Just to level-set, the relatively calm market reaction in the US is one thing that has allowed the conflict to drag on for so long. Probably no other president has kept score via tickertape like Trump, and commentators had been trolling him for nearly a year with the “TACO trade.” But with the US market caught squarely in the AI mania, valuations were able to slide while leaving stocks up over 9% (and double digits earlier this month). Crude prices meanwhile have been stage-managed to an impressive degree, with front WTI peaking up 68% five weeks into the war, and Tuesday falling to the lowest level since hostilities began. Obviously, most of us are unaccustomed to gold losing ground in wars, but gold is money, and when countries holding it in reserve suddenly are short on export cash (or need money to cover a higher energy bill), liquidation results. Perhaps the most absurd change on its face is the 44 bps tightening in high-yield spreads which have contracted to 266 bps over USTs. Despite a flood of AI-related issuance IG has tightened as well. Sovereign yields are higher but notably almost all of the increase is driven by rising short rate expectations rather than inflation.

As I cautioned when I first wrote about this 3-½ months ago, “I am not a geopolitical expert, and I do not know what is going to happen.” My BLOT was that for geopolitics “most investors, and any American investor can safely ignore it.” That said, there’s been many surprises for me during this saga, though I would characterize losing my “no boots on the ground” call as a technicality1.

For years the Strait of Hormuz was the ultimate deterrent for Iran, and macro strategists often warned of the catastrophe that could follow choking off Middle East energy supplies. Following the 2011 Arab Spring, Iran once again became a focal point for energy markets. Between 2009 and 2011 Israel conducted operations to stunt Iran’s nuclear development including cyber warfare against enrichment facilities and missile sites and an assassination campaign against the country’s nuclear scientists. Late that year Iran’s navy conducted drills in the Strait that heightened fears the then-40% of globally traded crude traversing the channel was at risk. At the time with crude around $100 per barrel The Schork Group suggested a closure could spike oil to $140, while some Iranian hardliners were cheering for oil to reach $250. A former oil major CEO warned closure of the Strait would be “cataclysmic for the oil price and the economy.”

Obviously, a lot has changed since 2011, in particularly America’s energy independence. The amount of petroleum production in the US has doubled in the last 15 years to 5x that of Iran’s. While Hormuz remains a critical chokepoint the portion of daily petroleum traffic is half of what it was in 2011.

While oil markets and related prices predictably spiked, the magnitude was not as severe as many feared, and prices recovered faster than expected. As the administration has worked this week to finalize its plan for a plan the sniping has included charges the US allowed more transit in the Strait than previously claimed. The Times of India reported the US secretly blessed Qatar’s protection payments that sent billions of dollars to Tehran to secure safe passage for their tankers through the Strait.

The surprising weakness of oil prices amid the ongoing conflict was credited to demand destruction, stockpiling and efficiency in China, and the tapping of global reserves which has included a record draw in America’s Strategic Petroleum Reserve (the 12-week 18% drawdown is unprecedented).

After the Covid experience most everyone was on the alert for downstream effects; war with Iran is the kind of event that can launch a hundred Odd Lots podcasts2. Their fertilizer show posted two weeks after war began, and rising prices amid lower ag contracts still is squeezing farmers. Incredibly, urea prices have fallen below their pre-war level3.

Oil markets believe the president: 40th time’s the charm. Oil prices plunged on Tuesday on news the two sides agreed on a Memorandum of Understanding to perhaps agree on a permanent ceasefire. In some sense, markets seem to believe the deal is real because on its face it’s so good for Iran.

At the start of the conflict the definition of what constituted a good deal with Iran was clear:

1. No nuclear materials and the cessation of the nuclear weapons program

2. No ballistic missile program

3. No funding of international terrorism

4. Freedom of navigation through the Strait of Hormuz

The administration has sought to keep details of the MOU secret. Just like Nancy Pelosi’s approach with ObamaCare, they want to sign the deal before we find out what’s in it. From a practical perspective the administration likely is trying to prevent Iran from publicly re-trading them in real time. For months now President Says Things will make a claim about something Iran supposedly has agreed to only for Bloomberg to report minutes later that Iran denied it. The most notable thing about the outline leaked last night is that the MOU is merely a framework for a 60-day negotiation period.

The most controversial and humorously panned part of the framework involves sanctions relief that would see cash flow to Tehran. First, it must be said that President Obama did indeed send pallets of cash to the mullahs on the same day Iran released four American prisoners and accepted the administration’s JCPO(S)4. Over the years apologists have seized5 on memes that conflate releasing frozen assets of much higher value with the cash drop in an attempt to muddy the waters. The MOU includes a clause concerning $300 billion “for the rehabilitation and economic development of the Islamic Republic of Iran,” which sounds an awful lot like war reparations.

While VP Vance went on a media blitz to assure the public that reconstruction funds would not come from taxpayers, it’s a distinction without a difference when it comes to funding global terrorism. Money is fungible; funds released (and sent) to Iran by the Obama administration surely funded their terrorist proxies and so would funds directed to them by Trump. Vance simply sounds naïve describing the new “moderate” negotiating partners who want to “turn over a new leaf” in the relationship. Former IRGC commander Ghabliaf purportedly will sign an agreement with Vance on Friday. You can hardly blame President Obama for taking a victory lap. The only thing that saves Trump’s plan from becoming JCPO(S) Part Deux is point 8 which states Iran “will never produce nuclear weapons.” Obama’s deal included a series of sunset provisions that could have set Iran on the path of a nuclear weapon by 2031. Point 8 is a laudable goal but if it’s based on more than a pinky promise that’s unclear.

On almost every conceivable level this foreign misadventure appears to be a failure for Trump. Of course, I’m mindful that no one in public office has ever wrestled more victories from the jaws of defeat than ol Donny Trump. If the deal is as good as it sounds for Iran, I suppose there’s a chance it will happen, but I remain skeptical (please remember I’m not a geopolitical expert). It’s unclear to me why Iran couldn’t simply continue this low-grade war through the US midterms. It also seems likely that Trump’s decapitation strike in February made the nuclear program existential for the ruling Islamists in Iran. Two weeks ago, Trump publicly intervened in Israel’s war against Hezbollah, essentially protecting a terrorist proxy on behalf of Iran. The first point in the MOU mandates “an immediate and permanent end to the war on all fronts, including Lebanon,” which is where Israel has been engaging Hezbollah. Trump’s influence over Israel is no doubt strong, but Israel didn’t make it 78 years by declining to defend themselves. Although my gold holdings would applaud an end to hostilities, I don’t think oil is in a new bear market, and I highly doubt peace is about to break out in the Middle East6.

I’d recently commented on the Rubric private credit critique that made the rounds a couple of weeks ago, and over the weekend I retweeted a rando’s tweet storm about some of the sketchy things held in BDCs. This angered several levered finance bros who endeavored to educate me. In “Brian’s” case it was because of the admittedly provocative statement that some private credit borrowers essentially exist to be borrowers. In the event I just conceded that “Brian” had it right and I just don’t know what I’m talking about, but it made me interested enough to spend more time on the topic.

As ever, none of this is investment advice. If there’s anything that intrigues you about publicly traded BDCs the best coverage I know is Finian O’Shea3 at Wells Fargo. Despite having no understanding of PE seller dynamics or M&A, I have personal exposure to some public BDCs as well as private equity, and nothing referenced herein is specifically4 about any of those. Did I mention none of this is investment advice?

Each quarter O’Shea ranks his coverage universe along several metrics including spread duration, leverage utilization, effective leverage, expense ratio, revenue quality, and credit loss rates (to name several). As the exhibit above shows, names can move around, but there’s generally some stickiness to the ratings since it focuses on quality; this is especially true for the best and worst quartiles.

Above you can see the relationship between Wells Fargo’s score and the average price-to-book5. The five-year average P/B for quartiles two and three are very similar, but the difference between the top and bottom quartiles (1.10x versus 0.82x) is significant at the 2% level (p-value of 0.0166). When it comes to closed-end funds I think one common mistake is trying to buy dollars for 90 cents instead of trying to buy 90 cents for 80 cents. That’s because as an investment vehicle CEFs are very expensive, to the point they probably should not exist as original issue securities. Within BDCs, going down in quality in pursuit of cheapness can be very dangerous.

Recently Rubric Capital’s Q4 letter made the rounds because it opens with a 14-page spirited takedown of private credit. Broadly writ, private credit enjoyed something of a renaissance in the years after Covid, extolled as almost magical by some. Some proponents even say the quiet part out loud, trumpeting what Cliff Asness labeled volatility laundering as a feature. Go back far enough and this applied to the public high-yield market. There was a time when HY bonds were so illiquid that irregular trading required the use of grid pricing for month-end marks (sound familiar?). This led to such a high autocorrelation between prices that it was foolish to use monthly rather than quarterly returns to calculate volatility. You can still see this in the long-term6 volatility for high-yield bonds which is 8.3% annualized on a monthly basis, 9.4% quarterly, and 14.1% when measured annually. That also means beta to the S&P 500 looks quite different based on the periodicity used: 0.34 for monthly, 0.53 for annual7.

The capper in Rubric’s open declares flatly:

We think a “run on the bank” is inevitable and would recommend all investors to get out of levered private credit while they still can. This is the story of a $2.0+ trillion market on the precipice.

They believe that capital was aggressively deployed in a “bubble-like environment” by excessive flows and misaligned incentives. That resulted in a combination of compressed margins, increased leverage, PIK interest, and deteriorating underwriting. The recent AI disruption just highlighted some of these issues. Rubric expects dividend cuts, tighter liquidity, the reversal of flows, fund gates, and pro-rata distributions, which will burst the bubble. The most damning specific charge leveled in the report is that BDCs are utilizing a Repo 105-type transaction to hide leverage:

We know of a specific product being sold by an investment bank to BDCs that allows BDCs to hide leverage between quarters so that it does not appear on quarter end financial statements…Our key takeaway from this behavior is that distribution cuts are so worrisome that some bad actors are playing Enron-like accounting games.

Once upon a time banks lent money to companies and real estate developers. The financialization of the economy means that banks moving away from originate-to-hold pre-dates the GFC, but post-crisis regulation further encouraged securitization and intermediation. Basel rules were the original catalyst for the growth in shadow banks, a trend that intensified after Dodd-Frank. The growth in lending to non-depository financial institutions8 has dwarfed lending to traditional sectors like companies and real estate.

The 2013 Interagency Guidance on Leveraged Lending had a profound effect on lending by effectively capping leverage provided by banks at 6x EBITDA. Although the regulation was rescinded last year, there’s no expectation that banks will suddenly circumvent NDFI, which have become convenient intermediaries. When a bank lends to an intermediary who then lends to someone else, the bank maintains structural seniority (the NDFI is in a first loss position). It’s also a very efficient use of capital, since it may be distributed among dozens (or hundreds) of underlying credits the bank doesn’t have to underwrite or monitor. Deregulation is unlikely to reverse the NDFI trend. A study last year argued that private credit has grown because it’s a more profitable way for banks to lend to risky companies, rather than because of regulation. After growing at 22% per annum over the last five years, loans to non-depository financial institutions now account for 14% of total loans and leases for US banks.

OK, But What About Companies Existing Only to Borrow?

It’s fair to say that’s a bit extreme; perhaps better to say many of these companies could only exist because of private lenders. It’s common to hear private credit fans characterize direct lenders as “disintermediating” banks, but that’s not really true. In the back half of 2023 direct lenders did take share from a skittish BSL market, but in Q1 2024 a net $9 billion of direct lending deals were refinanced in the BSL market. Direct lending faces a lemons problem because whenever lending standards ease, and large, stable companies can borrow in the public market again, they refinance out the private deals9.

In the 1950s the Modigliani-Miller theorem posited that in an efficient market a firm’s enterprise value was unaffected by its capital structure. Of course, like any efficient market theory it relied on assuming away pesky features of reality, notably taxes and the cost of financial distress (“first, assume a can opener”). In a sense the entire private equity industry is built on a bet against M&M; a bet they’ve clearly won. But there’s still a presumption that capital structure decisions are an optimization exercise. That is, the business could exist without debt, but there’s a level of debt that optimizes returns to equity investors without constraining the enterprise.

But what if speculative debt isn’t a choice? What if the economics of being an equity (“equity?”) holder in an enterprise only makes sense if it can be highly levered? This isn’t a hit on private equity, which overall is much better capitalized than when PE emerged in the 1980s. Larger buyouts also have their pick of lenders, and can opportunistically switch between direct lenders and BSLs. Despite that and a generally strong economy, there’s a steady cycle of sponsors levering up, cashing out, and tossing creditors the keys. Of course, some of the same groups that are equity sponsors also manage debt funds. One such fund is a BDC trading around 80% of stated book value with 15% of net assets in five companies that either are restructuring or went through one in the last year. And that was in a year that nominal GDP grew 5-½%.

I struggle to put my finger on the problem because I don’t hate private equity and certainly not “credit creation,” but something is deeply wrong with the state of play, and a lot of us feel that. Maybe the best way I can say it is we’ve moved from debt as a tool to maximize value for equity investors to sponsors cultivating bagholders to maximize option value. Given inflated valuations10 that have left many equity sponsors stuck, dividend recaps are one of the few ways they can return capital to LPs11. Loose credit standards can push off a day of reckoning for poorly performing businesses until the tide finally goes out. All this intersects with a push to “democratize” private investments that leaves no doubt for many of us that retail investors are going to have their faces ripped off.

Above is my version of that table with results for S&P 500 price changes (and footnotes aren’t adequate to explain it). The last time I produced one of these was just over six years ago after the assassination of Soleimani triggered histrionics, particularly from the TDS crowd. The false choice repeatedly presented by the likes of President Obama’s former Deputy National Security Advisor2 Ben Rhodes was to appease Iran or face World War III. That original table ended in 2011 and employed two sources: PDM Investment Services (now defunct) and the second edition of Presidential War Power. To update it I asked a trusty LLM3 to produce a list since 2011 that was consistent with Louis Fisher’s book. The result didn’t include last year’s 12-Day War, but overall looks fine.

The results are consistent with the idea you can afford to mostly ignore these events. Yardeni, who has made a career primarily out of not market timing4, updated his running chart this week, which focuses on major events. Obviously not all geopolitical events are created equally; World Wars are qualitatively different than bombing an aspirin factory during an impeachment inquiry5. Also, globalization has changed the geopolitical calculus over time. The 1939 start of WWII is one of many events with no drawdown, but that’s because the US was a safe haven for capital when hostilities broke out. In the subsequent two weeks US stocks soared more than 16%, and did not drop to a loss until Hitler’s attention turned to France. That said, US stocks yawned past Europe’s latest conflagration and rose as much as 8% in the weeks after Russia’s invasion of Ukraine.

While acknowledging the list is subjective and includes events of varying degrees, about one third led to no drawdown at all (12 of 37)6. Of the 25 events with drawdowns, 10 (40%) recovered the next day and another five recovered in less than a week. Only six (24%) took more than a month of trading days to recover previous index levels. I stopped counting at a years-worth of trading days, and the only one to qualify was the start of the Battle of France. Which, fair. That also was one of six events that resulted in a double-digit drawdown. Among the 25 events that saw some drawdown the median was -2.8%, the average was -5.5%, which was close to the bottom quartile of -5.9%.

One final word before moving on: there’s a distinction between policy, geopolitics, and event studies. For example, it would be a mistake to dismiss as unimportant Russia’s invasion of Ukraine just because the S&P 500 didn’t decline in the immediate aftermath. Arguably, a warm winter in 2022 saved Europe from the humanitarian devastation that would have resulted from inadequate stores of natural gas7. Europe has reoriented its energy policy and four years later the conflict rages on. It could still get worse. The era of drone warfare was launched by Russia’s war and is likely to have implications for a very long time. Iran has been a key supplier of Shahed drones8 to Russia and their ramped production is allowing them to launch attacks on their neighbors for a negligible cost ($50k at most). The point is policy matters, of course, and that is broader than just distinct events. This is where Marko can be helpful, and for US domestic policy Henrietta Treyz of Veda Partners (whenever I see her on Bloomberg I turn the sound back on).

The weekend attacks on Iran has had basically no impact on the S&P, as per usual. For me personally, Korean stocks are much more relevant these days, and they had their worst one-day loss on record last night (edging out September 12th, 2001), bringing MTD losses to about 18-½%. Also, if you went into the weekend short oil you certainly see the latest conflict as substantial. Right now, the pop in oil futures is second only to the short-term move from the first Gulf War. The five historical cases saw an average increase of about 23% in three months. If you look out eight months, around when the midterms will fall, the average increase was closer to 1%.

The chart excludes the notable shock of the 1980 Iran-Iraq war because futures contracts for oil didn’t exist until 1983. Within days of the outbreak of hostilities between the two rivals, both countries completely halted oil shipments, removing 2.7 million barrels per day of output. At the time that was slightly more than the estimated daily excess of 2.5 MMbpd (estimates that are always uncertain in real time). However, the US had a massive stockpile, having experienced two Middle Eastern shocks in the 1970s, and there was little impact on benchmark WTI prices.

Right now it’s not entirely clear what the goal of the Trump administration is. Although the US had been moving forces into the region for months, and betting markets discounted an attack back in January, the exact timing was driven by opportunistic intelligence.

Everyone knows the ultimate economic impact of this skirmish will depend a lot on its duration, particularly as it relates to the flow of oil through the Gulf. One factor exacerbating the uncertainty is the administration also is fighting a narrative war in refuting speculation that attacks could deplete American stockpiles. The Atlantic9 went as far as to suggest that “using up scarce” munitions might invite Russian attacks on NATO or a Chinese invasion of Taiwan10. In any case, the administration certainly doesn’t want IRGC11 elements believing they can wait us out, but in the process of countering that claim has renewed domestic fears of Forever Wars.

Earlier today Jim Bianco noted that the 20 cent increase we’ve already seen in gasoline could add 27 bps to the March CPI alone if the increase persists. On Wednesday one-year breaks eased slightly, and Tuesday’s 2.64% was below the January high12. So far markets are not discounting a meaningful inflation spike.

Whenever something like this happens there’s the inevitable chatter about whether it’s inflationary or deflationary; any day now I expect to start seeing strategy reports warning about a Whiff of Deflation™. It’s both of course which is to say a stagflationary impulse which works through constrained supply. If that goes on long enough feedback loops make it deflationary as energy costs detract from spending elsewhere, and of course there’s an income transfer to energy producers from energy consumers. The chart above just takes the portion of personal consumption expenditures spent on energy (about 3.7% today) and applies oil’s inflation rate to it. That’s a simplification of course since oil is not the only energy we consume, but with front oil up about 24% YoY the consumer tax would revert from slightly stimulative to restrictive by about 0.9% of PCE.

As everyone has noted, the US is now a net exporter of oil, which has been true since 2020. Leading up to the GFC the US produced less than two barrels of oil for every Iranian barrel, but post-Shale revolution that ratio exceeded 6x and is still around 5x. The share of consumption expenditures devoted to energy has declined by more than a third since 2009 from over 6% to less than 4%. The US economy is in a good position to fade any disruption. The real wildcard is, like, vibes man, and I just don’t know. There’s a fair bit of stimulus headed to the economy in the form of tax refunds and policy changes in the OBBB, and it’d be a shame if those were muted by a sour mood over war and higher gas prices. Also, Europe once again is faring worse. While it doesn’t compare to the obscene increases after Russia’s Ukraine invasion, TTF natural gas prices soared as much as 82% this week versus mid-February. About 4% of the EU’s natural gas imports come from Qatar where production has been shuttered after its facilities suffered a drone attack.

How this ends I don’t know. As I never tire of reminding, Iran has no friends in the region13. A related point is I think talk of a “regional war” completely misses the point; one country against every neighbor is not a regional war, it’s what in the 1990s we called a “multilateral coalition.” No one called the first Gulf War a “world war” even though 35 nations from across the globe joined in. It was just one arsehole against everyone else. The point is there’s really nowhere for hardline regime elements to turn. Sure, Russia and China were nominal allies, but only insofar as Iran could act as a cudgel against the United States. Iran is just not very useful to them in their current state, and China is worried more about getting its oil than who rules Iran14.

So, there’s no climb-down from this for whoever is still alive. One concern I heard over the weekend was that the attacks may have been too successful, in terms of removing a level of leadership that could have plausibly stepped into the vacuum. That could explain some of the seemingly random drone attacks carried out against a dozen different nations, most of them Arab. An Iranian mouthpiece spun those attacks as “despite the elimination of senior figures… the Islamic Revolutionary Guard Corps can sustain operations through a decentralized chain of command.” Perhaps, or perhaps with no one in charge, military elements are operating under standing orders.

Betting markets have March 15 as a two-to-one favorite for Iran to have selected a new supreme leader by then. To the extent there is a viable domestic opposition they likely have two weeks to prevent the continuation of the country’s theocratic authoritarian regime. In the meantime, I’d dismiss any talk of American “boots on the ground,” as well as the idea the conflict will create a new refugee crisis (courtesy of our friends at Bloomberg). The price spike has put WTI into deep backwardation, which is great for commodity holders, though the geopolitical premium can disappear in a hurry (and, will, at some point). What’s more, the fact that 12-month forward oil remains under $65 a barrel (versus front month around $75) is a good indication that energy markets do not expect any sustained disruption.

Market reaction was mostly muted although the dollar fell Monday before political news out of Japan helped spur a rebound. Gold, the ultimate hedge on monetary disorder, rallied $100 the first two days of the week despite some notable headwinds. First, on Monday the CME announced it was shifting margin on precious metals to a percentage rather than a dollar-based system given volatility. That’s certainly sensible with gold up 73% and silver up 200% in the last year. The annual commodity index rebalancing was finishing up resulting in cuts to precious metals. Gold was reduced from over 20% at year end to 12-½% and silver from 9% to 8%. JP Morgan estimated the sales would amount to 2-½% of gold’s open interest and almost 10% for silver; neither was the worse for wear.

Reaction on the Hill was swift. A cadre of Republicans spoke out against the tactic and Senator Tillis (R, NC) threatened to hold up the president’s Fed nominees until the Powell probe was resolved (Tillis is “loud quitting,” having announced he won’t run for reelection this year). What happens if Powell’s term as Fed chair expires before a suitable replacement has been confirmed? There is a historical precedent here with the forgotten chairman: G. William Miller.

Miller served for just 17 months between the infamous Arthur Burns and the deified Volcker, and his nomination was a bruising fight in the Senate. Burns’ term ended on January 31, 1978, and the Justice Department’s Office of Legal Counsel concluded that the “holdover” provision for the BOG did not apply to the chairman. However, the OLC further determined that the president could designate a member as “acting chairman” while awaiting Senate confirmation. Miller had been nominated at the end of 1977, so Carter appointed Burns chairman pro tempore. Miller had been chairman of Textron, which was being investigated by the SEC over foreign bribery and Swiss bank accounts1 (very spicy stuff!), and by late February the NYTs was opining he should step aside. The pearl-clutch-inducing headline above appeared after Miller’s January Senate testimony wherein he also said “it would be impossible” to get inflation below 6%. True to his word, CPI was double that when he was “promoted” out to Treasury2.

Miller was a consummate team player and exactly the kinda guy Trump is looking for. In his 1976 campaign against incumbent Ford, candidate Carter coined the “misery index” as an effective cudgel3. CPI bottomed a month after Carter’s election at under 5%, and eventually the combination of that and U3 would reach new heights during his single term. Despite his reputation, Burns expressed a preference for fighting inflation, telling Congress that it caused business disruptions that exacerbated unemployment. Carter’s man Miller claimed both problems could be tackled at once, but “seemed to lay a greater emphasis on getting the jobless rate down. Team player.

While in between chairs the chief bank regulator was pursuing consequential things like allowing banks to pay interest on checking accounts. That sounds bizarre today, but banks were still operating under Regulation Q, which stemmed from the 1933 Banking Act, and wasn’t fully eliminated until 1986. The FOMC held a meeting on February 28, 1978 in which Burns served as acting chair. It was largely uneventful, affirming currency swaps of $2 billion (lol) and setting M3 growth targets of as high as 10% (yeesh), but there’s a precedent for the FOMC meeting with a temporary chair.

Of course, it’s difficult to imagine Trump naming Mr. Too Late the acting chair, but he could name Waller to the post. My reading of the 1978 ruling is that Trump can’t do this as a trial run because he must have an active nominee before the Senate. Failing that, the role would fall to the current Vice Chairman Philip Jefferson, and we’d have our first black chairman. Note, Trump could treat that as a trial run, but I rather doubt the lifelong Democrat whose economic specialty is poverty will give Trump what he wants.

As an aside, while I think prediction markets are quickly becoming a scourge on decent society, a 1000-to-1 payout on Jefferson is intriguing. Obviously there’s no liquidity there but I think it’s fun to ponder for the Machiavellian aspect; this is Trump we’re talking about after all, and he likes “making history.” Jefferson also was on Trump’s “long list” last August.

There is an angle-shoot that could allow Trump to name an acting chair (like Waller) and give that person a trial run, which would be to nominate Stephen Miran for Fed chair. The nomination would be a dead letter, but simply having a candidate in front of the Senate allows for a chairman pro tempore. That’s probably a bit too House of Cards, and in any case whoever gets the job will have to contend with DC and markets long past January 2029. Really, I don’t think any of the publicly pondered chairs would be willing to be Trump’s stooge (no, not even Warsh). Jim Bianco is voting “none of the above,” hypothesizing that Trump doesn’t trust any of the current candidates to truly bend to his will. There’s a longer discussion to be had about whether the Fed is even as important as it used to be, for now I’ll note the FT’s Robert Armstrong said some quiet things out loud this week about the state of Fed “independence” amid current debt levels.

To the point above, I don’t think it matters all that much if the Fed cuts twice or four times this year, and also have no reason to bet against market pricing for two. Absent politics the “correct” amount for 2026 is probably zero cuts (using the Fed’s SEP for inputs). That’s especially true given a policy mix that includes not only a renewed fiscal impulse but the new “Oval Office QE.”

There’s already a rate effect from, ahem, Treasury’s debt issuance management. Current betting markets (I can’t resist) expect Trump to beat the buzzer but there’s no clear favorite, but a Kevin is a 3-to-1 favorite.

One last bit of remaining drama is the question of whether Powell continues to serve on the Board of Governors past his chairmanship, which he could do through January 31, 2028. It is a delicious thought, and not a long shot according to the betting odds. Last July betting markets thought Trump was likely to name the next chair in 2025, setting up the specter of a shadow Fed chair. On that note, Secretary Bessent opined that Powell remaining “would be very confusing for the market,” which is to say the administration would hate it. That’s especially true if Trump somehow succeeded in getting a toady through the Senate (speaking of which, it’s a bit surprising Pulte’s name hasn’t been floated). It is unthinkable in the modern era, but the first two Chairs of the Fed remained on the Board after relinquishing the reins: Charles Sumner Hamlin who stuck around for 20 more years and the man for whom the Fed building is named, Marriner Eccles, who remained a Governor for three additional years. However, since Volcker the post-Chairman period has been too financially lucrative to hang around the Fed.

It wasn’t always like this. John Quincy Adams famously served nine terms in the House after losing his re-election bid for the presidency. Andrew Johnson was elected to the Senate after serving as president (17 presidents have previously served in the Senate, but Johnson is the only man to do the reverse). Two Veeps went on the serve in the Senate, most famously Walter Mondale. I don’t know Powell from Adam’s house cat, but I can imagine how much he enjoys adulation from the elites. After the administration’s recent escalation a collection of global central bankers voiced “full solidarity” with Powell4, lauding his “unwavering commitment to the public interest.”5

I know there’s an abundance of people who will see this match-up and root for “stadium collapse,” but we should all hope Powell delays his lucrative speaking circuit future and remains on the Board. First, it will contribute to some delightful macro volatility in an era of waning Fed influence6. Second, however profligate you believe Powell has been, he almost certainly is better than Trump’s next choice. One of the historical precedents for Powell to remain is a particularly good match. As previously discussed, Eccles has a complicated history relative to his reputation as the father of the Fed. When he was “demoted” from Fed Chair in 1948 he decided to serve out his Board term for another three years.

Eccles had a long history of accommodating US debt growth and even endorsed subordinating the Fed to the president, but what history tends to remember is his battle with President Truman over pegging interest rates. By the end of his term as Fed chair Eccles seemed to have tired of debt monetization and pushed back. In 1951 Truman told the press the Fed agreed to continue capping interest rates in support of the Korean War, leading Eccles to release the Fed minutes that contradicted the president. At the time “Accord” did not mean what history subsequently bestowed upon it. There’s probably nothing Powell could do in opposition to Trump that rises to the achievement of what Eccles accomplished with Truman, but it sure is fun to ponder it.

Everyone knows that a strawman is when someone constructs a weak argument to place in the mouth of their opponents. The headline of Bloomberg’s piece essentially starts with that: “ICE Shooting Should Be Mourned - and Investigated1.” The implication is that anyone supporting law enforcement wants to just sweep the whole thing under the rug. Speaking for myself that’s not only false, but I want a full investigation into the person, people, or groups who/that instructed Good on her tactics that fateful day.

Just below the title and date is the byline, which in this case is cowardly: The Editorial Board.

The fact that the lede image establishes just who the villains in the story are is fine because, after all, this is an opinion piece. The dishonesty of it is the post’s attempt to pretend Bloomberg is above the fray of “the vitriol that routinely infects US politics.” Even better, they drop that line after McCarthy’s famous “decency” quote.2

The Editors concede that videos show the “agent firing into the vehicle while it was in motion,” but say they’ve been much debated3. This is something of a temporal trick because the story links to video available January 8 for a piece published on January 14, by which time much more was known and more video had been released. To boot, the NYTs heading in the link is “Videos Contradict Trump Administration Account of Shooting in Minneapolis.” At the time, the claim was Good’s vehicle “appears” to be turning away from the ICE agent.

Back to their “both sides” gimmick the piece claims “People can argue over” whether the shooting was justified or who was more at fault, or “whether ICE agents are sufficiently trained.” Here they link to a WSJ article that purports to be a taxonomy of how ICE encounters escalate into shootings. In that piece four Journal reporters analyze the original video with headings like “Boxing in,” “Intrusive actions,” and “Obstructing a moving vehicle.” My God, I could write an entire piece about how idiotic this is. To take the first three in order, Good parked her car perpendicular in the street in the middle of an ongoing law enforcement operation. ICE agents did not go looking for Good and her partner, they came to harass ICE agents4. The authors go on to explain how the agents incorrectly did a thing (boxing in) that they weren’t doing, leaving “room for the vehicle to flee.”

The “Intrusive action” in the Good encounter was grabbing the car door which “can escalate the moment and create resistance from the suspect.” Back up, the escalation occurred when Good refused four separate orders to exit the vehicle. Anyone is free to make a legal claim that an officer has given them an unlawful order. For obvious reasons the best venue for that is in court after the confrontation is over, but in any case it’s asinine to claim the “escalation” happened only after the officer grabbed the car door.

Probably my favorite is “Obstructing a moving vehicle"; well if you didn’t want to be hit by a car why did you stand in front of it? As ever, this is not legal advice, but you should not even bump someone with your car if they’re standing in front of it. But, if you did, I think it would be more reasonable to do it to people purposely blocking roads over some protest, and I await the WSJ justification for running over those people (again, not legal advice). In any case, the Journal’s own accompanying video shows that it is Good backing up her car that maneuvers it to point in the direction of the agent.

Back to Bloomberg, after referencing the training they write “especially in de-escalation tactics.” I think some happy medium is possible between the left’s desire to replace cops with social workers and a militaristic police force. I know plenty of people who believe the legal burden in shootings by civilians versus those by officers is completely inverted, so I can somewhat concede this point, except for the context. And the context is that a two-ton vehicle was approaching the agent on an icy road and six months earlier he had been dragged by a car speeding away during an enforcement action. As for everything that led up to that point, again Good and her partner were there precisely to “escalate.” Point to the place on the exhibit below where Ice Watch Minnesota was interested in de-escalation.

Next Bloomberg goes back to “both sides,” imploring that the “decent response” would be to speak respectfully, and lamenting that “in the days after the shooting, the administration repeatedly misrepresented what happened.” I’m not interested in defending the administration, especially when they Say Things. I will note my experience among right-wing people was very different than, say, your average leftist’s response to Charlie Kirk’s assassination. In fact, one of the most right-wing guys I know told me early on he was leaning “officer error” (when only one video was out). While activists were already labeling the shooting “murder,” gun nuts were taking a critical view of the encounter with an open mind5.

“Misrepresented what happened” is rich of course coming from Bloomberg, or CNN, or ABC, or NBC, etc. We all know there’s an unmistakable pattern of shaping a story to fit a narrative, and discarding it if it does not. If some video emerged tomorrow of Renee Good saying into a camera she intended to plow into a group of ICE agents with her car you would never see her name in major media again.

Bloomberg continues that “The administration has falsely claimed that Good ‘ran over’ the agent with her vehicle.” That’s true; during a White House briefing last week one of the many things VP Vance said about the incident was Good “viciously ran over the ICE Officer.” The Editors claim Vance moderated his statement “only slightly” saying she was “trying to ram this guy with her car.” Their own link however shows Vance was leaving open the possibility she “was panicking.”6 Anyway, The Editors are relying on semantics here given video evidence Good’s vehicle made contact with the agent (here and here).

Bloomberg purports to take a balanced view and beseeches everyone to “stand together to mourn this tragedy and demand an impartial investigation.” They are in no way impartial in their case. I applaud their apparent discovery of “victim’s rights,” broadly writ. That is, whenever some despicable person is on trial for some heinous act, progressives are quick to remind us that “impartial” justice is owed to the person on trial. It’s inconvenient for them that in this case the presumed subject of the investigation would be the ICE agent who fired the shots. What they mean is rather than an FBI investigation they’d prefer one by a Soros-funded Minnesota prosecutor.

I support a diligent investigation into the death of Renee Nicole Good. I think the scope should include ANTIFA-adjacent groups who gaslight suburban women into believing they’re fighting a war for social justice by obstructing law enforcement. We should attempt to learn what tortured legal logic led them to believe they cannot be impeded by law enforcement whenever they are “in a public place,” but they also have the legal right to obstruct other civilians in the name of their causes. We should endeavor to learn who or what has created a generation of cosplaying LARPers so disassociated from reality that they would ask a law enforcement officer “why did you have real bullets?”

1

Note, this was the title as of 6:00 am January 14, 2026. Media outlets often alter their headlines, particularly after they label a dead terrorist an “Austere Religious Scholar.” I really wanted a footnote to a footnote but Substack has standards, so I’ll just link to it.

NPR warned that the trader’s success “raises insider trading questions on Polymarket.” Actually, it does not. Trading with inside information isn’t just permitted in prediction markets, it’s encouraged. NPR doesn’t quite understand their topic2 which is clear when they note the SEC polices insider trading but “far fewer guardrails are in place to keep prediction markets in line.” This betrays a common misunderstanding about what insider trading laws are and how they work3. NPR blames prediction market oversight falling to the Commodity Futures Trading Commission “with one-eighth of the staff of the SEC,” but there’s no such thing as “insider trading” in commodity markets.

Much of the Securities Exchange Act of 1934, which created the SEC, demonstrated a frustration with how rigged equity markets had been against the retail speculator. That was reflected in things like the prohibition against market manipulation (a primary tool of pool operators in the 1920s) and various disclosure requirements for large shareholders. But the misuse of material non-public information isn’t illegal because it’s “unfair” to the people who don’t have it, but rather because it violates a fiduciary duty owed to the company itself. In 2019 Congress attempted to amend Section 10(b) to eliminate the “gap” that exists from requiring a breach of fiduciary duty to pursue insider trading charges, but the proposed Insider Trading Prohibition Act failed to pass4.

Over my holiday break I noticed a surge in stories about wildly successful Polymarket traders. Of course, you have to be careful extrapolating trends from your own social media feed since the algo is programmed to feed you more of what you engage with5. Two things stood out: the first was the stories mostly involved the crypto-native exchange Polymarket (rather than Kalshi which has been running the Bet on Everything ad during college bowl games), and they mostly involved stories of traders creating Bots to automatically carry out winning trades (often via arbitrage).

That’s notable because it distinguishes these stories from casinos that trumpet the occasional big winner to attract the army of losers who fund them both. Most of the stories were not the narrative type of “smart guy figured out something before it happened6” they were “smart guy built a Bot to make free money.” One highlighted Bot was the classic tail buyer, acquiring small stakes across multiple markets and profiting from the rare wins at huge multiples. Another highlighted Bot supposedly turned a grand into $2 million via “microstructure arbitrage.” Based on the post I’m not exactly sure what that means other than a LOT of trading. The classic case, which shouldn’t exist, is accumulating small positions in “Yes” and “No” around short-term events that add up to less than $1.00. That’s enabled by markets that allow betting on 15-minute moves in crypto (where Poly is attempting to add some friction).

Exactly what is accomplished by this hype isn’t entirely clear, although obviously any market maker benefits from more activity on their platform. I suppose that’s true whether someone is taking the Tetlock approach or building Bots. I noticed many people credited vibe coding for their trading Bots, so something clicked when I saw a PSA from a purported prediction market trader. Dominatos warned against the blind use of various prediction market tools being touted on the socials, some of which were “straight-up wallet drainers.” Probably the most vital warning was to use a separate wallet rather than having their main funds piped to Poly. A market of Bots is very good if you make better Bots, and especially if you “help” other people make faulty Bots.

When I say that prediction markets encourage trading on inside information that’s not hyperbole. Last month Coinbase CEO Lex Luthor Brian Armstrong appeared at the Dealbook Summit where he addressed his October earnings call stunt when he read off a list of words prediction markets accepted wagers on him saying. The so-called “mention markets” had $84,000 of bets on words like Bitcoin, Ethereum, blockchain, staking, web3, and Armstrong dutifully recited them all at once making winners out of everyone betting yes. Armstrong said he was “just having a little bit of fun,” and noted he obviously didn’t trade on the market himself. But he could have7.

ARS weirdly asked Armstrong if he was worried about manipulation, after recounting a story of how he had manipulated the mention markets, but his answer was telling. Armstrong responded that he fielded a question from a CFTC nominee on whether insider trading should be allowed in prediction markets. While he called it “nuanced” he said for the “99% of people” using the markets to assess probabilities, you want traders with insider information “so you get a higher quality signal.” Of course, that argument works for any market; in fact in 1966 Henry Manne argued that insider trading should be legalized because it would result in more efficient stock prices.

This swerves into another big question with respect to prediction markets: what is the social utility of accurately forecasting which character on Stranger Things will be killed off at the end of season five? Or how long Trump and Zelenskyy will shake hands when they next meet?8 My guess is capital markets are much too large today to get any benefit from insiders disseminating information, but at least if it worked there would be some purpose to it. A Google employee making 10x gains on search trends is of dubious value to markets. An obvious related question is how sustainable a market is when it’s very badly weighted towards inside information? Maybe that’s why Kalshi raised a billion dollars, to continue funding its marketing machine.

One market with obvious utility was one of the first prediction markets: elections. The Iowa Electronic Market was launched in 1988 specifically focused on election outcomes. It’s a quaint operation compared to today’s followers not only for its narrow focus but its tiny scope: all markets are limited to $500 per trader. Launched for the sake of academic research, IEM always had a collaborative relationship with regulators, and was allowed to operate with real money as early as the 1992 presidential election (when the market handily outperformed polls on less than $80k in total investments). Several imitators have disappeared over the years, notably Intrade which lost access to US traders in 2012, leading to financial trouble. The industry’s regulatory treatment has come a long way since then; Polymarket, which appeared built specifically to skirt US law, gained US approval last July, Donald Trump Jr. is a board member both there and its chief rival Kalshi, and the president’s social media platform intends to launch a prediction market (where presumably his son will serve on the board).

Obviously society is full of legal things with questionable social value and personally I wouldn’t dream of attempting to ban prediction markets, or even to regulate them in a way that exceeds the CFTC’s current oversight. But, I do want more people to realize they’re bad for us, at least in this current cancerous form. I referenced Professor Philip Tetlock earlier who wrote the book on Superforecasting, and runs a website that tests his theories in real time. Of course the only skin in the game is one’s Brier Score, which isn’t the same as money. However, one interesting result from the historical success of the IEM in forecasting elections was how small the monetary incentive could be and still produce superior results.

Tetlock’s insights are not around punting but probabilistic reasoning. The best forecasters share certain traits that allows a housewife in Peoria to better handicap the odds North Korea will launch a ballistic missile than (say) Ian Bremmer (Tetlock’s earlier book exposed expert political judgement as bunk). In 2011 Tetlock entered his Good Judgment Project team into a forecasting contest run by the Intelligence Advanced Research Projects Activity (IARPA). The wisdom of the crowd was augmented with training on overcoming cognitive biases and best practices in forecasting. The contest consisted of over a hundred geopolitical questions and initially included five teams. After several rounds GJP was the only team still receiving IARPA-ACE funding.

Tetlock’s superforecasters share certain traits, chief among them is Bayesian thinking, continual updating of forecasts, and beginning with a base rate (outside view). Tetlock is quick to warn that humans can’t achieve true Bayesian estimation, but the best forecasters are better at it than most. At heart, this just means thinking in terms of probabilities rather than binary outcomes, and a willingness to adjust your expectations as new facts emerge. The best amateurs also are able to overcome cognitive biases, which is probably the primary reason experts are so bad at forecasting9. If your expertise is China’s political development after the Cultural Revolution, most of your predictions about China will be grounded in that experience (in the industry lingo, the expert is the hedgehog and the amateurs are foxes). Open-mindedness is a key feature of superforecasters, as is humility. Tetlock preaches an “error balancing process” that tries to avoid both over-conservatism and jumpy changes. GJO also posed the Maduro question, in their case removal by September 19th, and the crowd was above 50% 18 days before the close10.

Most “overnight successes” are decades in the making, and that’s true for prediction markets. Robert Shiller proposed substantive prediction markets for hedging over 20 years ago, which later became part of a book, and even spawned a failed attempt at a futures market for home prices (which Polymarket is resurrecting because of course). The Journal of Prediction markets was launched in 2012 (although topics often vary markedly from the current meaning). Around that time there was a lot of focus on internal prediction markets at corporations which used them to make estimates of important operating metrics. Betting on the next Pope has been with us for at least a dozen years now, but 60 Minutes interviews of a punter who called a 250-to-1 shot on the first American Pope is a very recent phenomenon.

One early attempt at a prediction market for substantive events was the Defense Advanced Research Projects Agency’s (DARPA) effort to create a market for geopolitical events that could augment intelligence analysis. In the shadow of 9/11 and with rumors terrorists may have bought put options on the targeted airlines11, critics labeled the effort “terrorism futures,” and the idea was quickly dropped. In a humorous retelling, Justin Wolfers and Eric Zitzewitz recounted how following the controversy Tradesports created a market to bet on Admiral John Poindexter’s removal as head of DARPA by August 2003 (“yes” paid).

One obvious concern with prediction market questions on terrorism is the risk someone could bet on an event and literally make it happen; that’s something people seem to take for granted with today’s markets. Last month someone observed a Poly user making a big bet that vandals would torch Sweden’s giant straw goat; the user’s name was “burninggoat” (the goat was blown over before anyone had a chance to burn it). An even more banal example also occurred last month when the Kabuto King began publicizing his accumulation of a very common Pokémon card, and Polymarket created a question for whether the first edition would hit $100 by year-end. It was immediately apparent that an illiquid collectable market would be easy to manipulate. That almost certainly happened, and “yes” bettors were paid. This week WH Press Secretary Karoline Leavitt abruptly ended a press conference just short of Poly’s betting line, collapsing a 98% probability to zero in seconds. X was atwitter with conspiracy theories, understandably (did I mention one of Trump’s sons is on the board of Polymarket?).

Just as prediction markets have recreated insider trading from first principles, they seem to be doing the same with cash investing. There’s apparently a wallet with nearly $3 million deployed for the sake of earning a 4% interest rate (but, crypto™!). Another way to do this is bet “no” on markets where if you’re wrong the trades will never clear, but getting a price that equates to bank interest.

The momentum of these markets in terms of both volume and zeitgeist is bewildering, like they’re speeding towards some singularity. Broad legalization of sports betting has attracted both prediction markets and brokers under the auspices of derivatives law. The same impulse that drives betting on the length of White House press conferences has made 0DTE options half of CBOE volume (that is to say, financial nihilism). Robinhood recently created sucker parlays from first principles; this is an incredibly stupid thing to do. Again, markets benefit from flow, but even dumb stock trades can look good relative to sports betting since over time stocks go up. In a way, the stock market protects degens from themselves with a rising tide12. Tenev seems to have forgotten that you can sheer a sheep many times, but skin ‘em only once.

This week Dow Jones announced a partnership with Polymarket to integrate the company’s probabilities into its content, further increasing the amount of automated content in the paper. Traditional journalism is just moving closer to The Polymarket Times - an agenic content producer driven by what punters are betting on. Weeee! The central tension here is a simple temporal mismatch: the most useful prediction markets address medium to long-term question, while the markets most profitable for the providers settle every 15 minutes.

On Thursday Bloomberg reported that President Trump was considering “bipartisan” CFTC picks; like other major Federal agencies the CFTC is bipartisan by design, it’s just that these selections would be the first Dems added to a major Street regulator in the second term. The Democrat names floated included a lobbyist for a market maker and a trader who oversees prediction markets at his firm. Red or blue, as long as it’s green. Prediction markets have been around a long time but they’re really having their moment as financial nihilism meets the golden age of grift.

Consequences

About 2-½ years ago I wrote “So Much Norming,” broadly about the bait-and-switch of the Biden administration, but particularly about Alvin Bragg’s lawfare against Trump. To recap, Bragg took a misdemeanor corporate records violation for which the statute of limitations had expired and fabricated a series of felony charges by linking it to a never-specified campaign violation. Dems are still dining out on this, with the chief WH correspondent for the NYTs, in opposing federalizing DC law enforcement, Tweeting that Trump was “convicted of 34 felonies and is the first criminal elected president.” Uh-huh.

Unlike Malcolm X I do mind the chickens coming home to roost. Last week Trump partisan, FHFA Director, meme stock promoter, and silver-spooner Bill Pulte opened a new front in the war on the Fed when he Tweeted out an allegation that Governor Lisa Cook committed mortgage fraud in a pair of 2021 home purchases. If you lived through the GFC such a charge might induce a yawn, but if you’ve ever watched The Wire you know better (and if you haven’t, I feel bad for you). That show’s creator David Simon worked as a police reporter for the Baltimore Sun from 1982 to 1995, a period that includes a time when journalism was a respectable profession. From his reporter days he knew about a statute employed by federal prosecutors called “the Head Shot,” and he wrote it into the show

In Season 5 (spoilers follow) Detective Lester Freeman is trolling through various public records in an effort to find some kind of dirt on the perennially corrupt State Senator Clay Davis. The setting being Baltimore Davis could have been inspired by a litany of public officials, but Simon seemed to confirm he was modeled on Larry Young when Young appeared in season 5 as a radio host sympathetically interviewing Davis (on the actual station where he made a comeback as a radio host). Freeman discovers that Davis made a down payment on a house and traces the same amount of money later paid to his mother, which he correctly surmises was a loan. While something millions of people have done, claiming a loan as an asset is technically a violation of Title 18 of the US Code, Chapter 47, Section 10-14. Federal prosecutors referred to it as the Head Shot because it’s punishable by up to 30 years in prison, and relatively easy to prove (mostly via signed documents)

Simon wrote the technique into the show but generally disapproved of the practice of using the violation as a cudgel to attain a plea on charges prosecutors otherwise found unproveable. One reason for his animus was his friendship with Edward Norris, a former police commissioner in Baltimore who played a homicide detective on the show. Norris angered a federal prosecutor when he publicly criticized Thomas DiBiagio for not bringing enough gun cases to court. After becoming Maryland’s police superintendent, an audit of a discretionary fund assigned to the commissioner’s office during Norris’ tenure found $2,000 had been spent on seemingly non-official business. Now, for only $2,000 to go missing in a Baltimore account over several years was nothing short of a minor miracle, but after Norris reimbursed the city DiBiagio decided to indict him over it. When it became clear that there were no actual guidelines for the use of funds, and previous commissioners (shockingly) had wide latitude in how they spent them, the case looked like a dud. Undeterred, DiBiagio checked the loan documents for Norris’ house and determined he claimed assets borrowed from his father on his mortgage application. Norris got six months and his law enforcement career was left in shambles (guess what? He later made a big comeback as a radio host).

Taking a target and then searching for a crime is the very definition of lawfare. Letitia James ran for New York Attorney General on a platform of prosecuting Trump, an obvious perversion of justice. True to her word, she manufactured a fraud case against Trump in which no one was defrauded, and that rested on Trump’s fabulist tendencies. Last week a NY appeals court threw out the $500 million penalty from the James civil case. Both James and Senator Schiff (he of the Russia hoax) have been targeted with charges of mortgage fraud. At least in those cases there’s a fairly direct link to vengeance, and to quote a line from The Wire, “you come at the king, you best not miss.” But poor Cook is catching a stray simply for being a Biden appointee; she’s not even a policy hawk, with Bloomberg rating her a dove.

For the sake of clarity, lawfare is bad. Abusing the power of government for personal grievances is bad. This is true no matter who does it. There’s often a purposeful misrepresentation that characterizes calling out hypocrisy as “whataboutism.” Technically whataboutism is justifying a bad thing by pointing to the “other side” doing the bad thing. Noting hypocrisy is qualitatively different: neither side should practice lawfare, and also the people who started this war can un-clutch their pearls, shut up, and sit down.

Bill Pulte appeared on Bloomberg last Thursday afternoon and good for him. He clearly was braced for a combative interview, which to be fair tends to be appropriate for any Republican when speaking to a journalist. But when asked about the origin of the investigation Pulte quickly denied it was the result of a “witch hunt;” he doth protest too much. He claimed that as the regulator and conservator of Fannie and Freddie, a case like this is the “bullseye of what my job is,” and he promised to be bipartisan in enforcement. He confirmed that the Cook case was the result of a tip but obviously gave no more detail than that, and he noted that mortgage documents are a matter of public record. Although he characterized such a case as part of the agency’s function it wasn’t clear what other prosecutions the FHFA has pursued so far. The Justice Department and FHFA were decidedly noncommittal about recent revelations that a Republican Senate candidate in Texas lied on at least two mortgage applications.

In his interview Pulte said “mortgage fraud is prosecuted every day in this country.” He added his agency refers people for prosecution “almost every day” and that he personally refers people “every week at a minimum to the Department of Justice for mortgage fraud,” citing an obligation under the Housing and Economic Recovery Act of 2008. Of course, that GFC-era law was focused on risk management for the agencies providing credit to home buyers, not targeting individuals who classified debt as assets or claimed a second home was a primary residence. Again, lying on a mortgage application is illegal, don’t do that (not legal advice), but also the financial soundness of Fannie and Freddie were not threatened by Lisa Cook receiving a slightly lower interest rate on her second home.

The FHFA provides a semi-annual report to Congress that includes fraud reports. The most recent includes a year-long $55 million origination scheme in California that sold fraudulent mortgages to the Enterprises. Another case from Texas involved a mortgage lending business that defrauded the Enterprises on loans they owned or guaranteed for the purpose of building a multi-million dollar SFR real estate portfolio. Another involved a real estate developer who BKed an Illinois bank through fraud and embezzlement. There’s absolutely no evidence of the FHFA trolling through random loan documents searching for discrepancies. The weighty report is replete with examples of criminal conspiracies to defraud without a single reference to a case involving inaccurate documentation for a personal mortgage.

Just as with the Eccles Building renovation witch hunt, this is simply a pretext to construct a “for cause” reason to dismiss a Fed governor since the president has very narrow legal authority when it comes to the Board of Governors. Predictably, Trump promised last Friday he would fire Cook if she refused to resign, which he attempted this week. Using a government agency in this way is a dangerous escalation in Trump’s war on Fed independence. To recap how the FOMC works, the Board of Governors are presidential appointments and always have a vote on the Committee. The 12 Presidents of Federal Reserve banks are chosen by their respective banks and approved by the Board, which is to say rubber stamped. The president of the Reserve Bank of New York (John Williams currently) retains a permanent vote on the Committee, with four other regional presidents receiving a vote on a rotating basis

In 2026 those regional votes are held by Cleveland (Hammack rated by Bloomberg as very dovish), Philadelphia (Paulson rated neutral), Dallas (Logan rated hawkish), and Minneapolis (Kashkari rated neutral, but who I would call dovish). Assuming Miran is confirmed, Trump would have three Board appointees through next January, when the Kluger seat expires. If Trump were able to force Cook off the Board and attain a fourth seat it would give him a majority.

Last week Julia Coronado of Macropolicy Perspectives outlined on Bloomberg that the 12 regional presidents serve five year terms concurrently which are renewed in years ending in 1 and 6, which means all 12 are up for renomination in February. Although this generally is done without issue, the BoG technically has veto power over these nominations. The risk is that with four out of seven seats Trump effectively could hold sway over who maintains their seat. Jim Bianco expanded on that theory this week. While Waller and Bowman have verbally backed Trump’s desire for lower interest rates, there’s no reason to believe they would accede to this level of political interference in the Fed. In fact, I think it’s extremely unlikely that they would, but the mere risk of it could unsettle rate markets and the dollar. Also Bloomberg confirmed this week the administration is eyeing how to extend its influence campaign to the regional presidents.

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Fed Independence: Orthodoxy and Reality

“Constitutional crisis” and “unprecedented” are overused terms with respect to President Trump. Both generally are employed by media observers when Trump does chief executive things that vary with what the chief executive they voted for would have done if she had won. When it comes specifically to the Fed there’s a long history of presidential interference in the making of monetary policy. The Fed has at times served as an appendage to the Treasury Department, most notably during both WWI and WWII, when they outright pegged interest rates below inflation (monetization by anyone’s definition). After WWI the Fed operated under a “real bills doctrine” that limited excess money growth and tended to curtail speculation. Hoover attempted unsuccessfully to press easier credit in the early 1930s, something his two Republican predecessors had not.

The FDR dynasty enjoyed a compliant Fed, and his abrogation of the gold clause in 1933 freed the Fed in new ways. FDR’s Fed chair had a spending appetite that exceeded his own, and cajoling him was unnecessary. Ike was mostly hands-off and when he did back-channel it was mostly about inflation concern. In fact, some contemporary observers that withhold credit from the Fed for the inflation experience of the 1950s consider Eisenhower’s hatred of inflation to be the true cause. JFK jawboning is sometimes credited with the Fed’s “operation twist” experiment meant to flatten the yield curve. LBJ applied verbal pressure to William McChesney Martin, and the 6’4” Johnson physically intimidated him as well. Of course, none of that was known at the time.

The grand poohbah of presidential interference with the Fed (until now) surely was Nixon, who was recorded on WH tapes explaining “we’ll take inflation if necessary, but we can’t take unemployment.” To this day poor Arthur Burns is synonymous with a central bank inflationary mistake. Contemporary central bankers explain their dedication to mitigating inflation by invoking his name. Nixon’s guns-and-butter economic policy and subsequent abandonment of the dollar’s link to gold (again) set the stage for the historic runaway inflation of the 1970s (further exacerbated by two oil shocks)

One in the long line of revolving door moves between the Fed and Treasury, William Miller was Carter’s first Fed chair, when he served while still Treasury Secretary. That arrangement spooked markets amid double-digit inflation, and Carter quickly pivoted to the inflation fighter for the ages, Paul Volcker. Reagan inherited him (and won in part due to the concomitant economic damage of tight money) and he bristled at times, but mostly via surrogates. Ironically, calls to end the Fed’s autonomy came from Democrats in 1982. HW Bush mostly complained after he left office, blaming Greenspan’s rate hikes for his loss, which was valid criticism. Clinton had an avowed “hands off” policy with respect to the Fed (although famously, not for interns), an approach W. Bush mimicked (the first part). Obama of course had no cause to complain with Funds at zero for seven years and continual bond buying programs post-GFC.

To return to where we began, while overused both terms apply; it is unprecedented for the President to remove a Fed governor from office. Trump has said he would abide by The Court which would avoid the Constitutional crisis part.

In the Beginning

“A cartel is a group of independent businesses which join together to coordinate the production, pricing, or marketing of their members,” G. Edward Griffin summarizes in his seminal Fed history The Creature from Jekyll Island. Griffin’s takedown of central planning focused on the cartel’s role in reducing competition and increasing profitability for the banksters. At the time the Federal Reserve Act was passed in 1913, non-national banks represented 71% of the total number of institutions and they held 54% of deposits, a threat the cartel sought to end.

Griffin quotes a 1935 mini-auto biography of Frank Vanderlip published in the Saturday Evening Post that included details of the plot. Reading it now it’s unclear if he was bragging or confessing. Vanderlip was the coauthor of a bill championed by the cartel’s collaborator, Senator Nelson Aldrich, whose name became attached to it. That bill never passed in part, according to Griffin’s telling, because Aldrich was known as a “Wall Street Senator.” In Vanderlip’s version Woodrow Wilson ran on a platform of opposition to “the Aldrich plan for a central bank,” and his win along with a Democrat majority in DC killed it. However, while the version with Aldrich’s name was scrapped, “nevertheless its essential points were all contained in the plan that finally was adopted.”

The 1913 bill created the Federal Reserve System with its 12 banks rather than one, “but the intent of the law was to coordinate the twelve (regional banks) through the Federal Reserve Board in Washington, so that in effect they would operate as a central bank” (again from Vanderlip). Despite that, Griffin claimed Washington’s presence was weak with policy dominated by the 12 privately owned regional banks, especially the NY bank which represented Wall Street interests. But the original intent of socializing losses remained.

The current centralization of authority in DC didn’t occur until the Fed was restructured by the Banking Act of 1935. The Federal Reserve Board comprised of an amalgam of Treasury officials and presidential appointees was restructured as the Board of Governors appointed by the president and confirmed by the Senate for 14-year staggered terms. The Act created the current FOMC structure with seven Board votes and a rotating set of five Reserve Bank presidents. This also ended independent regional monetary policy, coordinating all open market operations through the FOMC (as executed by the Reserve Bank of NY).

Marriner Eccles became the Chairman of the Federal Reserve in 1936 (having been Governor and Executive Officer since 1934) and the central bank’s power was not centralized enough for his liking. Attempts to abolish Reserve Bank chairmen were thwarted by Congress, but undeterred Eccles demoted the positions to “purely honorary.” With 10 of the 12 regional bank Chairmen roles filled at the time, six were “terminated.” The Philadelphia bank’s pick for President, George W. Norris, was vetoed by the Board ostensibly due to the new mandatory retirement rule that specified no one could turn 70 while still in office. Norris, who publicly declared “I hope never to see a central bank in this country” and if there was one that it should reside “anywhere else than in Washington” called the use of the new rule to justify his dismissal “an absurd camouflage” by Eccles.

Eccles’ Complicated History

If you didn’t already know that the Fed’s headquarters is named after Marriner Eccles you surely did after renovations to it became the subject of another Trump attack on Powell. The irony is the Eccles of the 1930s would have found the cause superfluous. Eccles was chair when the building was completed in 1937, and Congress named it in his honor in 1982. Initially named the Governor of the Fed in 1934 his title became Chairman after the 1935 Banking Act. FDR’s chairman was an avowed Keynesian, supporting counter-cyclical fiscal policy to the point that some believe Eccles considered monetary policy to be of secondary importance.

At a 1935 American Bankers Association convention Eccles defended the massive government spending feared by the bankers in attendance as “a lifeline for capitalism.” Senator Glass once called Eccles “the greatest inflationist in the United States,” and it was only the intervention of the Senate that prevented the Fed becoming a tool of the presidency. In testimony before the House to advance the Banking Act he helped craft, Eccles maintained that every presidential administration is responsible for the economic problems of the nation and could not address those “entirely apart from the money system.” In fact, Eccles continued, “There must be a liaison between the administration and the money system – a responsive relationship.”

How responsive? Eccles ended the volatile moves in the Fed Funds rate when he took the helm in November 1934. He had a much freer hand to apply loose policy than his predecessors with FDR’s suspension of the gold window about a year-and-a-half before he became the Executive Officer (Chair in the old parlance). The Roy Young Fed had lifted Funds above 5% helping to precipitate the bursting of the stock market bubble in 1929. The Eugene Meyer Fed hiked rates above 3% amid price deflation, and the Eugene Black Fed took rates above 2% amid deflation that 12 months later was 5-½% inflation. In contrast Eccles was free to fade the brief pop in inflation above 4% in 1937 when he lifted Funds to just 0.7%. Shortly after the US entry into WWII, inflation exceeded 13%, but Eccles held the Funds rate steady, and nearly two years after the War ended when inflation nearly touched 20%, Eccles barely responded and left the Funds rate at 1% when he departed the Chair.

The Treasury-Fed Accord

I’ve written in the past about the 1951 détente that was credited with restoring central bank independence, even if it didn’t end debt monetization by the Fed. In the official telling, the agreement amounted to the “liberation of monetary policy,” and to this day is a cornerstone of the Fed independence argument. While Eccles got the consolidation of power in Washington he so ardently desired, his preference to subordinate the Fed to the presidency was not inculcated into Title II (referred to contemporaneously as “the Eccles Bill”) of the Banking Act of 1935. In Eccles’ construction, members of the Federal Reserve Board would serve at the pleasure of the President like any cabinet member, and the twelve Federal Reserve presidents would serve only one-year terms. Had the “father of the modern Federal Reserve” had his way the debates of today would be far different.

There are scant contemporaneous details of the agreement with most of the conventional wisdom formulated in the years after it. In their below-the-fold coverage (page 20) the NYTs lamented the lack of details and warned against taking the news as evidence of a new arrangement that would restore policy “along sound monetary lines.” The announcement included plans to replace the 2-½% USTs which the Fed held along with institutional buyers with a 2-¾% non-marketable bond. The new bond with an extended maturity and convertible into an “unspecified” short-term security arguably amounted to a debt restructuring. The NYTs piece is a frightful reminder of how much more intelligent discussion in the media was 70 years ago, wondering “why, if the Treasury really means to permit a genuine test of the market for its securities, it doesn't permit that to be done by the simple, direct method of open-market Reserve operations.” Why, indeed.

To this day the agreement takes its name from the vague language of the announcement: “The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government's requirements and, at the same time, to minimize the monetization of the public debt.” The Times was right to be annoyed; at the time of the announcement inflation was running above 9% in the US and remained above 6% for the rest of the year.

There are those who believe the announcement was about “buying time” (as the NYTs hypothesized the day after the meeting), and the Fed didn’t really stop monetizing debt. Real bond yields were allowed to rise, but by then debt/GDP was down to nearly half its peak level. Interest rates also were modest relative to the post-War boom in economic growth in the US. As the only major economic power that suffered no meaningful loss of its industrial base, American production had a raucous head start. Between the 1951 Accord and the end of the 1960s, 10-year yields after inflation averaged just 1.7% against annualized real GDP growth of 3.9%. That spread helped cut debt/GDP in half again, down to just 33%.

Jonathan Newman recently called Fed independence a myth, noting “historically the best way to be appointed Fed chair is to either hold a high position in the Treasury Department or serve on the president’s council of economic advisors.” I’ve already mentioned the dual role of Carter’s first pick, and to that Newman adds Powell (former assistant secretary of Treasury), Yellen (CEA chair and later Treasury Secretary), Bernanke and Greenspan (both CEA chairs), and the man himself Volcker (Office of Financial Analysis at Treasury). Are the Fed and Treasury really separate, or only during administrations that don’t subscribe to Keynesian orthodoxy?

The Germ of an Idea

Probably the most calamitous historical example of central bank coordination with state finances is the Reichsbank in the early 20^th century. While technically independent, the mandate of the bank was to support state finance, and although banknotes were meant to be covered by gold reserves, President Havenstein had significant discretion (not that one). As detailed in When Money Dies, Havenstein foolishly held the view “that money supply was unconnected with either price levels or exchange rates.” Havenstein actively monetized Germany’s war debt as well as its onerous Versailles obligations, which of course laid track to the next World War. After Havenstein died in office finance minister Hans Luther introduced a new currency with limited issuance, and the following year the Dawes Plan re-linked the reichsmark to gold. During the next five years real GDP per capita grew 49% (then came the Great Depression).

The lesson of monetary financing leading to fiscal ruin was heeded globally, and arguably contributed to deflationary mistakes by the Federal Reserve during the early phase of the Great Depression (the existing gold standard played a part as well). France and Britain returned to a gold standard in the 1920s in part due to the Weimar experience, a bogeyman that still lives (other than for Mugabe and possibly Erdogan). The Bundesbank’s predecessor was established in 1948 with a single-minded focus on price stability that heavily influenced the Growth and Stability pact in the Maastricht Treaty.

As early as 1959 Milton Friedman called the Fed the “fourth branch of government” and derided the body’s unaccountability. The father of monetarism wrote in a 1962 essay “the case against a fully independent central bank is strong indeed.” On the question of whether monetary policy should be conducted by authority or rule, the free market economist obviously preferred a rule. Failing that, he wrote that “if it is by authority, then I prefer that authority to be the Treasury, directly accountable to the people through their elected representatives.” He probably did not anticipate the likes of Trump and Bessent.

Amid the horrors of the 1970s inflation experience, 1978’s Humphrey-Hawkins Act inculcated into law the Fed’s responsibility to maximize employment within the confines of price stability (the dual mandate). Left open was what was meant by stability, and the monetary mandarins concluded that our debt-fueled economy must have some inflation, which was a 2% unspoken target since Greenspan, and an explicit one since 2012. It is an artifact of history that the number was arbitrarily determined by New Zealand’s Reserve Bank, a rate that cuts purchasing power in half after 35 years (versus about 23 years for 3% inflation).

Backlash

Liz Truss has been on a media tour in the US recently, mostly to say I-told-you-so about the performance of the UK economy after her supply side reforms were rejected. I am guilty of using “Liz Truss Moment” as a verb because people understand it, and it’s now part of the market lexicon often used as a warning for the US. Google defines it as “to destroy one’s political credibility through a disastrous, self-inflicted, and ideologically driven economic policy.” This of course is very unfair to Truss, and I defended her back in 2022 noting “I’m old enough to remember the last time a conservative female PM introduced a supply-side budget that the American media assured us would end in calamity.” That was Margaret Thatcher and the NYT’s label of “The Thacher Plan’s Failure” back in 1981 was embarrassingly wrong.

I mention all of that because part of Truss’ current critique includes complaints about the Bank of England, which has had independence only since 1997. She sums up opposition to her much-vilified economic blueprint as stemming from a Keynesian preference among mainstream economists and policymakers. In her Odd Lots appearance she was asked why she didn’t adapt her policies to the market orthodoxy. Truss responded as a believer in democracy she thinks “democratically elected politicians should decide policy, not unelected central banks.” She grouped the IMF, World Bank, and various central banks together charging they “are far too powerful in my view at deciding what a country’s economic policy should be, and they have not been effective.” She noted the BoE’s record on growth and inflation during the last 10 years has been poor.

Quite apart from the pedantry pursued by the Fed when it comes to opining on fiscal matters, in 2022 the Bank of England threatened to withdraw support for the gilt market amid talk of tax cuts. The BoE’s Bailey essentially sacked the Chancellor of the Exchequer and Truss was forced to reinstate the previous government’s plan to hike corporate taxes from 19% to 25%. As Truss notes in the interview, the day before the mini-budget dropped the BoE announced it would cut gilt purchases (though they’d warned of this in August the September announcement was twice the pace previously disclosed). Despite all the blame Truss received at the time, a later BoE report concluded two-thirds of the spike in gilt yields was due to failure to regulate pensions (which were conducting levered risk parity as liability management).

After Truss’ stint as PM, which lasted short of five Mooches, I wrote in October 2022 “At worst this is a Globalist conspiracy to undermine any suggestion of supply side reforms;” Truss clearly believes that theory, “sabotage” is what she called the BoE’s actions. “The Bank of England needs to be accountable to politicians — the current system doesn’t work,” Truss told Joe and Tracy, warning “There is a reckoning coming for the central banks, not just in Britain, but also in the United States, also the ECB.” Of course, everyone knows that central banks must be independent of politics, but conventional wisdom changes. A hundred years ago the only credible currency policy was one linked to the gold standard. Sixty-five years ago the Phillips Curve was an important economic model. In the 1990s the US deregulated banks.

The Current Moment

“Lord, make me chaste, but not yet.” An unaccountable central bank that only involves itself in political squabbles when the fiscal policy is “too right wing” may not be the best model. Central banks have only just recovered from their embarrassing post-Covid response, and the Fed has missed its inflation target for 53 straight months. On the cusp of the largest inflation surge in 40 years the Fed adopted a “flexible” average inflation target, explicitly allowing for overshoots. Five years later they’ve scrapped their framework for what some see as an abandonment of the 2% target entirely.

But, whatever reforms of the Fed may occur, they cannot happen under the rule of Donald J. Trump. The commentariat has a penchant for hyperbole but they get it mostly right when it comes to Trump and central bank interference. The FT correctly warned this week Trump’s attack “threatens US credibility.” During the UK’s unfortunate experience in 2022 there were jokes about the Great British Lira, as the country suffered both a rise in yields and a decline in their currency. As the David Rodham Gergen (RIP) of financial markets noted, that is a response associated with emerging markets.

In the world of currencies, inflation surprises tend to have differential impacts on developed and emerging economies driven by central bank credibility. Although higher inflation erodes competitiveness over the long-term, developed economy currencies often rally on higher inflation because it's presumed to lead to higher carry as interest rates rise. That is, central banks are expected to counter inflation via higher interest rates, restoring real rates to a competitive level. This is in contrast with, for example, Turkey, where Erdogan takes an MMT view that higher rates cause inflation. The fulcrum in both cases is credibility, and when a central bank loses it it’s a long painful process to get it back.

In some sense it’s laughable to call the Fed today credible, but like so many things credibility is a narrative, a story. A powerful story. Credibility is something that can be willed into existence, and I think ultimately most people think the Fed is trying. Really, things have not been the same since The Maestro exited the Fed; whether through skill or luck (or most likely a combination), the Greenspan years saw per capita GDP rise 4-½% per annum with inflation annualizing at 3%. Greenspan made fine-tuning famous and seemed to have a knack for it, correctly surmising that a productivity boom would tamp down inflation in the late 90s.

Markets have been mostly sanguine about the Trump risk to the Fed, and prediction markets are pricing Cook remains in office this year as a 3-to-1 favorite. Trump stooge Navarro told Bloomberg this week that the Cook “firing” was “due process” which makes a mockery of the English language at best. If a presidential lackey is allowed to run a Star Chamber against officials seen as insufficiently loyal it will cause a riot in rate and currency markets. To borrow from Ben Hunt, in addition to DXY these are two key elements of Putsch Pricing to watch:

The end of the War did not mark the end of war-time spending, and the US entry into the Korean War in 1950 led to defense spending reaching a peak of 16% of GDP in 1952. The 1951 Economic Report of the President warned of an “inflationary danger” and stated that consumption would need to be curtailed to direct production to defense. Real growth boomed, but inflation also reached 10%. In 1964 LBJ signed into law the tax cut proposed by the late President Kennedy and and launched his Great Society programs. Less than a year later the first Marines arrived in Vietnam. The “guns and butter” spending of the mid-60s sowed the end of the gold standard in the US for the last time, culminating in the August 1971 Nixon Shock that ended Bretton Woods.

In November 1971 the G10 met in Rome to formulate the dollar-based global monetary order that was to follow. The size of America’s trade balance was meager by current standards, but was enough to lead to an accumulation of dollar reserves overseas far in excess of American gold reserves, which is what led to the window being shuttered. The persistent imbalance led to the quick demise of 1971’s Smithsonian Agreement that attempted to revalue the dollar and peg other currencies to it. It was at the Rome meeting, in front of finance ministers from Canada, Japan, and the major European countries, that Treasury Secretary John Connally (the same one) delivered his famous barb “the dollar is our currency, but your problem.” The message was clear: America would prioritize its own economic interests over those of nations relying on the dollar as the backbone of the global financial system.

That message echoes today as Treasury yields have marched higher. Persistent post-Covid twin deficits coupled with expectations of Trump’s pro-growth policies have led to talk of the return of bond market vigilantes. This is a concept that rose to fame in the early-90s, and led Corporal Cueball to famously declare if he was reincarnated he’d want to “come back as the bond market. You can intimidate everybody.” In the event, the Republican Revolution of 1994 led to a steady decline in yields and the 8.03% peak the day before the mid-terms has stood since.

The bear case for bonds is fairly straightforward which I’d summarize this way:

1) The Fed will not ease rates much more from here because based on economic performance, policy is not restrictive. About the (highly theoretical) neutral short-term rate Chair Powell repeatedly has said “we know it by its works,” and based on that definition R* clearly has increased post-Covid.

2) Inflation has remained sticky, and well above the Fed’s target. The recent Super Core measure that removes lagged rental inflation, as well as pesky food and energy prices, is still rising at a 4% rate.

3) The likely extension of the TCJA along with skepticism about any DOGE success suggests a continuation of large budget deficits. Treasury capitalized on increased demand for cash by shifting more issuance to Bills, but Fed hikes have reduced the interest savings, and the eventual shift back to notes will increase UST supply.

4) A decline in foreign demand for Treasuries suggests higher yields. Higher short-term rates reduce the hedged yield from holding US bonds, while QT means less Fed buying. The combination reduces the portion of yield-insensitive buyers from the pool of Treasury holders.

Baring shocks or other negative surprises I still expect the Fed to cut at least twice in 2025, probably June and December. Governor Waller, a previous Trump appointee, possibly auditioning for the Chair in 2026, suggested this week he wouldn’t rule out a March cut. One of the few conspiracy theories I don’t believe is that the Fed is especially political in their policymaking, believing instead they are obsessed with their institutional credibility. Their recent wild swing in upside risks from employment back to inflation, along with Powell’s December answer about the 2018 staff recommendation to “look through” tariff inflation, is testing my view. Despite animal spirits I see a decent chance of a growth scare at some point this year as well. The highest estimate of neutral suggests Fed Funds is at least 1% restrictive, and the highest FOMC dot for longer-run Fed funds implies policy is 50 bps above neutral.

Sticky inflation has been a core belief of mine for years, but the fulcrum issue is how dogmatic the Fed will be about its target. I expect the target to evolve eventually to a range like the RBNZ, and a point target is a silly goal. Of course, the Fed can not move the goal post before reaching it. If core PCE moves down to a 2% pace it still would not reach the Fed’s target until September, and with December expected to be about 0.3%, the over is a better bet. My assumption in the “last mile” debate has always been the Fed will get close enough to obviate the point. Also, real rates are high.

Of course I share the general skepticism of Musk’s budget cutting efforts, and even he downgraded his expectations last week from $2 trillion to $1 trillion. Expected discretionary spending over the next 10 years accounts for less than one-quarter of the budget, with mandatory spending and net interest comprising the rest. Current CBO projections forecast an average budget deficit over the next 10 years of 5.8%. If DOGE realized $1 trillion of savings each year (starting at its target date of 2026) the deficit would still average almost 3.5% of GDP, which would still be more than the four decades preceding the GFC. It would barely be enough to stabilize debt/GDP with deficits growing 3.1% per annum against projected nominal growth of 3.8% annually.

The simple presumption that increased supply axiomatically leads to higher interest rates does not fit with the historical data, and the actual answer is “it depends.” Japan famously has run persistent deficits for decades amid anemic growth and low inflation, just as the US did in the post-GFC era. The common denominator was the lack of private sector demand, which increased private sector savings; government dis-saving offset that. The obvious difference now is that growth is stronger, household savings rates have corrected lower, and the environment is more inflationary. In Yellen’s terms, we’re closer to a “high-pressure economy” (despite some loosening in labor markets). As the chart shows, real interest rates fell despite increases in net issuance post GFC, but recently amid strong private demand, the increase in supply has coincided with rising real interest rates.

Finally, foreign demand is another widely misunderstood component of the Treasury market. In general, foreign official purchases of US debt is the reciprocal of America’s trade deficit; the current account balance and the capital account balance must sum to zero. This is why concern over a Chinese buying strike over tariffs in the first Trump administration was misplaced as excess dollars must be recycled. A reduced trade deficit (had that been achieved) would have reduced the amount of excess reserves China needed to reinvest. That said, there are two notable developments: the increased diversification of reserves into gold, likely driven by the weaponization of the dollar after the invasion of Ukraine. It’s also the case that higher foreign rates, coupled with a relatively flat yield curve in the US, reduces the attractiveness of US bonds to foreign investors. JGBs have had a higher domestic yield than hedged Treasuries since 2022. The combination of reduced foreign purchases with the gradual decline in the Fed’s balance sheet means yield-sensitive buyers account for more than half of Treasury holders for the first time in five years.

Assuming no reacceleration in inflation, 10-year Treasuries offer value at around 5%. Recent highs in 10-year TIPS yields around 2.3% are at levels not seen since 2007 (outside of the spike in late 2023). You don’t hear much about the theory of crowding out anymore in our MMT world. British economist David Ricardo’s classical theories included Ricardian equivalence which argued that tax cuts had no impact on consumers because they would rationally expect them to be offset by higher taxes in the future (can you imagine?). His related theory was that increased government spending financed by debt would “crowd out” spending by the private sector because it would increase the cost of debt and reduce income. This all sounds rather quaint against the MMT observation that the government spends money into existence, and everyone’s spending is someone else’s income.

The theory of crowding out regained some prominence in the 1980s when high levels of defense spending coupled with Reagan’s tax cuts ballooned the deficit to over 6% and interest rates rose. As Volcker tamed inflation in the early 80s interest rates fell, but not nearly as fast as inflation, and real rates remained elevated; 10-year Treasury yields averaged 10.6% against 5.1% inflation in the 1980s. Part of that spread was related to the lagged effect of elevated inflation expectations as the public was slow to accept the inflation genie was back in the bottle. Given the post-Covid experience the theory doesn’t appear to be very descriptive of the US, but it might explain some turmoil in overseas bond markets.

In recent weeks there’s been a lot of chatter that what’s happening in the UK is not another Lis Truss moment, in the manner of protesting too much. The new Labour government has proposed a level of deficit spending that would be laughably small for the US, with the 2% of GDP in new spending covered half by higher taxes and half with borrowing. Back in 2022 the Truss government’s nasty market surprise was a mini-budget with just 0.5% of GDP in unfunded tax cuts; against £30 billion of expected cuts the government announced £38.6 billion. That was enough to trigger a 36% decline in the Gilt market’s 30-year zeros.

This harkens back to another piece of economic history, d’Estaing’s 60s-era “privilège exorbitant” to describe America’s ability to run persistent trade deficits without pressure to correct overconsumption. He was finance minister for French President de Gaulle, who publicly advocated for a return to the gold standard in 1965. Ironically, it was witnessing the sterling crisis in 1964 that convinced de Gaulle of the fragility of Bretton Woods. France converted its reserves to physical gold, and knowing the history of the 1930s abrupt dollar devaluation, de Gaulle repatriated France’s entire gold hoard in 44 boat trips and 129 flights over three years (what a lege).

In agreeing with the consensus this week that the UK is not facing a Truss moment, Alpine Macro stated flatly “the main culprit behind the sell-off in Gilts is the weakness in US Treasuries.” That link was made obvious when Gilt yields fell as much following Wednesday’s US CPI release as after the UK’s own tame report. If Treasuries sneeze, bond markets around the world are likely to catch a cold.

The first I saw of Dalio’s article was when Pmarca tweeted a snippet along with the famous Wall Street quote; it sounded bullish to me. “A giant renovation of government and the domestic order aimed at making it run more efficiently,” sign me up! Dalio says the most analogous period is the 1930s so the next thought is here we go again, “LiTeRaLy HiTlEr!” But he helpful adds that he’s not saying the Trump government will act like fascist leaders of that period, but rather that “nationalistic, protectionist, top-down, government-led economic and social policies” will rhyme.

Dalio uses scare quotes when referencing the deep state so we can surmise he’s a denier and he goes on to say Trump will purge those “who are not aligned with and loyal to the mission.” This continues a common theme I’ve seen from the media with headlines like “Trump turns to allies” as if any president appoints his enemies. You can tell a lot about how statist someone is based on how they discuss staffing the executive branch. If Satya Nadella had a lieutenant who thought Azure was stupid and actively attempted to sabotage it would Nadella be expected to keep paying that person? The president is the chief executive to the executive branch and it’s reasonable to imagine he’d staff it with people who agree with him on policy.

Where Dalio’s essay really starts to go off the rails is when he writes “This will extend to all parts of the government system including those that were previously thought to be less politically/ideologically controlled, such as the military, the Department of Justice, the FBI, the SEC, the Federal Reserve, the Food and Drug Administration, the Centers for Disease Control and Prevention, the Department of Homeland Security, the Department of the Interior…” This comes off as an almost-childlike understanding of how the US government works to the point it’s difficult to believe Dalio actually wrote it.

It's true that the military traditionally was an apolitical organization but that simply isn’t true today. I won’t dwell on the ridiculous recruiting pivot which has seen a plunge in enlistments, but that was a political decision. For the sake of civilian control of the military US law prevents the Secretary of Defense from being active duty within the last seven years (10 for generals), a provision waived twice since 2017. The backlash against the Pete Hegseth nomination is the Swamp lashing out in fear of the Military Industrial Complex being weakened. The disastrous withdrawal from Afghanistan that cost 13 servicemembers their lives was an entirely political decision and rushed, for some absurd reason, to be completed ahead of the 20-year anniversary of 9/11.

The Department of Justice not politically controlled? One of the youngest cabinet members in history was Robert F. Kennedy when JFK appointed his own brother to lead the DoJ at the age of 35. Eric Holder famously described himself as President Obama’s “wing-man” after refusing to turn documents over to Congress in the Fast-and-Furious gunrunning scandal. Holder was held in contempt of Congress but faced no consequences unlike Stephen Bannon who became the first person since 1948 to be jailed for the same charge. Trump aide Peter Navarro later became the second. To this day Democrats maintain Obama’s “only scandal was wearing a tan suit.” And then of course there are the two federal cases lodged against Trump by the current administration in an attempt to knock him out of the race. The people in power right now attempted to jail their primary political enemy and frontrunner for the presidency over the same charge that was ignored for Hillary and Biden, but the DoJ was “previously thought to be less politically/ideologically controlled?”

The FBI? An apolitical reputation would shock the agency’s founder who ran a blackmail operation against the leading civil rights figure of the 1960s. James Comey is vilified on the left and the right for how he handled the classified documents case against Hillary in 2016. He obviously was attempting to provide cover for her but botched it so thoroughly some on the left still blame him for Hillary’s loss. And then there was Crossfire Hurricane, an FBI dirty tricks operation run against the Trump administration tenuously based on the Steele dossier that was funded by the Hillary Clinton campaign via cut-out Perkins Coie.

The FBI illegally spied on the Trump administration and there’s every reason to believe it was based on political bias. One notable example was the illegal use of FISA warrants against Carter Page, a Trump advisor who also happened to be a CIA asset (whoops). The FBI op was the linchpin of a four-year scandal-mongering operation to undermine the Trump administration while in office. Other evidence included text messages between Peter Strzok and Lisa Page, two FBI agents engaged in an illicit affair as well as a conspiracy to “stop” Trump from becoming president. The paper trail shows Strzok willed Crossfire Hurricane into existence. I fear I must score Dalio’s characterization poorly on this one as well.

I’m not sure when it began but the appointment of the SEC chairperson has been highly political as it’s seen as a bellwether for the expected intensity of financial services regulation. During the GFC the agency was led by Christopher Cox, a regulator who supported deregulation. He later conceded that voluntary supervision was less than successful for Wall Street banks. The agency today is led by Gary Gensler who’s been on a crusade against crypto, and whose imminent departure has triggered an enormous rally in bitcoin. The US tends to fluctuate between waves of regulation and deregulation, and the SEC’s direction and focus are always ideologically-driven decisions.

The inclusion of the Fed is mostly a humorous reference to me, especially given the expectation that next year will see a lot of attempted political influence on monetary policy. As I wrote before the election, I never believed the Fed was adjusting policy for the sake of influencing a political outcome. That said, it’s naïve to suggest that Fed appointments haven’t had a political dimension in the past, and the ghost of Arthur Burns is a constant reminder of that (although I’ve long maintained he got a bum rap). Far more culpable was William McChesney Martin who served under five presidents and presided over the late-1960s guns-and-butter inflation that saw CPI rise from a 1% rate to over 6%. Of course, there’s the explicit 10-year long coordination with the Treasury Department during and after WWII to monetize federal debt via QE and inflation.

The FDA did not cover itself in glory during Covid and often was accused of playing politics, including by Trump when at one time the agency threatened to tighten emergency use standards for the ultimate result of Operation Warp Speed. The agency initially imposed strict guidelines on diagnostic test developers that were later reversed. It granted an emergency use authorization for hydroxychloroquine that later was impugned as fish tank cleaner. The agency changed guidance for Chinese-made PPP only to completely ban them a month later. The FDA ran adverts with a riff on Ivermectin as horse dewormer, and to this day the evidence is the medication is harmlessly ineffective at worst. When it comes to the FDA’s culpability in America’s devastating opioid epidemic it would be fair to label that corruption rather than ideologically-driven, but I’m including it nonetheless. Going back to the 80s, Reagan’s FDA commissioner Arthur Hull Hayes Jr. ended the agency’s opposition to aspartame, previously opposed over concerns of carcinogenic risk, then joined the PR firm for the company that made the artificial sweetener after leaving government.

I almost can’t believe he included the CDC on this list because it is probably the fulcrum of the massive loss of public trust in government and The Experts™. Tom Nichols was early and off in his diagnosis: the death of expertise was a suicide. Last year a survey found “trust in public health agencies was not especially high” and that this related largely to “beliefs that health recommendations were politically influenced and inconsistent.” Yes, they were. One of the early Covid images burned into my memory was an FT chart someone tweeted showing cumulative cases by country. They had drawn in a circle around countries on the bottom of the graph saying “masks” and one on the top where cases raged saying “no masks.”

Evil Health Elf Fauci eventually conceded that his early derision of mask-wearing was a noble lie to protect the scarce supply of PPP on behalf of health care workers. The CDC settled on an arbitrary 10-foot rule for social distancing, which was reduced to six feet after an objection by an unnamed political appointee who didn’t think Americans could judge a distance more than the average height of a man. The CDC was a virulent supporter of the zoonotic origin theory of Covid, actively undermining the far more likely lab leak theory because of NIH’s involvement with the Wuhan lab where the virus probably originated.  

The CDC may have lost the title of most cravenly political federal agency to the Department of Homeland Security under Alejandro Mayorkas. I agree with Ben Hunt that people are too cavalier with the word “treason” in the current political environment, but when it comes to Mayorkas I’ll flip through the brochure a few times. Mayorkas, who this week refused to testify publicly in front of Congress breaking 15 years of precedent, has overseen the largest invasion in American history motivated by an ideology that elevated “humanitarian considerations” over public safety. His excuses for the immigration surge under his oversight include economic instability, violence, and environmental disasters, none of which are new developments.

Heritage Fellow Simon Hankinson wrote last year “It is hard to think of a single appointed official in U.S. history who has done more harm to this country’s sovereignty, territorial integrity and rule of law than this one man.” Jose Ibarra was convicted of a heinous murder this week. After entering the country illegally in September 2022 from Venezuela, he was paroled due to detention capacity issues at the El Paso processing facility, despite a $176 billion annual DHS budget (2.6% of the federal budget). He received temporary protected status and a work permit and moved to New York City where he was housed at the Roosevelt Hotel at taxpayer expense. He was arrested in NY for an incident later expunged from the record. He applied for and received a government-funded flight from New York to Atlanta, and settled in Athens where five months later he brutally murdered 22-year old nursing student Laken Riley. 

The Interior Department is boring in comparison to most of this list but is still political. Among other responsibilities the DOI oversees federal land management, water resources, and energy and mineral development. In its early years it was labeled the “Department of Everything Else” due to the catch-all nature of its mission. If you’ve ever seen There Will Be Blood the film’s milkshake scene is a reference to the Teapot Dome Scandal, which involved DOI officials being bribed for oil leases (again, politics and corruption merging). The DOI has been employed in the fight over oil development in the Arctic National Wildlife Refuge with the stance depending on the administration in office. The department was supportive of coal mining that involves mountaintop removal during the W. Bush administration but opposed it during the Obama administration. The issues the DOI oversees are inherently about political choices and the leadership selected for the department can’t help but be political.

Finally, Dalio says the changing international world order means a more fragmented world with the US pursuing an “America first” policy, resulting in “a greater-than-ever chance of military war in the next 10 years.” See if you can spot on the chart below when Trump left office. Putin assumed the Russian presidency in 2000 during the W. Bush administration, and invaded Georgia under his watch. President Obama presided over the annexation of Crimea in 2014, and of course Biden was in the seat for Ukraine in 2022. In Putin’s 24-year rule there’s one US president during whose tenure he didn’t invade a neighbor, and that was “Russian catspaw” Donald Trump. The very day that Dalio published his essay Russia launched ICBMs into Ukraine because the Biden administration allowed the use of American missiles in Russian territory for the first time. In summation, Dalio is full of shit. 

Final demand PPI was a bit exciting this morning, but mostly dismissed because of the revision lower in March. Ultra longs plunged a point following the release, but recovered all of that in 30 minutes (sigh) and finished green. However, that revision was all of 7 bps in cumulative change YTD through March, which April brought to nearly 3%. The more bullish aspect was that the PPI indices that feed directly into core PCE were weaker on balance (although that wasn’t true for health care services). Following the report Barclays revised their expectation for core PCE down slightly to +25 bps. Tomorrow’s CPI data has a lot more impact on PCE measurement of course.

Back in January I updated the “peak disinflation” chart, which through March continues to track history. The basic idea is for periods when CPI inflation exceeded 5-½%, once headline declines to 3% disinflation progress tends to slow. This is troublesome for anyone still worried about the “last mile” of the inflation fight. I’m not. I haven’t believed the real target is 2% for while, and also think it’s a matter of time before the Fed adopts a target range like New Zealand. Last week the Riksbank (which sounds like it should be governed by The Citadel) set the precedent for what “sustainably towards” the target constitutes. With their targeted inflation gauge at 2.2% the bank cut overnight rates by 25 bps to 3.75%.  

I’ve abandoned the idea of “signaling cuts” this year. Rate markets still price almost two cuts, but the Fed is running out of time. I don’t want to fight about it, but I don’t believe Powell is going to cut rates to “help Biden,” and in any case I think it’s laughable that Captain Houseplant could be saved by overnight rates declining a half a percent. It seems manifest that the median voter is concerned about the cost of living, not what the Monetary Mandarins in DC are doing, or not doing. That said, I do think the Fed cares about the perception of being political, which is why they probably have two live meetings to do something. You should position your portfolio as if there are no rate cuts in 2024, and be pleasantly surprised if it happens.

One final related point is any debate about whether good news is good or bad news is dumb; good news is good news. Not just because my neighbor’s job is more important than your rate cut, but also because we are very late cycle. When things are this far along good news is good news, and if the Fed is “forced” to cut rates because of bad news, it will be too late. Don’t root for bad news; don’t be that guy. The stagflation theme is making a comeback, and if that turns into reality the Fed is painted into a corner anyway. Lowering the cost of capital a smidge is unlikely to do much for stocks at these valuations if the growth outlook darkens materially.

Good luck tomorrow.

Last week Nassim Taleb called the US debt load a white swan that could lead to a “debt spiral.” While an obvious play on the term that made him famous there’s already an appropriate label: a Gray Rhino, which according to Michele Wucker is a highly probable, high-impact threat. Her 2016 book detailed how leaders often fail to address obvious problems. In her telling, the GFC was more of a Gray Rhino than a Black Swan event; when her Manhattan apartment nearly doubled in value in just four years she sold it. One of the pernicious results of the popularization of the Black Swan term was to allow the policymakers responsible for the calamity to deny any responsibility.

Covid-era spending has inured many to the realities of the exploding debt burden. Sure, maybe it contributed to some unpleasant transitory inflation, but we’re past that now. Anyway, “real MMT” has never been tried because there were no tax increases. One especially acute weakness of functional finance is its inability to explain the declining marginal utility of federal debt growth. The more of the total debt stock accounted for by government borrowing, the lower GDP growth is per dollar of new federal debt.

I like to play a game where I respond to MMTers with some variation of a picture like the one below on the left. This particular one is from 1942 and was part of the US propaganda campaign to encourage Americans to buy US Savings Bonds. Anyone who professes to understand functional finance but doesn’t know the import of one of these pictures has no earthly idea what they’re talking about. After the start of US involvement in WWII President Roosevelt introduced the new Series E Defense Savings Bond to “finance the war” (they became War Bonds after Pearl Harbor). The simple thought experiment here is do you imagine that if Americans had not bought bonds the US would not have constructed battleships and bombers, or paid soldiers? The dollar became a fiat currency under Roosevelt in 1933; there was no restraint on printing dollars to “finance the war.”

It should be obvious what the consequence of that would have been: inflation. Along with tax increases and the rationing of key goods like sugar, meat, coffee, gasoline, and tires, selling savings bonds was the key to keeping inflation under control. CPI inflation rose from essentially zero in 1940 to a war-time peak above 13% in 1942. The Revenue Act in 1942 created a 5% “victory tax” on individual incomes and increased the “excess profits tax” to a flat 90% rate. Federal spending rose from less than 10% of GDP in 1939 to 43% in 1945. All that government spending turned into income for Americans, which either needed to be taxed away or lured into Treasury bonds to prevent the circulation that would have led to more spending, and therefore inflation.

All of that explains why trust fund math is meaningful, although almost no one is paying attention to it. When Al Gore Jr. ran for president in 2000, he proposed a “Medicare lock box” that would require payroll taxes be used only for Medicare or to pay down the national debt. While SNL writers found it funny it was a topic for a policy wonk like Gore Jr. because the US had been operating under the unified budget approach for 30 years. The FY 1970 budget (back when Congress actually approved those) specified that the concept adopted the previous year would be continued and that “the total of budget receipts is comprehensive, including trust funds as well as general revenues.”

That sounded innocuous; it wasn’t. What it meant was that taxes collected for future social insurance payments would be part of the revenue available for current spending, with no consideration for any unfunded future commitments. The budget anticipated receipts equivalent to over 18% of GDP, with nearly one quarter of that coming from social insurance taxes. Ever since then the real magnitude of the US deficit has been hidden by the government spending revenues intended to fund ballooning social insurance obligations. The colloquialism “trust fund” is a basket of IOUs the government writes to itself in the amount of social insurance revenues less current social insurance spending.

Last year the Congressional Research Service outlined what would happen in the event the “trust funds” were depleted. The report describes the fuzzy math well: “Social Security’s cash surpluses are borrowed by the General Fund of the U.S. Treasury. The Treasury, in turn, incurs an obligation to repay the bonds with interest. These bonds are assets to the Social Security program but liabilities to the rest of the government.” In other words, the liability of taxpayers. The report estimates that if the trust funds were allowed to run out, benefits would have to be cut 20% in 2035, rising to 26% by 2096. Social Security uses a 75-year estimate window so beyond that the math is uncertain, but the report anticipates longer life expectancies will mean deeper cuts beyond that.

Or, they won’t cut benefits. Last September PGIM’s David Blanchett told CNBC “I’d be shocked if we enter a place where grandma and grandad will have their benefits cut.” I agree. Other options include budgeting lower benefits for younger workers, means-testing retiree benefits, and raising taxes (the 2034 shortfall is expected to exceed 3% of taxable earnings). Another option would be a Congressional bailout by printing the money. While the trust funds are a fiction the mechanics of social insurance taxes still serve a purpose in controlling inflation. While the government is sending checks to older Americans with a high propensity to spend the money, it is also draining income out of the economy in the form of taxes. When the lines cross, and the trust funds are “depleted,” it means social spending will exceed the taxes used to fund it, constituting a near-permanent “stimulus.” Imagine CARES, but every year.

This weekend Powell gave an interview to 60 Minutes where he spoke some truths that Fed officials generally avoid. As usual, he began by stressing that fiscal policy is the purview of Congress which also has oversight authority for the Fed. But, pressed on whether the national debt is “a danger to the economy,” Powell conceded that “the US is on an unsustainable fiscal path.” He referred to the pandemic as “a very special event,” and said it was time for an “adult conversation among elected officials.” Powell defined “unsustainable” as debt growing faster than the economy, but of course that’s nothing new. Since the early 1980s there was only a brief time at the end of the Clinton administration and early in the Dubya administration when the economy grew more than debt. What’s different today is debt/GDP approaching 100%, and trust fund math.

As a crisis catalyst US debt isn’t a top draft pick, but there are still implications worth considering for the secular view. My guess is one reason this particular Gray Rhino is all but ignored is that the most vocal doomsayers suggest histrionic consequences like the loss of reserve currency status for the dollar. That’s simply not a reasonable forecast in anyone’s lifetime largely because there is no alternative. But more dollars does debase the currency, which is good for gold.

More broadly, the magnitude of US debt suggests the pivot to “higher for not that long” is premature. A recent study examined the post-WWII decline in debt/GDP to attribute the decline to primary surpluses and controlling for interest rates; UST yields were capped until 1951 and inflation was “surprisingly” high. Inflation likely will be part of the deleveraging solution again. Debt/GDP is expected to match the WWII high in 2029, reaching 181% in 2053. The counterargument to higher yields is that won’t happen because they can’t be tolerated. Many assume we’ll see some form of financial repression to cope with debt.

At the Jackson Hole conference last year Serkan Arslanalp and Barry Eichengreen presented a paper called “Living with High Public Debt,” and it was not an uplifting read. They begin with the observation that large primary surpluses “are not in the political cards,” a point on which I think we all can agree. On the chart above the line labeled “Primary Balance” shows the counterfactual for if the US had not run post-War budget surpluses. Their second point is the interest rate/growth rate differential is unlikely to be more favorable than it’s been post-GFC.

Their final two points directly address the tools most presume will be utilized to bring down debt: inflation and financial repression. For the former they observe that inflation “is not a sustainable route to reducing high public debts,” only unanticipated inflation can do that. Inflation eroded debt in the late 1940s because the rate cap prevented yields from equilibrating, and it worked again in the 1970s because rate markets lagged realized inflation. If rate markets price higher inflation the R minus G math ensures debt-to-GDP will grow.

As for offsetting that with dictates, the authors judge that unlikely, partly because they see investors as a more powerful lobby today (cough, BlackRock, cough). They also point to financial liberalization and globalization as limiting factors, making some knock-off of Regulation Q difficult to implement. That may be true but it hasn’t precluded QE, and there’s no reason to believe the Fed couldn’t Twist Again. I doubt anything as dramatic as an explicit yield cap like the 1940s or Japan currently, but the Fed may succumb to fiscal dominance and put their finger on the R minus G scale. Regardless of whether inflation is seen as a policy tool for managing debt, it is an obvious result of social insurance lines crossing. Within the next decade the US very likely will pay out more in benefits each year than it collects in taxes to support them, creating a form of permanent fiscal stimulus.

MKM’s Darda has been bearish on the immaculate disinflation theme, and not a fan of 20x forward earnings for the S&P. He sees weakening nominal growth as consistent with rate cut hopes, but inconsistent with the 11% earnings growth implied by analyst expectations. On the other hand, if growth is stronger than he expects the seven rate cuts priced this year is excessive. The nominal growth estimate based on the Fed’s Weekly Economic Index and SSGA’s PriceStats has ticked up recently, but not dented rate cut hopes.

December’s CPI came in hotter than expected at +0.3% MoM (vs. +0.2% expected) and 3.4% YoY (vs 3.2%), but core matched for the month and was just a tenth ahead YoY at 3.9%. Stocks did sell-off on the report but recovered most of it by the end of the day. More notably, the rate discounted for December Fed Funds declined steadily from 3.95% last week to 3.65%. The rate spiked briefly after CPI, but finished the day lower. At the moment market hopes for easier policy are so strong they’re impervious to new facts. The Fed’s focus measure of the moment, Super Core, annualized at nearly 7% in December and remains ahead of headline YoY.

Morgan Stanley explained the beat was “a goods driven upside,” as core goods prices were flat. Taking a longer view, TS Lombard observed goods deflation pulling down core and asked, “for how long?” For three decades 2% core inflation was a combination of 3% services inflation with flat goods prices. What’s more interesting to me is core services inflation bottomed well before Covid, back in 2013 on a five-year basis and 2018 on a 10-year basis. Just a lack of goods deflation is a challenge to the 2% inflation target.

Ex-transitory inflation reached a 3-handle for the first time in over two years, with a 3.9% YoY increase. The monthly increase was 17 bps versus 8 bps in November. Transitory segments made up less than 8% of the basket for December, the lowest since July 2020, and we can probably retire this gauge soon (most already have). Used cars prevented a perfect month of all deflation in transitory segments with a slight rise that was the second consecutive increase. After recovering from CPI, stocks got a boost from PPI which lagged consensus with slight deflation in final demand prices. At the risk of nut-picking, the 6.4% YoY increase in homeowners insurance was reported the same week as horror stories about skyrocketing premiums in Florida and North Carolina. That’s at least closer to reality than the fiction that is retained-earnings imputed health care insurance deflation.

Following CPI, Epsilon outlined the narrative battle around inflation, which is part of emphasizing rate cuts as soon as possible. They highlighted the WSJ ’s spin asking, “will inflation’s rapid downturn stabilize?” as opposed to acknowledging “inflation might pick up again.” Statistical fabrication and spin aren’t the real world and that’s reflected in people’s mood about inflation. Of course, part of the reason consumers are so “bad” at forecasting inflation is they’re not trying to guess a government number.

Many of us think it’s too soon to hang the Mission Accomplished banner but old man shakes fist at clouds aside, what is the Fed actually going to do? Using core PCE, the real Fed Funds rate in November was the highest since before the GFC, and 170 bps above the Fed’s estimate for the long term neutral rate. I’ve assumed for a while we’d at least get “signaling” cuts in 2024, what might have been called “fine-tuning” in the 1990s. Obviously with inflation coming down policy gets more restrictive without rate cuts. The chart translates forward pricing into real terms using CPI fixing rates, and accounting for about 50 bps of basis between CPI NSA (that TIPS use) and core PCE (that the Fed uses).

Ahead of CPI, permanent voter Williams repeated the “restrictive stance of policy for some time” mantra, and it’s reasonable to think the Fed Funds rate will remain above 0.5% real through 2024. That also means if inflation comes in close to current fixes, forward rate projections aren’t completely idiotic. However, the path to hit the gentle decline in rates is narrow because it’s a combination of preemptive cuts and a firm economy, whereas forwards are a combination of outcomes that includes an intransigent Fed and one that panics.

First a disclaimer of sorts. Over the last 30 years I’ve spent a declining amount of time futzing with geopolitics. I probably spent too much time on that factor early on because it fascinated me personally, and because currencies were my first love in macro. In any process you have to be very careful about the aspects you gravitate towards because they interest you, and be very aware of the areas in which you’re merely a hobbyist. My change in   attitude   doesn’t   suggest   that   geopolitical  factors  aren’t  important  for  macro,  but  rather  1)   it’s   well   outside   my   zone   of   competence,   2)  it  often  impacts  asset  returns  over  the  very  long-term,  and  3)  there’s  often  a  fair  bit  of  art  involved  in interpreting how  geopolitical  factors will impact markets. (The chart is my own use of “geopolitics” is regular writing, and the red shading indications S&P 500 drawdowns).

Of course, there’s not always nuance involved; if Iran blockades the Strait of Hormuz oil prices will rise. But, I’ve observed that geopolitics often can be a very hand-wavy factor for strategists to throw out when their other arguments aren’t working. Late last year Kolanovic published a piece that made me think you could  probably  model  out  something  like  “the  geopolitical  phase  of  bearishness”  where  someone  has  faded  a  bull  market  for  so  long,  they  turn  to  ultracrepidarian  arguments. Ultimately,  they amount to something-something-tail risk, and you can always construct a scary sounding  bear  case  with  global  geopolitics. And with all that said…

The next presidential election is just over 10 months away, but 2024 is an unusually busy year for elections globally, with nearly half the world’s population across 64 countries going to the polls. First up is Taiwan where the pro-independence DPP party is expected to win, potentially raising tensions with Beijing. Modi appears headed for reelection in India in May, and the European Parliament is expected to shift more rightward in June, which is expected to challenge the Green agenda (at the margins, Europe is still Europe). The UK has until January 2025 to conduct parliamentary elections, but PM Sunak has pledged to make 2024 an election year, which is expected to turn the House over to the Labour party. And of course, the US looks set to run it back in 2024. Oh, joy.  

Last week Maine became the second state to remove Trump from its Republican primary ballot under the auspices of the 14th Amendment. This, of course, is absurd, and also the natural consequence of histrionics around the January 6th riot (as I write I’m wearing my traditional bison-horned fur headdress in honor of the event). Words mean things, and recent decisions by Colorado and Maine demonstrate the danger of mollycoddling semantic overloading from melodramatic leftists. The Colorado case was certain to be reviewed by SCOTUS, an inevitability the ruling court conceded when staying their own order.

The Court agreed on Friday to take the case. The primary question around this overreach is whether it will be struck down 7-to-2 or unanimously. If it’s not unanimous it will be another shameful example of political partisanship by Democrat-nominated justices. Chief Justice Roberts has staked his legacy on consensus, a principle he values so strongly he rewrote Obamacare from the bench to ensure it survived. It’s probably a bonus (for the media and other Democrats) that whatever happens will be used as justification to further undermine the Court.

There’s the question of whether the office of president is even subject to the insurrection clause of the 14th Amendment since it’s unlikely the authors accepted the idea a sitting president could perpetrate insurrection against himself, and the office is not named. Beyond that, it delegated the authority to craft enabling legislation to Congress, which it did. Since the post-Confederate era Section 3 of the 14^th Amendment has been employed twice, most famously to deny socialist Victor Berger his House seat. While that was likely flimsy, Berger actually was convicted under the Espionage Act in 1919. To date, Trump hasn’t even been charged with any act of insurrection, outside of verbally by the media and other Democrats.

Everyone knows Trump entered office amid protest from election-deniers who crafted the Russian collusion hoax to explain Hillary’s loss. What’s less appreciated is this trend didn’t begin in 2020 but rather 20 years earlier when Al Gore Jr. attempted a selective recount in Florida to find several hundred votes in Democrat-heavy counties. The DNC was without a Daly in the key state, and Gore Jr. dropped the election over 537 votes in Florida (it must still hurt to this day). A true sliding doors moment. Gore Jr. moved on without presiding over a riot, but the party spent the next eight years pursuing extra-legal maneuvers in Congress, and often threatening impeachment of the “illegitimate president.”

The 2000 election was so even that the Senate ended up deadlocked. In May 2001 Democrats cajoled Jumpin Jim Jeffords into switching from Republican to independent, handing effective control to Democrats for the first time since the Republican Revolution in 1994. It was short-lived. Despite being the party in the White House and having to defend 60% of the seats up for election (including five open seats), Republicans regained a narrow majority in 2002 (it’s fair to conclude the sitting president had an electoral boost from the terrorist attack in 2001, which as we know, was so bad it was like January 6^th).

The 2002 election cycle also was the birth of the DNC’s ghoulish habit of turning funerals into fundraisers after the death of Senator Paul Wellstone. Former Reagan punching bag Walter Mondale was wheeled out to replace Wellstone on the Minnesota ballot, and the 74-year old lost, flipping the seat Republican for the first time since 1994. Side note, Norm Coleman lasted one term before being defeated by the infamous Al Franken, best known for playing part of a baggage handling duo in the Christmas classic Trading Places).  

I meet otherwise seemingly intelligent people all the time who are hysterical about the prospect of a second Trump term. That half the country (and undoubtedly large swaths of the world) believe the US will descend into a fascist hellscape if Trump is reelected makes our presidential election one of the key geopolitical risks of 2024. Alpine Macro’s geopolitical strategy team wrote about that this week in a report titled “The Great Trump Panic of 2024.” On Trump’s trolling “dictator for a day” comment they write “Trump has shown no aptitude to turn the judiciary, military, or the civil service into his personal fiefdoms (a prerequisite for any successful strongman).” As many of us have noted, Trump did not in fact “drain the swamp,” it drained him

President Biden embarked on a January 6^th tour last week amid a net approval deficit that’s almost back to the July 2022. That -20% mark was hit less than two weeks after June’s headline CPI printed over 9%, and it’s back to -16% despite the inflation problem having been declared defeated. His net rating hasn’t been positive since August 2021. Thus, “my opponent would be a dictator” is an obvious tactic from a deeply unpopular president.

Of course, there are other problems with the claim in addition to Alpine’s. It’s hard not to laugh when the media and other Democrats warn that Trump would weaponize the Justice department against his political enemies while Trump is battling four legal cases. It’s true that two are state cases (and that the classified documents case is legitimate, but for the Hillary Precedent), but those are being pursued by Democrats aligned with Biden. The guy who was denied a SCOTUS seat by Cocaine Mitch now runs the Justice department and appointed a Special Counsel just after the mid-terms to pursue Trump over January 6^th.

The Imperial Presidency has been dated as far back as James K. Polk, but was perfected by Obama’s pen and phone. In response to calls for action on immigration President Obama at one time said “I’m president, I’m not king,” and then went on to enforce DACA by executive action. Congress is complicit, having increasingly abdicated responsibility to the executive branch. Political popularity doesn’t make the abuse of power less tyrannical, which Biden’s repeated attempts to cancel student debt clearly are. Even after losing at SCOTUS last June the Biden administration has continued to pursue extra-legal means to achieve that goal. Let’s be grown-ups; the election this year is about picking our tyrant, not avoiding one.

I count myself a fan of historical analogs, but to take them seriously I require an empirical link. Most historical analogs have a small sample size, which means statistical significance generally is too much to hope for, so an intellectual link to fundamentals is especially important. Analogs around Fed actions are meaningful because they make sense; monetary policy matters a lot to financial markets. It’s that time again when there will be dozens of reports on markets in elections years, and, meh.

Between 1928 and 2022 the median return in election years was 10.7%, but the median return in non-presidential election years was 10.8%. Slightly better is the percent of positive years at 75% for election years versus 63% for non-election years. Usually, the presumed fundamental link is fiscal stimulus, or politicization of the Fed, which requires incumbency, and preferably with control of Congress. That makes some sense when observing that years with incumbent Democrats had a median return of 13.6%, over twice the 6.7% during races with Republican incumbents (there was a time when Republicans tended to spend less, although that time has passed). Again, with only eight cases each, it’s just an anecdote.

Given the bloated levels of Covid-era spending it might reasonably be assumed there’s not much ammunition left for fiscal impulse. However, late last year BofA calculated that 77% of authorized federal funds in recent legislation had yet to be spent. In the end, I don’t put any stock into the idea that an election year will boost risk assets. Alpine’s piece also refuted the idea that Powell would be politically-motivated to cut rates. Maybe I’m naïve, but I tend to agree. However, I think it’s manifest if the Fed plans to cut anyway (and they do), they’d try to avoid suspicious timing, which argues for cuts sooner rather than later

As it happens there’s no historical difference in equity vol between election and non-election years, both averaging a 16-handle. In general, I think the further back you go the less meaningful vol measures are anyway. In their report Alpine makes allusions to 1968, famous for the riots during the DNC’s Chicago convention. As they note, markets were unaffected, and in fact at around 8-½%, S&P vol that year was the third-lowest in election years. Everyone seems to think implied vol is too low these days and I tend to agree. It seems doubtless that breathless coverage of the election will create drama, and we’ll be treated to leading lights like Krugman promising depression (again) if Trump is reelected.  

The biggest source of uncertainty arises from the fact that absent a landslide in either direction (which seems unlikely), the losing side almost certainly will protest the results. The lawfare employed by the Biden administration will lead to another round of “rigged election” allegations, while Democrats haven’t fully accepted a presidential loss since 1988. One thing bullish for stocks and bearish for bonds is neither frontrunner opposes massive spending.

One closing note - I find this chart a bit weird. There will be more sophisticated collections of stock baskets based on each candidate published this year I’m sure, but one obvious relative winner in a Trump administration is the energy sector. Weak global demand and some cracks in OPEC+ has pressured oil and cheapened energy stocks again, but that could end if Trump’s numbers continue to rise.

Last December Chair Powell was asked directly at the FOMC presser whether the Fed was considering raising its inflation target. It should be obvious why Fed officials cannot publicly disclose such deliberations, which made it all the more odd when he kept talking after denying the Fed was thinking about it; “I mean, there may be a longer-run project at some point.” As I wrote at the time, my charitable interpretation was Powell knows there are dozens of research papers in the works at Federal Reserve banks at any given time, and a thought piece on raising the target could drop at any moment, so best to hedge his answer (more likely it was logorrhea).

The Fed is a fairly new entrant to the inflation target game, having adopted one officially in 2012, about 20 years after New Zealand started the trend. As a small, open economy New Zealand is exposed to the vagaries of volatile capital flows, as well as imported inflation for key commodities it does not produce (when the first oil shock hit the country was importing half of its energy). NZ inflation soared in the 1970s like in the US, but also experienced two more peaks that the US did not, particularly in 1987 when core inflation nearly reached 20% versus just 4% in the US. How exactly did 2% come to be the central bank ideal? New Zealand’s finance minister at the time described it as “I just announced it was gonna be 2%, and it sort of stuck.”

And stuck it has. The combination of Western agricultural subsidies and soaring energy prices undermined the competitiveness of New Zealand’s economy and led to a nearly 60% currency depreciation before the bleeding was stanched by the Plaza Accord. The rising costs of imports led to the final surge of inflation, which was already at a more manageable level when the RBNZ adopted the first of more than a dozen Policy Target Agreements. The bank’s initial target of 2% was reached in short order, and the next major PTA update came in 1996 when the target was replaced with a band of zero to 3% inflation. A band remains in place today, but in 2002 was narrowed to 1% to 3% over the medium term. Finally, in 2012 the RBNZ once again elevated the 2% midpoint to an explicit focus of the central bank. While the mid-point of the band was recognized as the target, the bank thought formalizing it would help anchor inflation expectations.

Until the post-Covid rise in inflation, core prices in New Zealand averaged a 1.7% rate since 1996 and was within its prescribed band 83% of the time. Unlike the US and Europe, New Zealand never flirted with deflation during the GFC and the deleveraging period that followed. The year New Zealand again made 2% an explicit goal the Fed finally formally adopted a 2% inflation target. It was a long and winding road. In a way it’s surprising that it took so long because ultimately an inflation target is just a form of forward guidance, a tool the Fed fell in love with after the GFC.

When Alan Greenspan chaired the Federal Reserve he was no fan of the strictures of rules. The former Ayn Rand acolyte became a fan of leviathan federal power once he was ensconced at the Eccles Building. As chair he made his decisions according to what colleague Alan Blinder labeled “the Greenspan Standard,” which he defined as monetary policy that was whatever Alan Greenspan thought it should be. He exercised “pure, period-by-period discretion.”

Adopting an official inflation target was a regular topic of debate at the FOMC at a time when members were still employing Volcker-era targets for growth in monetary aggregates. In their 1996 deliberations they still couldn’t pull away from M2 growth, but that July adopted a private 2% target that Greenspan insisted remain a secret. In Blinder’s description of the Greenspan Standard he enumerated 11 principles, the second of which was “Don’t let yourself get trapped in doctrinal straitjackets.” Better to be thought of as The Maestro than failing to hit an official target.

The Fed’s first major adjustment to its inflation target took eight years, and arguably came at the worst possible time. Bedeviled by the perceived constraints imposed by the zero lower bound (until CBDC is forced upon us, anyway), the Fed adopted flexible inflation targeting. Because deflation risk had been the dominant concern for so long, the Fed decided to stop letting bygones be bygones in undershooting the target. We can safely conclude the Fed has dispensed with the undershooting problem. It would strain credulity to call 2012 to 2023 “medium term,” but for the record the core PCE deflator is 2.6% above a 2% trend rate, 7.9% below a 3% rate, and 14.4% above a 1% rate.

What is “price stability?” A cynical person might think it’s absurd for our monetary mandarins to target a level of decline in our purchasing power. Realistically, we’re an enormously indebted economy, and moderate inflation greases the skids of commerce. The Greenspan definition of price stability was “that state in which expected changes in the general price level do not effectively alter business and household decisions,” which was just a riff on the Volcker maxim that inflation views were not a pervasive influence on economic and financial behavior. It’s more complicated than it sounds because while expectations of high inflation can motivate behavior that creates a spiral, we’ve also seen low inflation motivate behavior that creates bubbles.

The most dangerous thing in the current moment would be for Republicans to believe they will somehow escape blame if chaos ensues, an idea of which I’ve heard whispers. The “negotiations” may be handicapped by the President’s five-hour workday, although the more likely impediment is whoever the Gen Z’ers are running the White House these days; we still don’t know. Biden likes ice cream though – hope he demands two scoops like Orange Man Bad did! Of course, no one is allowed to discuss the issue of the President’s obvious dementia, but one time President Trump used two hands to drink a glass a water, and who can say which is worse?

The statutory debt ceiling dates back to World War I, a time when it was foolishly presumed the government would balance its budget, even despite war-time spending. As with so many government tragedies, this one began with Congress abdicating its authority to the executive branch (the existence of the imperial presidency in the US is at least half Congress’ fault). In those quaint times Congress passed appropriations bills, so to delegate the authority to fund the war to Treasury, the debt limit was created. This gave the department the ability to issue bonds as needed, within the strictures of the Second Liberty Bond Act. The Public Debt Acts of 1939 expanded that limit to all federal debt.

The ceiling has been an anachronism since 1974 with the passage of the Budget and Impounding Control Act. Rather than formally remove the limit, in 1979 Congress approved the Gephardt Rule, a parliamentary provision that deemed the debt ceiling raised when a budget was passed. This is sensible of course since the debt is to pay for spending Congress already has appropriated. That’s a slight overstatement since half the time Congress doesn’t formally pass a budget, something they never failed to do between 1975 and 1998. The Gingrich Revolution repealed the automatic increase to the debt ceiling as a final repudiation to former Majority Leader Dick Gephardt.

The 1995 fight produced the first government shutdown since 1990, and there were two during the budget process lasting 26 days. For a time in the late 1970s shutdowns were practically an annual event, and President Carter presided over at least one in every year of his presidency save the election year of 1980. Don’t worry, the man who said “government is the problem” happily picked up the mantle, and President Reagan averaged one shutdown for every year in office. However, they totaled just 14 days (yawn), less than President Obama’s one shutdown in 2013. That one featured what remains my favorite bit of theatrics when the White House had police tape draped around an open-air World War II memorial during the “shutdown.”

The 2011 debt ceiling was a bruising fight that included a nearly 19% decline in the S&P 500 in just over three months, and a downgrade to the US Treasury rating by S&P to AA+ with a negative outlook. That debacle included no government shutdown, which historically have been non-events for the market. Probably because it’s impossible to imagine a government employee foregoing income, there’s been little fear of an economic hit to shutdowns, and the median return of 21 of them stretching back to the Ford administration is exactly 0%.

There was a lot going on in the 1970s, and since Reagan the 15 shutdowns had a median gain of 1.0%. The best stock return by far was Trump’s 10.3% gain over a 34-day shutdown that began in late 2018, which many people are saying was because he was the greatest president ever (but it probably had something to do with the Fed-induced 17% plunge in stocks that preceded it). While S&P’s downgrade was the only one, in the 2013 budget fight Fitch did put the US on negative watch, which was reversed to a positive bias the following March.

Sadly, we don’t hear much about shutdowns these days, just “default.” Of course, the US is not going to default in any generally meaningful sense of that word. A true sovereign default involves more than paying interest late; it means restructuring debt. Restructuring is the term of art that describes paying someone back far less than you owe them. Obviously, that is not going to happen, unless you measure the debt in terms of gold or purchasing power in general. Why incur the disruption of a debt restructuring when you can just print currency?

As in past battles the GOP is resisting a “clean resolution” because the ceiling is the only bargaining chip the Republican-led House has in attempting to rein in federal spending. At this point, discretionary spending only accounts for about 30% of the budget. Leaders of both parties have been playing nice with each other in public; Speaker McCarthy has to deal with the Freedom Caucus and Jeffries has to bargain with, well, rank-and-file Democrats. No tax hikes are a line in the sand for the GOP while Dems are fighting any new work requirements for social programs. This is, of course, political theater, and nothing that happens will change the trajectory of the US, which is slowly going bankrupt.

“Default” is a histrionic exaggeration of what would happen in the event Treasury hits the debt ceiling. In a sovereign default either debt is restructured to reduce the NPV of creditor claims, or it is satisfied with a dramatically depreciated currency. Neither of those things will happen (in America we depreciate our currency slowly over decades). In the past Treasury has prioritized principal and interest payments on debt, and the House has been trying to mandate that legally for months. Secretary Yellen has openly opposed the idea, and the Administration is likely to go for maximum chaos in the event Treasury “runs out of cash.” Imagine the ads: “the GOP is starving children to pay rentiers.”

Biweekly coupon payments generally are in the $5-to-$15 billion range, but last Monday it was $50 billion, leaving the Treasury General Account at $57 billion Thursday, its lowest level since 2021. If actual payments are missed it’s difficult to handicap how that would ripple through global money markets, but it would not be great. SIFMA has provisions in place to extend maturities day-by-day, meaning securities remain transferable, so could still be used as money. But, the usual flow of money and credit could be significantly disrupted by even a delay in Treasury payments, and that is precisely why it is very unlikely to happen.

Before Taylor Swift was writing Stunning & Brave™ songs about “controversial” social issues five years after the Supreme Court codified them into law, she was oddly quiet. She was so quiet in fact that her silence was called “deafening.” It’s possible Swift took Michael Jordan’s approach that Republicans buy sneakers too, or maybe she didn’t want to alienate her Alt-Right worshipers (I would give her the benefit of the doubt on the last once since white supremacists are a vanishingly small market, but others have been circumspect in the past). During the 2016 election Swift was contrasted, disapprovingly, to all the other pop stars intent on the public knowing their every desire. In fact, she was still explaining her silence in 2019 (new Progressive™ music soon followed).

The Breitbart Doctrine states that politics is downstream from culture. Every political war starts with a cultural one, and “culture war” is just a term employed to try to discourage people on the right from entering the public square. However, if a public figure is presumed to be of the left, then silence is violence. The Taylor Swift Effect is a construct where the left publicly harangues corporations to support their policy preferences, while the right treats corporate entities with the sanctity of church and state separation. DeSantis blew all of that up.

For the sake of delicate sensibilities I won’t say what Draconian™ policy DeSantis enacted, only that I know from sitting with teachers that the media mischaracterization of it was very successful. I’ll also propose a truce of sorts for anyone who believes Actual Book Burning™ is happening in Florida: you can place any book in a classroom if you can read it and show pictures from it on the nightly news without violating FCC rules. Predictably, Disney was bullied into Taking a Stand™ on the issue, and DeSantis’ response was the company can’t use his state’s tax breaks to fund a campaign to undermine the will of the voters.

The Taylor Swift Effect is being undermined as player 2 has entered the game. Previously, the corporate calculus was quite easy: one party demagogues you until you say what they want you to say, and the other side leaves you alone. Here, Pascal’s logic would suffice. In May DeSantis signed a bill barring the use of ESG when investing public money, enshrining an idea that has permeated many GOP-led state houses. BlackRock has had billions of dollars in redemptions from state pensions over the ESG monicker, although they’ve surely come out ahead on that gravy train. The same people who previously worried about greenwashing now say greenhushing is an emerging problem, even blaming State Street for shrinking a climate change report and removing a reference to “systemic risk.”

Something consequential happened overnight that is sure to excite the FOMC as they meet for what may be the last rate hike of the cycle. Chair Powell has struggled to maintain optionality in policy setting, which will become extremely important if the Fed signals the “conditional pause” this week that markets expect. His problem is that for most of 2022 markets didn’t take him literally or seriously. Just as markets started to in 2023, fantasies of an “immaculate disinflation” emerged.

Last month after 10 rate hikes the Reserve Bank of Australia paused, while pledging to do more if needed. As per usual, markets didn’t take Lowe seriously. At the start of March forward rates implied about three more 25 bps hikes through year-end, but a week after the failure of SVB priced about a 70% chance of a cut in 2023. When leaving the policy rate at 3.6% in April Lowe pledged that the pause didn’t mean an end to rate hikes, and pledged “if we need to raise rates again then we’ll do it.” Last night he delivered.

It’s true the Oceanic countries aren’t as slavish to rate markets as the Fed, but it’s still surprising for forwards to be so off-sides, and for the RBA to push ahead without nudging expectations. Australia reports headline inflation only quarterly (with a monthly estimate that began in September 2018), and Q1 data was reported three weeks after the pause. Higher frequency data suggested a sharper drop than they actually got, with inflation holding a 7-handle in Q1 down from Q4 2022’s 7.8%.

In defense of turning hikes back on Lowe cited sticky services inflation, which is at a two-decade high. Meanwhile, like in the US, unemployment remains at a 50-year low, and Lowe warned that weak productivity could entrench inflation. He further warned “there is a limit” to inflation patience, while saying a 3% rate (the top of the RBA’s target range) by 2025 would be an accomplishment. The RBA likely also was spurred to action by the turn in home prices as soon as they paused. After 10 straight months of declines, the CoreLogic Dwelling Prices index reported in April showed a 0.8% surge with the most recent report up 0.7%.

But that’s not the point of the story. I mean, who cares about Aussie rates (other than AUD traders) or how far behind the curve the RBA is? The point is the precedent. The Fed will hike 25 bps this week and likely signal that they anticipate being more data-dependent at future meetings. After repeated failed predictions of a pause it’s reasonable to think 18-1/2x earnings properly discounts the end of a Fed cycle, but a pop can’t be ruled out. The FOMC likely will be heartened that there’s now an example of a central bank skipping a meeting then hiking again. How seriously equity markets takes that this week is an open question.

In just over two years the Norms crowd has ignored a court order to end the eviction moratorium, unilaterally declared a debt moratorium with no basis in law, persued an open border, repeatedly violated the Hatch Act, pushed for packing the Supreme Court and abolishing the Electoral College, and advocated for DC statehood (anyone who knows anything about what the Founders thought of the seat of federal power realizes how extremist that view is). And yet, Democrats broke new ground this week with the indictment of President Trump.

“No man is above the law” is beatific sloganeering but a vacuous sentiment in this case. Forgetting for a moment that Alvin Bragg is famous precisely for not prosecuting crime, which was the entire reason for his campaign for Manhattan DA, misdemeanors past the statute of limitations are not turned into criminal prosecutions against random people. Obviously. And, you can celebrate the idea of finally getting that coveted mugshot you wanted for Christmas without pretending otherwise. To call Bragg’s case flimsy would be an insult to Terry Sanderson.

It must first be stipulated that being creepy and gross is not a crime in the state of New York, although it did finally lead to a gubernatorial change in 2021. The premise of criminalizing a seven-year old misdemeanor is that Trump, who made a habit of making hush-money payments, made one particular disbursement as a campaign expense that he did not properly report. Before she was Kathy Hochul’s doormat, Attorney General Tish James hoped to ride a persecution of Trump to the governor’s mansion. James campaigned for AG on the platform of investigating Trump, an obvious perversion of how the law is meant to work. Meanwhile the classified documents case against Trump seemed to fizzle about five seconds after it was discovered that President Biden improperly stored secret government files within reach of his crackhead, influence-peddling son. Far be it from me to deny the joy of progressives across the country, but spare us the platitudes about simply pursuing justice.

On the bright side, Hunter Biden will almost certainly be indicted. As a 2024 campaign strategy the indictment of Trump is undeniably brilliant; it elevates his prospect in the primary, and further erodes his already-weak position in a general election. But, as usual Democrats have taken a myopic view for the sake of political expediency. In 2013 Harrah Reid nuked the judicial filibuster, and four years later Republicans confirmed Neil Gorsuch on a 54-45 party-line vote. The flood gates are now open. Yes, of course the pursuit of Trump is banana republic stuff, and also there’s no reason for some ambitious local prosecutor to not indict Nany Pelosi for insider trading, Hunter Biden for influence peddling, or Illhan Omar for campaign finance violations.