entities, guiding the economy through the collective impact of the entities' decisions?
This is similar to a debate around the best form of government - authoritarian with highs degree of centralized control or some sort of democratic structure with checks and balances? A strong and effective dictator can mobilize a nations resources far more effectively to a single goal but how sustainable is that over a longer term, or with a lesser leader?
Strong dictators or central planners (nuance is required here, in my opinion) can easily be effective if their objective is to accumulate personal wealth and let the rest eat cake. On the other hand, if their goal is to advance society through traditional centralized planning they can easily fall into echo chambers, with those around them being fearful and therefore afraid to have thoughtful debates even in a closed circle. Something to consider is, what happens when centralized planning and immense data collection meet together? Can then a central authority be in a better position to make decisions? My opinion is that probably yes, although the question again is who would reap the benefits and how disproportionate would the reaping be? Would the average citizen be better off or would this lead to a disproportionate accumulation of power, similar to that of traditional dictators? Incentives matter, as it would likely be the central power that would determined that.
Then we have markets, which in theory are efficient as they are more akin to a "natural force" - the collective decision making of billions of individuals . Naturally, some of those individuals begin from a position of strength while other from a position of relative weakness - we are not all equal in front of a system (democracy) that not too long ago was a monarchy, a dictatorship etc. At the same time, we have checks in place that occasionally lead to huge failures that again, disproportional affect the least "powerful". My point is that an open market system is as good as its checks are. And those checks are on many occasions determined by people in power and therefore influenced by their incentives. Incentives matter.
I think it is extremely hard for someone to find absolute truth in a world with so much noise. Similarly, it is extremely tough to define which system is best in a world with so many inter dependencies, with so many ways to define success and so many subjective views.
Personally, the more I study, listen, experience and learn the more I realize that the unknown knowledge that lies ahead is ever expanding. What one can do in this situation is stay humble, be curious, ask questions and try to always keep their biases out of their analysis. I suppose this is kind of (at least partly) what the Bear seems to suggest when saying "look through the windshield, not the rear view mirror".
Having said all this, once more thanks to the Bear for attracting a little community that is willing to ask honest questions and engage in thoughtful dialogue. Amazing work.
How will the Treasury in the short term is stuck with a more familiar and pressing obstacle - raising the debts of wanting a position the was never intended to hold. Expect the spotlight to focus on the Treasury is a joke the spotlight always shine down upon its surfaces anyway right. You see it’s bigger than just having the final chapters ripped apart rather than one accepting the truth of the Facts. Treasury was betraying to have it all under control, and yet the stiff neck disgruntled sickness has crept back in. No one has ever focused on Treasury. Treasury has never been a factor to even hold weight against anything/anyone. Treasury job is to deal with the losses and finish collecting data. Falling apart at the seams but it was all fun a games before are they sure they don’t need a Dr.for trauma. Get over it .
Well written, fact based article. I'll be looking for your bull running handle. I also think it's time to start looking at equities as reaching a buying opportunity. Perhaps when large economy, dollar indebted EM defaults start making headlines we will see a turning point with the supply of credit and hence the registration of US assets...
(So I think Substack is doing a stupid glitch where comments are getting posted to the wrong articles - this has happened a number of times in the past couple weeks. I assume this was meant for today's post, The Year of the Bear?)
Thank you TLBS. You are right about my interest in your article" Has the Rally Peaked". I pay close attention to all your articles and in particular, topics about volatility. In my opinion, it is likely a volatility event should occur soon. The limited data available to me indicates the Fed has never raised rates this fast and by so much in the past. This should cause a significant amount of stress to corporate balance sheets in the present economic environment. However, it appears the Fed is controlling this risk by slowly winding down its balance sheet. Higher interest rates quickly affect the consumer but, a slow QT process appears to maintain stability in the bond market. As a result, I think stresses in the bond market have not translated to market volatility.
Thanks for taking of your time to share your thoughts about volatility and other economic topics. Happy holidays!
Thanks Chris! I'm planning to do a more thorough update on volatility soon.
Regarding balance sheets - no doubt that these rate hikes will be a problem for over-levered borrowers. Though, everyone took advantage of the low rates and easy credit over the past two years and refinanced and pushed out maturities. This means the impact won't be immediately felt but rather will be a big overhang in the coming years when these debts come due (assuming rates haven't been cut again by then).
Happy holidays to you as well, and thanks for reading.
Hello TLBS, thanks for the interesting article. When you reference option costs for hedging tail risk, typically how many months are you looking forward?
Hi Chris - I assume this comment may be in reference to the "Has the Rally Peaked"?
In any case - I hate to give specific advise, because it all depends on your risk tolerance and objectives - are you hedging or speculating? If the latter, I don't like to pay for too much time value, as tails happen faster than people realize - no more than 2 months, and often more like 1 month.
Thanks as always Bear, another great piece. Thanks for touching on the Vol Squeeze too, been pondering that one for a while now. I wonder what effect, if any, all those extra Trillions sitting in household checkable accounts are having on the inflation regime (and vol too for that matter). Though I would presume vol is driven more institutionally anyway. In any case, I have a hard time seeing inflation rolling over easily with that type of personal and accessible liquidity. Business checkable though is another story, no extra there really. I wish they published that particular data more to than quarterly and without the lag. Maybe it lives somewhere else accessibly but I haven't found it yet other than the feds data sets.
I semi-recently listened to a Sam Harris podcast with Peter Zeihan and Ian Bremmer discussing Zeihan's latest book "The End of the World is Just the Beginning" and am just now getting around to reading it.
If you haven't heard of it (or him) Zeihan is using demography, geography and history to paint a bleak economic future. THE END OF GLOBALIZATION. I'm not totally sold on the severity yet ... but folding some of the concepts into my mental model of the challenges of the coming decades.
This chili is an excellent pairing with Zeihan's cornbread. **What does monetary policy look like in a world with flat-to-negative population growth?**
I will have to give it a listen (I’m a fan of Sam’s podcast, and know Peter by name at least). Based solely on your description, I think I probably have a more rosy view of things over the longer term even as I often focus on risks in my writing.
I’m glad you continue to enjoy the chili :) also good to see who has been around from the beginning !
the main issue for the world is to adapt to a new interest rate environment that is not on steroid. Mortgages without the FED bid are now priced more correctly. the 10 year TSY is finding its equilibrium rate pricing in some term premium. Last comment, i hope the FED will not underestimate the QT impact that should be at least symmetrical to QE.
Is the 10 year finding term premium? It currently trades at a lower yield than a 1 month treasury! But I agree that it is ultimately healthy for the world to re-adapt.
Behind the curtain it doesn't look like QT has started. Check out RRP stats, balance of MBS. Def fishtailing when you tell everyone you're putting on the brakes at the same time you're pumping the gas. Facades are the preferred policy. CBDC is coming, and then the Fed CAN control the money supply directly. Wonder what piece of the pie they'll throw the banks when they take over their role in money creation?
With respect to QT - I've written pretty extensively on the topic, and would disagree with the conclusion. If you're interested here is probably the most in depth analysis: https://thelastbearstanding.substack.com/p/down-the-drain
Another simple proxy to see how much practical tightening has occured is to look at the cash assets of commercial banks, which you can see has come down substantially from its peak about a year ago. https://fred.stlouisfed.org/searchresults?st=cash+assets
With respect to the CBDC - I share concerns, though I don't see this coming in the near term especially considering much of the "shine" of crypto has worn off.
This is a great question - and I meant to post about it. RRP drawdown is the one I’m more focused on. It makes sense given that 1month yields have now risen above the RRP award rate, and seems to be that money is liquidity is flowing out as intended. This is good news for the market - but I will continue to watch and update all my analysis for readers going forward. TGA is more just natural fluctuation of the treasury debt issuance/maturity
There is an aspect that gets lost in the sauce on occasion. The fed risk free rate specifically measures or capitalizes the risk of the US Government as an ongoing enterprise. More broadly, it capitalizes the expectation of risk tomorrow by discounting it to today. The zero interest rates policy held by central banks deliberately skews the capitalization of risk. There cannot be a day where the risk tomorrow (expressed as the e term) is less than the risk today. One is know. The other expectational. The entire enterprise of zero interest rates destroyed savers and bond holders in the economy and forced capital into the equity markets, vastly expanding them, sending indices up and giving the appearance of gains. I hold mixed feelings on the entire enterprise as duplicitous policy.
Very well put!
Thanks again for another great article. Instability is surely in the headwinds.
Your footnote regarding the definition of money reminded me of a great book, one of my favorites on money/finance, titled “The Natural Law of Money” by William Brough 1896. It’s incredibly insightful and evenly technical, like your articles. I believe you would enjoy this read. If you wish to check it out here is a link to a free pdf version: oll.libertyfund.org/title/brough-the-natural-law-of-money
As always, looking forward to next week’s piece. Have a good week.
JDEVO, Thanks for reading - I will have to check out this book! To be honest (and perhaps I shouldn't be sharing) I haven't read many books on monetary policy or finance in general (though I have a degree and professional experience in finance). I'm sure there is so much great stuff out there that could enhance my own understanding, and improve my writing here. Thanks for sharing.
In general, is there an advantage to having a small number of experts guiding the economy through their decisions (such as The Fed setting interest rates)?
Or is it normally better to have markets, in the sense of vast numbers of transactions by small economic entities, guiding the economy through the collective impact of the entities' decisions?
This is similar to a debate around the best form of government - authoritarian with highs degree of centralized control or some sort of democratic structure with checks and balances? A strong and effective dictator can mobilize a nations resources far more effectively to a single goal but how sustainable is that over a longer term, or with a lesser leader?
I suppose incentives matter in all systems.
Strong dictators or central planners (nuance is required here, in my opinion) can easily be effective if their objective is to accumulate personal wealth and let the rest eat cake. On the other hand, if their goal is to advance society through traditional centralized planning they can easily fall into echo chambers, with those around them being fearful and therefore afraid to have thoughtful debates even in a closed circle. Something to consider is, what happens when centralized planning and immense data collection meet together? Can then a central authority be in a better position to make decisions? My opinion is that probably yes, although the question again is who would reap the benefits and how disproportionate would the reaping be? Would the average citizen be better off or would this lead to a disproportionate accumulation of power, similar to that of traditional dictators? Incentives matter, as it would likely be the central power that would determined that.
Then we have markets, which in theory are efficient as they are more akin to a "natural force" - the collective decision making of billions of individuals . Naturally, some of those individuals begin from a position of strength while other from a position of relative weakness - we are not all equal in front of a system (democracy) that not too long ago was a monarchy, a dictatorship etc. At the same time, we have checks in place that occasionally lead to huge failures that again, disproportional affect the least "powerful". My point is that an open market system is as good as its checks are. And those checks are on many occasions determined by people in power and therefore influenced by their incentives. Incentives matter.
I think it is extremely hard for someone to find absolute truth in a world with so much noise. Similarly, it is extremely tough to define which system is best in a world with so many inter dependencies, with so many ways to define success and so many subjective views.
Personally, the more I study, listen, experience and learn the more I realize that the unknown knowledge that lies ahead is ever expanding. What one can do in this situation is stay humble, be curious, ask questions and try to always keep their biases out of their analysis. I suppose this is kind of (at least partly) what the Bear seems to suggest when saying "look through the windshield, not the rear view mirror".
Having said all this, once more thanks to the Bear for attracting a little community that is willing to ask honest questions and engage in thoughtful dialogue. Amazing work.
Superb as always, thanks TLBS!
Thanks as always!!
sdsqdsqdsqd
nice
How will the Treasury in the short term is stuck with a more familiar and pressing obstacle - raising the debts of wanting a position the was never intended to hold. Expect the spotlight to focus on the Treasury is a joke the spotlight always shine down upon its surfaces anyway right. You see it’s bigger than just having the final chapters ripped apart rather than one accepting the truth of the Facts. Treasury was betraying to have it all under control, and yet the stiff neck disgruntled sickness has crept back in. No one has ever focused on Treasury. Treasury has never been a factor to even hold weight against anything/anyone. Treasury job is to deal with the losses and finish collecting data. Falling apart at the seams but it was all fun a games before are they sure they don’t need a Dr.for trauma. Get over it .
Well written, fact based article. I'll be looking for your bull running handle. I also think it's time to start looking at equities as reaching a buying opportunity. Perhaps when large economy, dollar indebted EM defaults start making headlines we will see a turning point with the supply of credit and hence the registration of US assets...
Yes it posted to the wrong article but certainly applies to all of your articles
You are a guiding light. Thank you for sharing your insightful thoughts
Thanks Cheri!
(So I think Substack is doing a stupid glitch where comments are getting posted to the wrong articles - this has happened a number of times in the past couple weeks. I assume this was meant for today's post, The Year of the Bear?)
Yes it was meant for this article you just posted… happy and healthy holidays to you and your family
Thanks again Cheri! Hope you have a happy holidays and a fantastic new year.
Thank you TLBS. You are right about my interest in your article" Has the Rally Peaked". I pay close attention to all your articles and in particular, topics about volatility. In my opinion, it is likely a volatility event should occur soon. The limited data available to me indicates the Fed has never raised rates this fast and by so much in the past. This should cause a significant amount of stress to corporate balance sheets in the present economic environment. However, it appears the Fed is controlling this risk by slowly winding down its balance sheet. Higher interest rates quickly affect the consumer but, a slow QT process appears to maintain stability in the bond market. As a result, I think stresses in the bond market have not translated to market volatility.
Thanks for taking of your time to share your thoughts about volatility and other economic topics. Happy holidays!
Chris
Thanks Chris! I'm planning to do a more thorough update on volatility soon.
Regarding balance sheets - no doubt that these rate hikes will be a problem for over-levered borrowers. Though, everyone took advantage of the low rates and easy credit over the past two years and refinanced and pushed out maturities. This means the impact won't be immediately felt but rather will be a big overhang in the coming years when these debts come due (assuming rates haven't been cut again by then).
Happy holidays to you as well, and thanks for reading.
Hello TLBS, thanks for the interesting article. When you reference option costs for hedging tail risk, typically how many months are you looking forward?
Thanks
Chris
Hi Chris - I assume this comment may be in reference to the "Has the Rally Peaked"?
In any case - I hate to give specific advise, because it all depends on your risk tolerance and objectives - are you hedging or speculating? If the latter, I don't like to pay for too much time value, as tails happen faster than people realize - no more than 2 months, and often more like 1 month.
Thanks as always Bear, another great piece. Thanks for touching on the Vol Squeeze too, been pondering that one for a while now. I wonder what effect, if any, all those extra Trillions sitting in household checkable accounts are having on the inflation regime (and vol too for that matter). Though I would presume vol is driven more institutionally anyway. In any case, I have a hard time seeing inflation rolling over easily with that type of personal and accessible liquidity. Business checkable though is another story, no extra there really. I wish they published that particular data more to than quarterly and without the lag. Maybe it lives somewhere else accessibly but I haven't found it yet other than the feds data sets.
Awesome article as always. The fed has no system of checks or balances and definitely needs one so that the benefits aren't one sided.
Thanks again Yunus!
I semi-recently listened to a Sam Harris podcast with Peter Zeihan and Ian Bremmer discussing Zeihan's latest book "The End of the World is Just the Beginning" and am just now getting around to reading it.
If you haven't heard of it (or him) Zeihan is using demography, geography and history to paint a bleak economic future. THE END OF GLOBALIZATION. I'm not totally sold on the severity yet ... but folding some of the concepts into my mental model of the challenges of the coming decades.
This chili is an excellent pairing with Zeihan's cornbread. **What does monetary policy look like in a world with flat-to-negative population growth?**
I will have to give it a listen (I’m a fan of Sam’s podcast, and know Peter by name at least). Based solely on your description, I think I probably have a more rosy view of things over the longer term even as I often focus on risks in my writing.
I’m glad you continue to enjoy the chili :) also good to see who has been around from the beginning !
Thanks as always for the feedback !
the main issue for the world is to adapt to a new interest rate environment that is not on steroid. Mortgages without the FED bid are now priced more correctly. the 10 year TSY is finding its equilibrium rate pricing in some term premium. Last comment, i hope the FED will not underestimate the QT impact that should be at least symmetrical to QE.
Is the 10 year finding term premium? It currently trades at a lower yield than a 1 month treasury! But I agree that it is ultimately healthy for the world to re-adapt.
Behind the curtain it doesn't look like QT has started. Check out RRP stats, balance of MBS. Def fishtailing when you tell everyone you're putting on the brakes at the same time you're pumping the gas. Facades are the preferred policy. CBDC is coming, and then the Fed CAN control the money supply directly. Wonder what piece of the pie they'll throw the banks when they take over their role in money creation?
With respect to QT - I've written pretty extensively on the topic, and would disagree with the conclusion. If you're interested here is probably the most in depth analysis: https://thelastbearstanding.substack.com/p/down-the-drain
Another simple proxy to see how much practical tightening has occured is to look at the cash assets of commercial banks, which you can see has come down substantially from its peak about a year ago. https://fred.stlouisfed.org/searchresults?st=cash+assets
With respect to the CBDC - I share concerns, though I don't see this coming in the near term especially considering much of the "shine" of crypto has worn off.
Hi 🐻. Thank u for your great post.
One question, what do you think about the recent drop in TGA and RRP account?
This is a great question - and I meant to post about it. RRP drawdown is the one I’m more focused on. It makes sense given that 1month yields have now risen above the RRP award rate, and seems to be that money is liquidity is flowing out as intended. This is good news for the market - but I will continue to watch and update all my analysis for readers going forward. TGA is more just natural fluctuation of the treasury debt issuance/maturity