A Quick Thread on How Interest Rates Work.

The 2 year vs Fed Funds spread is unusually wide.

Is the 2 year forecasting something bad and saying the Fed is behind the curve? That chart might make you think that the 2 year is leading the Fed and foreshadowing that they're behind the curve.

This isn't what's happening!

I like to think of the govt yield curve as a person walking a dog.

At the short end the Fed, as the reserve monopolist, has ABSOLUTE control. But the farther the bond is on the leash the more the Fed lets it wander.

Very good article in Bloomberg showing how net interest to households is negative. Ie, higher govt interest payments aren’t offsetting higher interest costs on debt. The reason for this is because household debt is now comprised increasingly of more interest sensitive debts and because banks are slow to pass on interest rate increases.

Is monetary policy (MonPol) working to slow the economy and inflation?

Let's take a look.

The primary transmission mechanism of MonPol is the credit channel (higher rates make credit less affordable).

How does credit look? We'd expect this to primarily impact private investment and how the private sector borrows to finance new investment.

This should be especially impactful for private residential investment.

Here's my full interview with @OJRenick on @TDANetwork from yesterday.

We talked about the bank panic and the potential risks to watch out for in the year ahead.

tdameritradenetwork.com/video/this-rat… @OJRenick @TDANetwork The analogy I used in the interview was the banks as the pipes in our economic house.

The Fed controls the water pressure. Raising rates so much so fast caused a bunch of pipes to burst so now we're inspecting for collateral damage.

New piece up - a postmortem on SVB.

disciplinefunds.com/2023/03/10/cre… To understand the fallout and future I think it’s important to understand the cause of the bust. And the cause of the bust always lies in the boom.

In this case it was the venture capital bubble and deposit boom at SVB.

Maybe the most important chart about the US economy these days. House prices vs rents.

How much will this mean revert? This is the main driver behind my "muddle through" perspective and why I think the US economy is in for a long slog. The process of this mean reversion will take years to play out.

A few of my favorite charts from 2022.

Gotta start with t-bills at 4.75%. Savers aren't being punished anymore.

PS - ditch your "high yield" savings account paying 3-4% and buy the bills yourself. They're effectively charging you 1-2%. Bear markets in perspective. From the excellent macro analyst @MacroAlf

https://twitter.com/MacroAlf/status/1608576353951186944

Crypto, in a lot of ways, runs on narratives and network effects. Many of those narratives are good. Others are exaggerated. Some are flat out wrong.

For instance, there is no such thing as a decentralized financial system. Every financial system in human history takes a decentralized item (like gold or Bitcoin or whatever) and then centralizes it into a credit system. Every. System.

This is a feature, not a bug because the decentralized item is scarce and hoarded).

The odds of this being a persistent 1970s style inflation looks increasingly low.

Goods inflation is collapsing. And services is pretty much all (lagging) rents at this point.

Rents are still running 6.9% YOY in CPI. Rents lag and the data clearly shows rents have peaked and are turning lower. 2023 is going to be one persistent disinflation theme.

And if you think real estate isn't falling or turning at this point then I have an NFT of a bridge to sell you. :-)

Fantastic paper here on what is arguably the most important trend in the global macroeconomy.

They say "The dollar has strengthened considerably since mid-2021and a contractionary phase of the global financial cycle is now under way"

brookings.edu/wp-content/upl… This is a nice chart showing USD appreciation with global slowdowns.

One of the most common fallacies of composition in finance is the "debt is bad" narrative.

Debt reflects the relationship of a financial liability AND its financial assets. Financial assets and liabilities are not inherently good nor bad. *It depends*.

https://twitter.com/cullenroche/status/1476598339172900864

In the aggregate we should expect financial liabilities AND assets to rise over time. In fact, we need them to. This is why total debt always rises in the long-run. See, eg, household debt:

"What's the right amount of Fed printing?"

Good question with lots of confusing/moving parts. Here's a short thread on this.

https://twitter.com/AdamSinger/status/1475507875359469569

At its core the Fed is just an interbank clearinghouse.

This means most of the "printing" they do does not even enter the real economy. Most of it is printing enough interbank reserves so banks can clear payments between themselves.

I disagree with this analysis concluding that fiscal policy didn't add to inflation.

And unlike Krugman, I was very vocal early in the pandemic about the risk of surging core inflation leading to potential Fed policy worries.

https://twitter.com/paulkrugman/status/1459940021599887361

The big lesson from the financial crisis was that QE and Fed policy isn't as powerful as many assumed and that fiscal policy is in fact, a huge powerful bazooka.

This became evident in the last 24 months as huge fiscal packages made a recession literally disappear.

I am THRILLED to announce the official launch of the Discipline Fund ETF, which is now trading on the NYSE under the ticker DSCF.

$DSCF The Discipline Fund ETF is the summation of all my personal investing beliefs – low fees, tax efficient, global stock/bond diversification, countercyclical rebalancing, all in one systematic ETF.

Seeing lots of talk about the surge in M1 money supply in the last week and the potential for very high inflation.

Let's dive into this in some more detail. First, we know from the financial crisis that M1 is a terrible, I repeat, TERRIBLE measure of future inflation.

It's just not broad enough to understand what's going on....

1. Can we stop calling this a "rainy day"? It's a category 5 hurricane that could hit the entire country.

2. States already have balanced budget mandates which impose discipline and results in *NEEDED* federal aid.

3. You want an economic collapse? Let a state default.

https://twitter.com/NikkiHaley/status/1253325061265620994

Why do states ultimately *NEED* federal aid? Because they're not businesses! They're in the business of putting out fires, etc and that's not a profitable business.

We leverage our PRIVATE wealth via the Federal Govt to keep ALL states solvent.

During times like these it's nice to go back to first principles and better understand how things work so we can understand why/how we navigate financial problems.

The 2008/9 crisis was the greatest learning experience of my life. It was the reason I wrote this paper, which helped me formulate a better understanding of the monetary system and how things work at an operational level. More facts, less ideology!

papers.ssrn.com/sol3/papers.cf…

Some thoughts on Covid 19, the economy and the markets.... This is different from every other market shock since the GFC in that it is clearly a real global economic event.

This is important because corrections are short-term non-fundamental events. This is a real fundamental event which means it will linger.

This meme going around Twitter is fun.

The history and economics of hardscaping is actually very fascinating. Cobblestone, or sampietrini, as the ancient Romans referred to it, is basically a cement surface with huge rock aggregates. That is, it's large stone connected with a cement bond. It's only as strong as the bonding agent used.

85% of stock market wealth is owned by 10% of Americans.

https://twitter.com/realDonaldTrump/status/1191350738536083459

Source: NBER working paper no 24,085. Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered?

nber.org/papers/w24085?…