“Innovation is the conference theme, and I believe that the public and the markets—in their collective wisdom—understand that innovations in the conduct of policy at the Fed will help deliver price stability alongside full employment.” Kevin Warsh, August 2026.
August once again brings us the joys of the annual Federal Reserve gathering in Jackson Hole. This gave Kevin Warsh, the still freshly anointed Chairman, another chance to clarify his intentions as he seeks to define the Fed’s role under his leadership. As per the above quote, Mr. Warsh seems to have noticed something similar to what we picked up from the theme and selection of topics for this year’s gathering.
Most years, we would highlight various of the relevant speeches and papers that reflected on the many structural challenges that we have regularly highlighted. We won’t be doing that this year, just the Chairman’s opening speech. Mr. Warsh, in essence, has laid out some of his priorities in consideration of challenging the established consensus as can be inferred by the themes of his construction of his task forces. None of those issues were on the agenda this year. None of the papers or discussions revolved around fiscal dominance and financial repression, nor demographic challenges, nor impaired policy fitness, nor dysfunctional bond markets, nor systemic fragility, nor ongoing inflation, nor currency/trade/kinetic wars. Nope. The theme and the papers were all on fin tech and payments infrastructure.
We respect how Mr. Warsh turned the theme around, in his opening comments above, to his emphasis on how “innovations in the conduct of policy at the Fed will help deliver price stability alongside full employment”.
Mr. Warsh has been beating this drum for a very long time. He laid out very similar views in this August 2016 Wall Street Journal op-ed that he drafted in line with the then Jackson Hole gathering.
The Federal Reserve Needs New Thinking – WSJ
“A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communication and governance… The groupthink gathers adherents even as its successes become harder to find. The guild tightens its grip when it should open its mind… They fail to recognize that central bank power is permissible in a democracy only when its scope is limited, its track record strong, and its accountability assured.” Kevin Warsh, August 2016.
We could hardly agree more. It is, to a great extent, what we are always writing about. For some very specifically targeted examples, check out our April 2023 Update – “Credibility” Convex Strategies | Risk Update: April 2023 – Credibility, and our May 2026 Update – “The Erosion of Trust” Convex Strategies | Risk Update: May 2026 – “The Erosion of Trust”.
Sadly, to date Mr. Warsh has been all talk and no action. His initial presser after the June FOMC meeting was a barnstormer. His inextricable hold at the July FOMC meeting, and subsequent fumble of a press conference, was a big hit to his reputation. If, again, he follows up his hard-nosed speech at Jackson Hole with another ‘do nothing’ at the September FOMC meeting, he may find himself permanently branded with this moniker. He, and plenty others, talk about the 66 consecutive months above the 2% target of their, so called, preferred measure of PCE Core. It has been well above the target over that period, and continues to be so, yet they still act as if the next data point and a single decimal point could somehow be determinant of addressing this with policy tightening.
Figure 1: US Core PCE YoY% (white). Fed 2% Inflation Target (red dash). 1997 – July 2026
Source: Bloomberg, Convex Strategies
We of course would prefer if Chair Warsh gave the accumulated, non-ergodic, Hurst Exponent dynamic, price level view a little bit more credence. Here is our often-used view of that, using CPI which we now have August numbers in, split by pre and post Flexible Average Inflation Targeting regimes. Either way, he is a long way off from restoring the Fed’s inflation-fighting credibility, from convincing regular folks that they do not have an asymmetric bias towards much greater tolerance for overshooting, than for undershooting, their target.
Figure 2: US CPI Index (white). 1997 – August 2026. Pre-FAIT Trend to August 2020 2% (red dash). Post-FAIT Trend from August 2020 4.3%
Source: Bloomberg, Convex Strategies
The tiny tick down in June is being taken as an excuse that things are softening, and they should hold off on taking back any of the 175bps of rate cuts that were put in over the last 2 years by the previous Powell Fed. Both above pictures, as well as the freshly reported August CPI numbers, should put that to rest. The below picture makes one wonder how there could be so much discussion, well after prices were known, that the softer June numbers were indicative of a developing trend of lower prices. We won’t call anyone out by name, but it isn’t difficult to find commentators pushing the argument that June was indicative of an ongoing lower trend, even with known market prices through August being readily available for consideration.
Figure 3: US CPI YoY% (white, LHS). Copper (blue), Diesel (orange), Sugar (purple) (normalized). May ‘21 – August ‘26
Source: Bloomberg, Convex Strategies
For these select, key economic items, it is easy enough to see with the naked eye that the June drop in prices has been corrected, and then some, by the end of August. Mr. Warsh and his army of economists ought to be able to review these market-based prices even ahead of the official numbers being released.
This is the sort of rigidly embedded ‘social learning’ that Mr. Warsh needs to overcome. Our note last month, “The Rogers’ Paradox”, dug into the decaying ‘fitness’ issue, when ‘social learning’ overwhelms the share of learning coming from ‘individual learning’. The Fed, all central banks, are in desperate need of some ‘individual learning’. If you haven’t already, this is an important note and in our view very much worth reading Convex Strategies | Risk Update: July 2026 – “Rogers’ Paradox”.
As a simple visualization of where stagnant mentalities may be impeding adaptation to changing circumstances, we give you our good old Bank of England ultra long-term inflation scattergram.
Figure 4: Stability Begets Instability. Bank of England 800 years of UK CPI Average (x-axis) vs Volatility (y-axis)
Source: https://personal.lse.ac.uk/reisr/papers/22-whypi.pdf Convex Strategies
The misspent efforts at “Inflation Targeting”, along with a clear element of Goodhart’s Law, created the anomaly of anomalies. Only an Econ PhD would see the 1997-2016 dot as not representing a violation of the natural order of things. It is adapting to the post-price-stability-manipulation regime, and the inevitable repercussions of it, that are the challenges Mr. Warsh and all current/future central bankers are staring down.
For an excellent discussion on the topic of credibility and the accumulated rot of social learning, we would refer readers to the wonderful ponderings of Dan Davies and his recent Substack note – “The Battle for Hamble”.
the battle for hamble – Dan Davies – “Back of Mind”
“The biggest obstacle to current development is, usually, the accumulated consequences of past decisions… The system we have hasn’t been imposed through sheer evil or incompetence; it is an accountability sink, created to manage public demand. And that public demand is partly a result of a lack of trust, which in turn is largely driven by past behaviour… Every cut corner and every occasion on which one doesn’t respect the public is a small theft from the common stock of trust and goodwill.” Dan Davies, September 2026.
Paraphrasing Dan and splicing in central bankers – When central bankers ask “why is it so difficult to get anything changed” they really do have to look in the mirror a bit.
That last sentence, in our humble opinion, is precisely what we think every time somebody states that it isn’t the price level that matters, that we shouldn’t concern ourselves with the accumulated long memory of rising prices, but rather that it is just the most recent marginal change we should singularly focus upon. It is an “accountability sink” in spades.
Our friends Grant Williams and Marvin Barth engaged in a discussion on just these topics on a recent episode of the incomparable Grant Williams Podcast, even framing some of their discussion around our own views. (Too kind gentlemen!).
“You and I have mutual friends in the Convex Strategies guys, Dave Dredge and Julian… one of the things that they’ve been banging on about for years is that this whole edifice of modern policymaking rests on models that assume that the world is normally distributed and pretty well behaved. There’s no fat tails. There’s no long memory. There’s no volatility clustering… the deeper point is that institutions can’t really learn without accountability. So central banks just keep making the same errors and calling them all unforeseeable.” Grant Williams, August 2026.
“Any organization is going to go off mission and make mistakes if it isn’t accountable. I think it’s very clear that central banks have lost accountability. We have taken certain ideas… almost as a religion.” Marvin Barth, August 2026.
Absolutely spot on!
Marvin makes a further point that we would strongly support as well. Restoring some credibility around the commitment to their price stability mandate might go some way to improving circumstances further down the road.
“The worst thing that the Fed can do for fiscal finance is pursue irresponsible policy… The best thing they can do… is to act responsibly on inflation, which is you may have to raise interest rates in the short run to bring them down in the longer run.” Marvin Barth, August 2026.
We love showing these simple pictures and pointing out, while folks are happy to blame tariffs and various supply shocks for bounces in inflation measures and related instability in the long end of bond markets (which, of course, all do have an impact), it is surely not a coincidence that the actual current drawdown in duration bond markets very clearly commenced when respective central banks paused their hiking cycles and then started to cut rates and remove restrictiveness.
Figure 5: US Fed Funds Rate and US 30yr Tsy Yield. Sept 2021 – Sept 10, 2026
Source: Bloomberg
Figure 6: ECB Deposit Rate and 30yr Euro Govt Bond Yield. Sept 2021 – Sept 10, 2026
Source: Bloomberg
Figure 7: UK BOE Bank Rate (white) and 30yr Gilt Yield (blue). Sept 2021 – Sept 10, 2026
Source: Bloomberg
Pretty obvious just to the naked eye. The long end has not liked lower policy rates. Now we can see the market showing as much, pretty aggressively, in the front end as everybody’s favourite proxy for policy rates, the 2yr yield, has once again started moving aggressively higher. This is another one of those things that brings back our memories from the latter part of that 1995 – 1999 period.
Figure 8: US Fed Funds Rate (white) and 2yr Tsy Yield (blue). 1991 – Sept 11, 2026. June 11, 1999 (white vertical) Fed Fund 4.75% vs 2yr 5.65%. Sept 11, 2026 (red vertical) Fed Funds 3.75% vs 2yr 4.56%
Source: Bloomberg, Convex Strategies
Figure 9: ECB Deposit Rate (white) and 2yr Bund Yield (blue). 1998 – Sept 10, 2026. Nov 1, 1999 (white vertical) ECB Deposit 1.5% vs 2yr 3.96%. May 26, 2026 (red vertical) ECB Deposit 2.0% vs 2yr 2.7%
Source: Bloomberg, Convex Strategies
Figure 10: UK BOE Bank Rate (white) and Gilt 2yr Yield (blue). 1990 – Sept 10, 2026. Aug 27, 1999 (white vertical) Bank Rate 5.0% vs 2yr 6.0%. Sept 10, 2026 (red vertical) Bank Rate 3.75% vs 2yr 4.87%
Source: Bloomberg, Convex Strategies
Mr. Warsh has commented that he wants to get information from the market, not simply have the market price what the Fed tells it to price. We hope he is receiving this information.
What really is driving economic and market fragility? We have long argued that it is what we have dubbed “The Hunger Games and Resource Wars”. It sure seems more and more people are coming around to our way of thinking. Ever since the foregone control of price stability, we have posed the obvious question of “who’s gonna buy the bonds?”
Our friend Mike Green gets specifically to this topic in a couple of his recent “Yes, I give a fig…” Substack notes – “Anchors Aweigh, My Boys” and “Great, Scott”.
(3) Anchors Aweigh, My Boys – by Michael W. Green
(3) Great, Scott… – by Michael W. Green
From the first piece, Mike gives us this very clear introduction.
“The world’s long-term bond markets have lost their two dependable buyers: the central banks that absorbed bonds through quantitative easing, and the Japanese life insurers who absorbed them because their home market paid nothing. That is the argument of Part I: the chairs at the long end are being vacated. The questions left standing: who sits down in America, what must they vacate to do it, and does the music stop peacefully” Mike Green, August 2026.
The second piece elaborates on his prior open letter to the Treasury Secretary and reflects on the mechanical response to some of his points in relation to the August announcement of increased off-the-run buybacks. As always with Mike, these are very good reads.
We would, however, stress that, while QE-enthusiastic central banks and Japanese life insurers are indeed major former sources of buying, they are merely subsets of the vastly broad buying base that we package together under the nomenclature of “Rational Accounting Man”. This encompasses all the vast bond market participants that have for decades bought bonds based on rules and incentives that had nothing to do with managing their own capital. These price-insensitive participants are QE practicing central bankers, of both the domestic QE practitioner form as well as foreign central bankers enacting the version masked as FX Reserve building. It includes not just Japanese life insurers, but also their peers in Taiwan, Korea, Europe and the US, who became kingpins in the hiding of duration in badly accounted for callable note structures. It includes pension funds from around the globe who were allowed to treat leveraged duration bond holdings as risk reducing. And, maybe most importantly from a systemic risk perspective, it includes banks that were incentivized to accumulate massive government bond and mortgage duration holdings as 0% RWAs (Risk Weighted Assets) and bury them in HTM (Hold to Maturity) accrual accounting portfolios.
As we have discussed so often before, the answer to the question about who was dumb enough to buy all this debt when interest rates were at zero and below, is Rational Accounting Man. As interest rates rise, these folks accumulate massive unrealized losses, they don’t cut positions, they don’t manage the duration, they just follow their risk and accounting rules. It isn’t their foregone wealth. But, as interest rates rise, they stop buying. The CBs are no longer trying to drive up their measure of inflation with relentless QE. The pension funds and insurance companies have seen the duration of their liabilities collapse lower as rates have gone up and yet are stuck with much of the excess duration that they were forced into on their assets during the extreme financial repression era.
The marginal buyers today are no longer Rational Accounting Man but rather actual folks with skin-in-the-game, what we would class as Boundedly Rational Agents, people making actual long-term investment decisions on their own capital, for their own retirement. At peak financial repression, Boundedly Rational Agents were nowhere to be found in the day-to-day activities of bond markets. Now Treasury Secretary Bessent and Fed Chairman Warsh need them to pick up the slack from the buried-in-the-mud Rational Accounting Men. Good luck, when neither the fiscal nor the monetary side shows any inclination to a disciplined maintenance of price stability or government spending.
But, of course, this is not a US-only problem. This is a global complication, thus the Hunger Games analogy. And, it is driven at its very foundation by the structural challenge of historically unprecedented population demographic circumstance, what we describe simply as “for every year going forward there will be fewer taxpayers”. Fewer taxpayers also means fewer savers, precisely as the bulk population cohort moves into retirement and commences dissaving. This is how we get around to “who’s gonna buy the bonds?” Meanwhile, nobody’s fiscal authority thinks that it is upon them to figure out how to reduce the supply of their bonds. Nobody’s monetary authority seems to seriously consider that an inflation targeting strategy explicitly targeted, as explained by Janet Yellen to Alan Greenspan, at compressing real wages during peak working-age populations, might not be the right thing as working-age population declines and dependency ratios skyrocket.
Even if they could address these issues, it is still far from clear that they can fill the void of Rational Accounting Man buyers with Boundedly Rational ones. We would proffer that the implications of not addressing these issues are pretty obvious. Our guess is, and efforts like those from Secretary Bessent and the ongoing Fed $40bn monthly purchases, suggest that we likely just get more of the same old thing, more of the social learning that is ill-equipped to adapt to the evolving world.
At least, as with Mike, it is garnering growing attention. Here is a recent note from John Cochrane on the subject where he lays out a swath of the things that could be undergirding the global flight from sovereign duration bonds. He very clearly makes the point that it is a global issue.
Interest Rate Surge? – by John H. Cochrane
“If we’re seeing a flight from sovereign debt, it’s a global flight from sovereign debt. And such a crisis is certainly a possibility.”
Likewise, Hanno Lustig put out two Substack notes, “What are US Treasury markets really telling us? Part I & II”, reviewing a very in-depth paper that he and some colleagues have written, “America’s Risky Debt: What Markets see that Policymakers Don’t”. We provide links to all three below.
What are US Treasury markets really telling us? Part I
What are U.S. Treasury markets really telling us? Part II.
The gist of Mr. Lustig’s efforts here is that the ‘market’ has shifted to treating Treasuries (again, we would highlight this is a global issue, not just a US issue) as a risky item as opposed to the old Sharpe World construct of Treasuries being riskless, or even risk reducing. This goes back to our good old catchphrase – “what about the 40?” The ‘40’, refers to the bond holdings in a 60/40 equity/bond balanced portfolio; the gold standard of Sharpe World investment methodologies. When you remove the assumption that the 40 is risk mitigating, you do a good job of removing demand for sovereign bonds. See the Rational Accounting Man conversation above.
“Market participants and policy makers are using competing models of US government debt. The market has moved to a risky-debt model that is a better fit for the data, while central bankers and regulators still operate under the safe-debt model embedded in their analytical tools and prudential rules.” Hanno Lustig, August 2026.
Hanno does great work. We would love to get him to consider modelling markets split into our two differing factions of market participants, i.e. Rational Accounting Man and Boundedly Rational Agents. What we suspect he would find is that the Sharpe World Imposed risk and accounting construct for Rational Accounting Man led to financial institutions massively overloading their books with the assumption that he is now seeing dissipate in markets, the old ‘safe-debt model’. Again, we suspect this is where the same old thing will be focused on addressing this problem, more financial repression through the central planner’s favourite tool, Rational Account Man, as opposed to true structural reform that could entice Boundedly Rational Agents to become willing bond buyers.
Another question we hear often is why does it seem that the Hunger Games is seemingly heating up even more so at the moment? The logical answer to that has to be Japan. Readers will be well aware that we have long highlighted Japan’s critical role in the evolving nature of the Hunger Games. The reason for that being that Japan has long been the biggest contributor of savings into the global pool and stands out as arguably the last one still contributing. If/when that reverses, the consequences are obvious.
The issue that we showed above for the Fed, the ECB and the BOE, have now become a very similar problem for the BOJ. The below picture makes it pretty obvious that adaptation is becoming point-critical in Japan. The days of Japan being the sole provider of capital into the Hunger Games are quickly coming to an end.
Figure 11: BOJ Policy Rate (white). JGB 2yr (blue) and 30yr (orange) Yields. 2000 – Sept 11, 2026
Source: Bloomberg
Talk about potentially losing control of your back end! Likewise, the 2yr market is speaking loudly about what it thinks about current policy rates, i.e. not nearly high enough.
This nice chart in figure 12 is available on the Japan MoF website, sadly only in Japanese but the picture tells the story, regardless of the language.
Figure 12: Japan Govt Debt Outstanding (blue bar), Weighted Average Interest Rate (pink) and Interest Cost (black)
https://www.mof.go.jp/policy/budget/budger_workflow/budget/fy2026/seifuan2026/01.pdf
The blue bars are the ever-growing stock of Japanese government issued debt. The pink line is the weighted average interest rate on the debt, with ridiculously favourable assumptions about future interest rates. And the black line is the size of the annual interest payments, the blue bar x the pink line. Even with the conservative assumptions, the just one year forward projection is already going exponential. Safe to say, Japan has also now entered the fray of “who’s gonna buy the bonds?”
Of course, you wouldn’t know it from this wide-ranging speech from BOJ Deputy Governor Himino.
Japan’s Economy and Monetary Policy
We can save folks the time taken to read this speech by summing it up thusly – “the same old thing”. Just further assurance that they increasingly believe they are approaching their target of 2% of their still undefined ‘underlying inflation’ metric and, as such, will continue to remove monetary accommodation contingent on a whole bunch of economic this-or-maybe-that speak. There is clearly an emphasis at the BOJ that communication is the key and, as long as you communicate the same old thing, people will accept the same old thing. So, ignore the above chart.
The corollary companion to the Hunger Games analogy is the Resource Wars. Once every debt issuer becomes your competitor in the battle to attract ever scarcer capital, they likewise become a competitor in the necessity to secure critical goods and resources. Capital starts out as the key critical good. You must attract it to carry your accumulated and ongoing profligacy. When that becomes a competition, then so too does all other necessary goods and services. As the nature of said competition heats up, the criticality of building your own production capacity, of building your own defense capability, of building your own tech stack, all accelerate.
For one of the clearest descriptions of our Hunger Games and Resource Wars observations, we refer readers to this speech from the anointed head of the European Union, President of the European Commission, Ursula von der Leyen. This one is a must read, not just for the specifics of what she has to say but also for the language of competition she weaves throughout her comments. She knows.
“The first challenge concerns the rules and conditions for competition.” Ursula von der Leyen, August 2026.
“We must also defend the resources our economic security depends on: critical raw materials, batteries, semiconductors, cloud computing, data and sensitive technologies. Our market remains open. But openness requires security, fairness, and reciprocity, ladies and gentlemen” Ursula von der Leyen, August 2026.
“China is a key economic partner. And our approach is clear and consistent: derisking without breaking ties. But being a partner does not mean accepting permanent imbalances.” Ursula von der Leyen, August 2026.
“The second challenge concerns the financing of our economies… Europe cannot set new targets unless it has the means to fund them… And a large share of Europe’s savings is invested outside our continent. Europe now needs to put these savings to work for its companies.” Ursula von der Leyen, August 2026.
“The fourth challenge is energy. Nowadays, it is the main factor limiting our competitiveness and independence.” Ursula von der Leyen, August 2026.
“The fifth challenge is artificial intelligence… Europe must control the main elements: computing power, semi-conductors, cloud computing, data, energy and state-of-the-art models.” Ursula von der Leyen, August 2026.
“The sixth challenge is trade… That is what economic security means: never to be dependent on one player.” Ursula von der Leyen, August 2026.
We could hardly have written a better outlining of the Hunger Games and Resource Wars ourselves.
For more on this topic, we would refer readers to these two links.
The first, from Michael Pettis, delves into the unsustainability of the accumulated, and still burgeoning, global trade imbalances. The second is a collection of short comments from a range of Brookings Institute affiliated experts.
A Great Rebalancing Is Coming | Foreign Affairs
“The trade imbalances that have come to characterize the global economy are fundamentally untenable. China, Germany, and a handful of other economies run large, persistent trade surpluses, while the United States absorbs much of these surpluses by running the world’s largest trade deficit. Sooner or later, something must give.” Michael Pettis, August 2026.
Europe’s China Shock 2.0: Where does it go from here? | Brookings
“China’s exports to the EU keep rising, while our market share to China keeps shrinking. This trend is not sustainable, and the status quo is not an option”. EU Trade Commissioner Maros Sefcovic, September 2026.
One wonders if the EU is structurally capable of adapting to the current nature of initial conditions? Will what is to come look like a smooth transition or rather more like some sort of punctuated equilibrium?
Either way, from an investment portfolio perspective, we suspect that convexity is the answer. Explicit protection that responds to dislocations if/when the unsustainable cracks, and participation should the same old thing solution of profligacy and asset inflation continue as singular tool of choice. Simply sitting in the presumed safety of bonds, relying on the Sharpe World “safe-debt model”, is likely to continue to meet with similar, if not worsening, results to what has been delivered since the volatility of price stability broke free in 2020.
How does one address this? The simple step is to replace bonds with things that participate and protect. As a very simple hypothetical example, imagine replacing a holding in the Global Bond Aggregate Bond Index (LEGATRUU Index) by splitting that capital 50/50 into a simple Defensive Barbell of MSCI World Equities and explicit risk mitigation in the form of our spliced together Long Vol Manager Index (the old EurekaHedge Long Vol Index splice with the new WITH Long Vol Index). Looking back to 2020, that hypothetical return stream would have looked something like the below.
Figure 13: Defensive Barbell (blue) vs Global Bond Aggregate (red). 2020 – Aug 2026. Scattergram and Return Distribution
Source: Bloomberg, Convex Strategies
Figure 14: Defensive Barbell (blue) vs Global Bond Aggregate (red). 2020 – Aug 2026. Compounding Path
Source: Bloomberg, Convex Strategies
The hypothetical Defensive Barbell, relative to the Global Bond Aggregate over this period, has about ¼ of the Max Drawdown (6.6% vs 24.2%), less than ½ the Downside Volatility (2.2% vs 4.8%), and a negative Downside Beta (-0.05 vs +0.29).
That is, arguably, just the simplest example of “freeing up capital” by utilizing the explicit risk mitigating strategies of Long Volatility and Tail Risk. We could go on and on, showing versions of Aggressively Defensive strategies, even Stacked Aggressively Defensive strategies; for various examples readers can refer here, amongst other notes – Convex Strategies | Risk Update: November 2025 – “Aggressively Defensive”. The challenges in today’s complex world necessitate something more efficacious than merely driving slowly. It truly is a competition out there. It is time to put highly reliable and efficient brakes on your car and get out there and drive with confidence, drive with intention, drive with objectives of improved terminal outcomes.
Read our Disclaimer by clicking here