The ghost of Arthur Burns

plus Europe and links

Maybe the Fed is a ‘five dimension chess player', like Trump, but my intuition is it’s trapped in a historical analogy. By vanquishing the ghost of Arthur Burns, they are getting further behind the the curve and possibly re-establishing the low rate conditions that are conducive to asset bubbles and inflationary fiscal spending.

Randall Quarles on David Beckworth’s podcast

So as we're going around, and I'm explaining, "Well, this painting, this is a chalk portrait of Marriner Eccles, and this is a chalk portrait of Carter Glass," and explaining to the young security guard the history and so forth, we get to Arthur Burns. And I say, "Now, this was painted by Arthur Burns," and I'm getting ready to explain to him who Arthur Burns was and why it's on the wall, and kind of bringing this young, new member of the Fed family under the tent. But before I can explain any of that, all I say is that this is by Arthur Burns, and the security guard says, "Oh, my gosh, that's the guy that let inflation get out of control."

As you said, it's a story that I sometimes tell to sort of give an indication of the commitment of the institution to controlling inflation, when people say, "Will this Federal Reserve really have the stomach to control inflation and see the unemployment rate rise and the economy be reined in?" And the answer is, the one great sin at the Federal Reserve that is on everyone's mind, from Jay Powell's to the brand-new security guard, is that you don't let inflation get out of control. My young colleague had no idea what the unemployment rate was in 1972, had no idea what the oil price was in 1972, had no idea what the political situation was in 1972, but he knew that Arthur Burns let inflation get out of control, and was a hiss and a byword in the building half a century later. This FOMC is not going to become those people.

The Fed couldn’t be clearer that they are judging the effect of policy with contemporaneous inflation readings.¹

Observation–Orientation–Decision–Action (OODA)

John Boyd, as I’m sure many/most of you know, was a total stud.²

He had a standing $40 bet with all comers at Nellis AFB that he could put them on his six and outmaneuver them for a kill in less than 40 seconds. He never lost the bet.³

Per Boyd, I think a simplified, but accurate, description of the Fed’s inflation OODA loop is:

Observation—Where did CPI/PCE print? Where are market indications of forward inflation?

Orientation—Is inflation perceived to be ‘out of control,’ either by the general public or the markets?

Decision—”This FOMC is not going to become those people,” i.e. decide based on their perception of how history will perceive their reaction to inflation.

Action—Hike rates

By waiting to hike rates until the balance sheet stopped growing, the Fed lost the initiative. The correct action now is to pause. Because they are playing catch up they can’t react quickly enough

The Fed doesn’t meet the threshold of supermaneuverability⁴ and won’t be doing this.

Employer OODA loops are shorter, here’s a good paywalled piece about tech industry hiring/firing. Excerpts:

Younger startups hitting the wall.

InVision: ~50% people laid off on Wednesday, 20th July. Close to 400 people let go at the once iconic prototyping toolmaker.

Invitae: 50% layoffs. Close to 1,000 employees will be let go at the genetic testing company, their newly appointed CEO announced. The company last raised $1.15B in April 2021. The valuation of the company nosedived after the company went public in January 2022: valued at $3.5B on IPO, and now the corporation is worth $530M. I am told software engineers are also to be laid off.

Olive AI: 30% of employees let go on Tuesday, 19th July. About 450 of the 1,400 staff wre fired. Many software engineers wre impacted. Olive AI was one of the best-known unicorns in the US Midwest and is a large employer in Columbus, Ohio. The company last raised $400M in June 2021, valued at $4B at the time.

Capsule Pharmacy: 30% of software engineers let go, and 13% of staff. The company last raised $300M in April 2021 and had a valuation of more than $1B.

Whoop: 15%, well around 60 people. The athlete-focused fitness wearable last raised $200M in August 2021 and was valued at $3.6B. In this deep-cutting layoffs they let go their CPO, VP of Software and about 10% of the software engineering team.

Blockchain.com: 25% of staff laid off, and closed their office in Argentina

So far, it is “only” VC-funded companies and some of Big Tech which have been impacted. For VC-funded companies, the reasons are clear: the venture capital market has dried up.

But what is making Big Tech react much faster than other companies? I’ll suggest this is because they are more nimble in how they both gather and analyze data, and in how they operate, compared to some more traditional companies.

This means Big Tech predicts a slowdown in business, based on data they have, and is implementing a slowdown immediately. Traditional companies either don’t detect changes in the market with such sensitivity, or they might have learned to take a longer-term outlook, and not worry about changing direction.

Don’t get me wrong, I’m all for eradicating the ‘bezzle.’ But popping the bubble, without supply side reform and/or balancing the US current account, takes us right back to liquidation or the zero bound. Self reinforcing weakness in the levered economy should be as concerning as inflation.

Europe

50 bps seems like a cheap quid for the TPI quo. In 2010/2, Euro break up was a real possibility. It seems inconceivable now, especially post TPI. As with almost everything else in the modern West, hard decisions are put off with monetization. As Willem Buiter puts it, here:

The question is not whether it is desirable to have an emergency asset-purchase facility managed by the central bank – the only entity in the eurozone with infinitely deep pockets for euro-denominated debt absorption. But why would the ECB create the TPI when it already has a perfectly adequate alternative: the Outright Monetary Transactions (OMT) program?

The answer is not very encouraging for those who worry about fiscal capture in the eurozone. The fiscal conditions attached to the OMT are much more robust than those applied to the TPI. With the TPI in place, member-state governments might now risk sovereign default rather than submit to the OMT’s conditions.

The provinces will be allowed to play sovereign games that serve as a populist pressure relief valve, but the EU is Sovereign and will enforce European law slowly, but absolutely. It’s easy to gloss over TPI as another Euro acronym, like an old half remembered New Deal program, but I think it marks a new phase in Europe. The European Council has a powerful new tool to further European consolidation.

Now that monetization of fiscal excess is a tool of political consolidation, I think it will get used. Putting aside the more immediate winter energy shortage, I don’t see why the Euro can’t trade more like the old ECU going forward.

This essay on French politics elucidates the ideological political stack in France and brings home that the only internal resistance the to the current iteration of liberal hegemony comes from the populist right.

the left-right divide has lost most of its erstwhile historical significance. Consequently, it corresponds, at present, to nothing more than what Guy Debord, in 1967, called the “spectacular sham struggles of rival forms of separate power.” […]

There is some freakout about the Italian elections—David Broder here. But except for the Brothers of Italy’s historical connection to Fascism, Meloni strikes me as a non-radical conservative. Here’s her CPAC speech. She presents stridently on social issues, but as noted here, is firmly ensconced in the liberal establishment.

Links

Possibly shitposting, but likely won’t age well.

Roshan Patel @roshanpateI

Just got unlimited cold brew and kombucha on tap for our office. It’s going to cost us $150k every 6 months. How do normal startups afford this?

Is crypto still in the denial phase of mourning? Rally Pushes Crypto Market Capitalization Above $1T

Crypto schadenfreude —“Many people lost a lot of money.”

Lord, grant me the folksy self confidence of Mike Novogratz—Billionaire Mike Novogratz says the crypto industry is suffering from a credit crisis - and that he was 'darn wrong' on leverage risks

Dominic Cummings on Liz Truss, link:

I gave Truss the nickname ‘human handgrenade’ when she worked in the Department for Education. She said this week it was a ‘compliment’ because she gets things done. No. It was because she caused chaos INSTEAD OF getting things done.

Boris is supporting Truss. Why? 1) He thinks it’s the best way to stop Sunak. 2) He knows Truss is mad as a box of snakes and is thinking, ‘there’s a chance she blows, there’s another contest and I can return’.

And with the human handgrenade, she may catastrophically escalate the war — remember she has defined the goal as pushing Russia out of Crimea, which if seriously attempted would be seen by the vast majority of Russians (including anti-Putin Russians) as an attempt to destroy Russia and could lead to nuclear weapons.

Woke Imperium: The Coming Confluence Between Social Justice and Neoconservatism

The emerging hegemonic posture and its moral imperialism are at odds with a sober and realistic appraisal of U.S. interests on the world stage, as they create untenable, maximalist, and utopian goals that clash with the concrete realities on which U.S. grand strategy must be based.

A radical plan for Trump’s second term

Now that the January 6 hearings have flopped, they are going to have to lock Trump up, or warm up the ol’ heart attack gun. It’s tough for me to visualize the establishment letting Trump back in 2024 so it’s only going to get weirder.

1. Governor Michelle Bowman (voter)

June 23 speech

"Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them."

Cleveland Fed President Loretta Mester (voter)

July 13 Bloomberg radio interview

With a 0.75-point rate hike as a minimum for the July meeting, "until we get and see convincing evidence that inflation has turned the corner, is on a downward path and is sustainably on a downward path, we just have more work to do."

Chicago Fed President Charles Evans

June 22 comments to reporters

A 0.75-point rate rise in July " is a very reasonable place to have a discussion" and would be likely if inflation doesn't moderate.

St. Louis Fed President James Bullard (voter)

July 15 speech

With inflation still very high, "the way we can react is charting out a course that's somewhat more aggressive over the second half of this year...It probably doesn't make too much difference to do 100 basis points here and less in the other three meetings of this year, or to do 75 basis points here and slightly more in the remaining three meetings for the year."

2. link to his Discourse on Winning and Losing

3. https://www.usafa.edu/app/uploads/Harmon54.pdf

4. https://en.wikipedia.org/wiki/Supermaneuverability