Each Sunday I compose a list containing the most thought-provoking and interesting content I’ve consumed during the past week. Primarily as a way to keep inventory of material that influenced me and my way of thinking.
Papers/Notes
Risk Update: March 2024 – “Divergence” by Convex Strategies.
The issue of ever more funding needs seems to be a particularly active topic in Europe. Former Governor of the Bank of Italy, former Chair of the Financial Stability Board, former President of the ECB, and former Prime Minister of Italy, Mario Draghi, has been appointed to head up an EU competitiveness task force, presumably because he was overseeing much of the past decline in competitiveness. . . . The inevitable solution, though not something that everyone is prepared to get behind, is a push for more EU “common debt”. The implications of just these sorts of issues was touched upon in a speech by current ECB dignitary, Isabel Schnabel. Ms. Schnabel gave a speech neatly titled “R(ising) star?”. One of her key explanations for a growing belief that r*, the so-called natural rate of interest, has increased, is that under the ‘savings-investment hypothesis’ the need for massive investment “towards a climate- and nature-preserving economy may in itself necessitate investments comparable to what was required to rebuild the European economy after the Second World War.” “Such investments will be particularly large in the EU, which has been lagging the United States and China markedly over the past years. Considering that part of these massive overall investment needs will be government-financed, and that, in the new geopolitical situation, defence spending may have to be significantly stepped up, public debt burdens are likely to rise. Higher net issuance, in turn, may face a shrinking supply of global savings, as a gradual retreat in globalisation may reduce current account surpluses.” This is precisely the battle to fund government finances that we call The Hunger Games. To Russell’s point from above, who is going to provide those funds? US savers? Japan savers? China savers? Probably not. More likely, trapped European savers.
I think we can take it, yet again, as the ECB is going to buy the bonds. The good old days of a central bank with a very clear central focus on maintaining price stability continues to erode with many many more tasks falling onto their plate. Oddly, having significantly failed at maintaining price stability in line with their stated target, their revised framework seems to emphasize everything but their previous core tenet.
The Indispensability of Risk by Howard Marks. Audio version.
You shouldn’t expect to make money without bearing risk, but you shouldn’t expect to make money just for taking risk. You have to sacrifice certainty, but it has to be done skillfully and intelligently, and with emotion under control.
Writings/Essays
10 Popular Questions about Monetary Policy by Dario Perkins.
Of course, in principle, it is possible that the pure income effects could be net positive – particularly in the short term, if debtors have termed out their loans and deposit rates move quickly, or governments face large/immediate rollover needs. But even here, the sceptics of monetary tightening miss an important point: the marginal propensity to consume of borrowers is around three to five times higher than that of savers (that is why they are debtors!). So, if you take money away from private debtors and give it to bondholders, you are still generating a net monetary squeeze (this is called the “redistribution channel” of monetary policy). In short, the whole idea that higher rates are stimulative is wrong because it is based on a partial assessment of how monetary policy works.
To sum up, “fiscal dominance” sounds cool, but it is not what we have today. I prefer the term “fiscal prominence”. This is where governments will play a more active role in the economy than they did in the past (through larger deficits and strategic industrial policies) but this does not lead to a large/persistent inflation overshoot or an eventual budgetary crisis. Instead, we have just stumbled onto a more reflationary fiscal-monetary policy mix than we had during the 2010s. And to the extent a higher-pressure economy will boost productivity, this could even be a good thing.
Bedtime for Bonds by Harley Bassman.
As late as September 2021, the FED’s “DOTs” projected a FED funds rate that would remain near zero for all of 2022 and reach just 1.8% by the end of 2024. Moreover, their “long run” policy rate was targeted at 2.5%. As such, I do have a morsel of sympathy for the top dogs at the banks who bet the ranch on FED Chairman Jerome Powell’s “promises”. That said, I will show absolutely no pity for the risk managers. Situations such as these are the sole reason you have that job: “You are the designated driver”.
Podcasts/Conversations
Peter Thiel on Political Theology, Conversations with Tyler.
A Conservative Communist’s Take on Global Capitalism and Desire (Zizek, Marx, Lacan), Philosophize This!
Jerry Peters, Managing Partner of Smithbrook, Alpha Exchange.
Teppo Felin on When Prediction Is Not Enough, EconTalk.
Long vol, short prediction models 