Markets/Econ
Aswath Damodaran’s thoughts on market levels— includes a link for a DIY S&P 500 valuation.
A familiar finance fable in UK bonds.
Now wait a minute, you say, especially if you got your degree at the University of Chicago. If people are selling in a panic and driving prices down, why doesn't Goldman or Blackrock stop playing ESG games for 5 minutes and scoop up the bonds? Well, they don't, at least fully, and at the very high frequency we're taking about. Collateral has to be posted daily. (Just why they don't is a very good question.)
Huw Pill: Recent developments in the economy and markets. This speech has been effective shifting the narrative away from debt monetization. But really the BOE could have avoided the whole mess by being appropriately hawkish.
…we are committed to avoiding pulling back prematurely.
Post Dobbs, the Fed should be more careful.
Druckenmiller interview.
Macro Musings podcast with Andrew Levin.
I think that it's very plausible now that the total cost of QE4 is going to approach $1 trillion. And when I talk about cost here, we're not talking about kind of paper losses. We're saying that the remittances that the Federal Reserve pays to the US Treasury, so this is real money that really matters for the debt and for tax obligations and government spending, okay, real money. Those remittances over the next 10 years are going to be about $1 trillion lower than they would be if the Fed hadn't done QE4.
related—Time to pay the piper?
The FOMC’s Committee on the Directive: Behind Volcker’s New Operating Procedures
“I keep coming back to the NY Fed speeches, in which I gave a rationale for spending more time on the monetary aggregates. It reached the point where we wanted to discipline ourselves. It was easier to nail our flag to the mast of the monetary aggregates than to continually fiddle around directly with interest rates, where you always had the danger of being too late. From the transcript, it’s clear why people were hesitant about raising interest rates directly. We needed some other tool to discipline ourselves. It was also a better message to the public. (Volcker (2008)”
Rick Rieder on Meb Faber’s podcast.
Short-Dated Term Premia and the Level of Inflation
To conclude, we have shown that historical estimates of term premia have tended to be high when inflation was also high. Given the recent rise in inflation, one might expect a commensurate rise in term premia. We find, however, that various measures of short-dated term premia have remained relatively small in magnitude, implying that current market prices do approximately reflect investors’ expectations for monetary policy over the near term.
The decisions made that led to the great European energy war of 2022 will likely go down in history as some of the greatest economic and geopolitical miscalculations in the history of mankind. They will join the Treaty of Versailles and the tariff wars of the 1930s in the basket of policy pariahs that future generations will be taught to avoid at all costs. How did we get here? How have such poor decisions been made on our behalf? I will leave it to future historians to work that out — probably when the archives are opened.
The US Inflation Bonanza for Sovereign Debtors.
At the end of 2020, the US government’s long-term fixed-rate debt was nearly $21 trillion, and the US monetary base (which includes the amount of currency in circulation) was about $5.2 trillion. While the full brunt of 2021-22 inflation (12.4%) falls on the monetary base, its unexpected component (7.7%) reduces the value of the US government’s debt, because debt holders are compensated with interest for expected inflation. The US Treasury thus nets an enormous $2 trillion reduction – nearly 11% of GDP – in the real value of its $26 trillion in inflation-exposed liabilities. Netting out the US Federal Reserve’s holdings of long-term Treasuries brings the figure down to 9% of GDP.
Today, it is unclear whether there is still a safe path between Scylla and Charybdis. But following two more 75-bps hikes in July and September, I worry that the Fed has given up on even trying to find it. Instead, like Odysseus, it has intentionally started to hew toward Scylla (secular stagnation), viewing it as the lesser of two evils. One no longer hears Fed officials cautioning that last winter and spring’s tightening has yet to ramify fully throughout the economy. Instead, the Fed has signaled another 1.25-bps’ worth of hikes to come before the end of this year.
Pace of Rent Increases Continues to Slow.
Rents are still increasing, and we should expect this to continue to spill over into measures of inflation. The Owners’ Equivalent Rent (OER) was up 6.3% YoY in August, from 5.8% YoY in July - and will likely increase further in the coming months.
Why does the financial sector account for only 8% of US GDP but 30% of US corporate profits?
Boaz Weinstein Reveals the Secret Trade That Helped Make Him Famous.
Politics/Foreign Affairs
5 Reasons For Democrats To Still Be Concerned About The Midterms. Related—The Problem with Polling Might Be Unfixable.
Christopher Caldwell—The Contradictions of Giorgia Meloni
How The War In Ukraine Might End.
The trouble, Goemans found, lay with the leaders who were neither democrats nor dictators: because they were repressive, they often met with bad ends, but because they were not repressive enough, they had to think about public opinion and whether it was turning on them. These leaders, Goemans found, would be tempted to “gamble for resurrection,” to continue prosecuting the war, often at greater and greater intensity, because anything short of victory could mean their own exile or death.
What If We’re Already Fighting The Third World War With Russia? Then we should stop.
From the Carnegie Endowment—Who Attacked the Nord Stream Pipelines? vs Diana Johnstone’s Omerta in the Gangster War.
Cyberwar in Ukraine: What You See Is Not What’s Really There.
Getting Serious About The Threat of High Altitude Nuclear Detonations. Related—Interactive Map where you can simulate nuclear activity.
The Anticipated Strong Representation of Foreign-Educated Returnees in Xi’s Third Term
Is China about to turn on Russia? Overwrought, but mentions that a gentleman named Wang Yang is likely to emerge as Premier, rather than Xi’s lackey—which I have heard separately. Supposedly that would be a win for more western/reformist CCPers.
Is China Running Out of Policy Space to Navigate Future Economic Challenges?
The self-help guru who conquered Brazil
In elections this Sunday, former president Luiz Inácio Lula da Silva is likely to triumph over current President Jair Bolsonaro. But the best way to understand the new Brazil, as well as to shed light on the workings of Brazilian politics, may actually be to leave Bolsonaro and Lula to one side and examine another candidate, a life coach and self-described theologian who, thanks to party wrangling, has been left without a legal candidacy.
Policy/Health/Miscellaneous
Elon Musk’s Texts Shatter the Myth of the Tech Genius.
Brett Favre, Welfare Fraud, and the TANF Block Grant.
As awful as this scandal is, the fraud and abuse on display in Mississippi is not unique to TANF and not caused by its block grant structure. The Government Accountability Office (GAO) estimated that from 2015–2017 the annual average amount of Supplemental Nutrition Assistance Program (SNAP) benefits (or food stamps) “trafficked,” meaning retailers taking a fraudulent profit, was $1.2 billion. The GAO also found that improper payments in Medicaid, including payments for services not provided, totaled $36.7 billion in 2017. Earlier this month, the Department of Justice charged a nonprofit organization in Minnesota with a $250 million scheme that took federal pandemic-relief money earmarked for a child nutrition program and instead pocketed the funds.
4,000 Years of Failed Price Controls.
Never say we’ll be seeing declining terrorist attacks, or school shootings, or serial murders. Never say a certain technology won’t advance very much. Never say it will be a quiet year, or quiet month, even in a certain domain (“it’ll be a quiet year for Asian geopolitics”). Never say something has reached a final form and won’t change very much.
I feel like I have been reading similar articles for twenty years—but hopefully it becomes a real thing this time. Airships Rise Again.
The Electric Purple Snake-Oil Machine. I want one. It might be the perfect placebo device.
Do you even lift, bro? Regularly Exercising With Weights Linked to Lower Risk of Death.