“Europe’s fundamental values are prosperity, equity, freedom, peace and democracy in a sustainable environment. The EU exists to ensure that Europeans can always benefit from these fundamental rights. If Europe can no longer provide them to its people – or has to trade off one against the other – it will have lost its reason for being” So says Mario Draghi in the Forward of the long-delayed release of his report “The future of European competitiveness”. A lot happened in the month of September, not least of which being the Fed’s 50bp interest rate cut, and we will get back…

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Jerome Powell, Jackson Hole August 2024. With that, Chair Powell declared the battle to restore price stability complete. The market, probably quite rightly, has taken his comments as a clear signal that the Federal Reserve (Fed) will commence rate cuts at their next FOMC meeting in September. Speech by Chair Powell on the economic outlook – Federal Reserve Board For the mature crowd, the concept…

“Too often, the potential range of behavior of complex systems had to be guessed from a small set of data. When a system worked normally, staying within a narrow range of parameters, engineers made their observations and hoped that they could extrapolate more or less linearly to less usual behavior.” James Gleick, “Chaos: making a new science”. It’s not hard to see how the above statement aligns to our criticisms of what we dub “Sharpe World”, the nonsensical assumptions that undergird the consensus models of today’s economics and finance. Put very simply, chaos theory shows us that complex systems, even…

“The interest burden of the debt is at what I would call normal historical levels.” Janet Yellen. June 2024. https://www.realclearpolitics.com/video/2024/06/21/treasury_secretary_yellen_the_interest_burden_of_the_debt_is_at_what_i_would_call_normal_historical_levels.html US Treasury Secretary Yellen (Professor Yellen, as we know her) gives a masterclass in obfuscation, maybe even so far as gaslighting, in the Fox News interview inside the above linked story. It is no easy trick to describe the below as being within “normal historical levels”. Figure 1: US Govt Interest Expenditure Source: Bloomberg We can broaden that picture by including the US Federal Debt/GDP and the yield on 2yr Treasury Notes, a proxy on the cost of fresh debt…

“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,…