“The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. Based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.” ECB Policy Statement, 6 June 2024. https://www.ecb.europa.eu/press/press_conference/monetary-policy-statement/2024/html/ecb.is240606~d32cd6cc8a.en.html#qa The ECB went ahead with a 25bp rate cute at their most recent policy meeting, despite raising the forecast for their 2024 price stability measure (HICP) from 2.3%, the March 2024 projection, to a revised 2.5%…

Nassim Taleb introduced the concept of Wittgenstein’s ruler in the first book of his Incerto series, “Fooled by Randomness: The Hidden Role of Chance in Life and in Markets”. He elaborated on the concept and usage of it in his technical companion to the Incerto series, “Statistical Consequences of Fat Tails: Real World Preasymptotics, Epistemology, and Applications”. He defines it this way: “Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler.” Nassim Nicholas Taleb, “Fooled by Randomness”, 2001. If…

“At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan assessed the virtuous cycle between wages and prices, and judged it came in sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report (Outlook for Economic Activity and Prices). The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles. With the price stability target…

“I have been working in or around central banks for over fifty years. To my regret, as I look back on my career, I can now see that I was often guided by an evolving set of false beliefs about how an advanced economy works and how monetary policy might contribute to its better functioning. I was at various times an advocate of targeting the exchange rate, of targeting the natural rate of unemployment, of targeting monetary aggregates and, more recently, of pursuing the near-term stability of some index of consumer prices. Indeed, a summing up of my career, prior…

“To ensure that a central bank does not prioritise the solvency of the sovereign over its primary mandate of price stability, the European treaties prohibit monetary state financing. In its public sector purchase programme ruling of 5 May 2020, the German constitutional court stated that this prohibition had not been obviously circumvented because ‘acquired debt instruments are to be returned to the market if continued intervention is no longer necessary to achieve the inflation target’. However, that stipulation would not be upheld if central banks continue to maintain government bonds on a large scale over the long term.” Jens Weidmann…

Last month we titled our Update “Recession. Yay!” in which we said this: “As we have stated over recent months, the ‘good outcome’ would be to get to the recession, and we see people willingly buy and hold bonds. We would argue this is what happened in what was an epically ‘good outcome’ November 2023. Pauses by central banks, softer CPI and employment numbers, and the firm belief that central banks will follow the same old playbook, saw an aggressive repricing of imminent interest rate declines, ie. a willingness to buy their bonds, and that was GOOD!” https://convex-strategies.com/2023/12/14/risk-update-november-2023-recession-yay/ December continued,…

Sorry, but we must return to our often-used Hayek quote yet again. “We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.” Friedrich A. von Hayek, “The Road to Serfdom”. We use this in reference to a recent speech given by ECB Chief Economist, Philip Lane. As is usually the case, this isn’t…

“Those whose job it is to manage risk today tend to focus on the things to which probabilities can be attached and shrug their shoulders about everything else.” Niall Feguson, Oct. 2023. Decent note from historian Niall Ferguson in Bloomberg this month. He touches on the issue of unintended consequences and applies some familiar sarcasm to the issue: “Nobody could have predicted the Treasury market’s collapse of the last two years – apart from every critic of artificially low interest rates since John Locke.” It is a shame that he never explicitly refers to Sharpe World. Worst Bond Collapse in…

In what could prove to be a pivotal month, September saw a swath of central banks pause at what many hope will be the end of the historically swift monetary policy tightening cycle. The Federal Reserve led the pack (along with the BOE, RBA, SNB and many others) to put on hold, at least for now, further hikes in their policy rate. As usual it was all rather blandly stated in the official FOMC statement. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the…

In our discussions last month about entropy, we introduced the term “arrow of time”. https://convex-strategies.com/2023/08/15/risk-update-july-2023-it-will-not-work/ “Like with all things that live in non-ergodic, path dependent space, time dependence matters. Something that may be a low probability in a limited specified time horizon, is a certainty over the course of unbounded time.” “This goes back to the concept of Self-Organized Criticality, aka Sand Pile Theory. The low entropy accumulating pile of sand only appears stable. It wants to transition to its high entropy state, the post avalanche equilibrium of disorder as the sand chaotically spreads out across the table. To paraphrase…