This is going to be a holiday edition since I’m off this week with family.
“Nothing endures but change”
- Heraclitus
“Always do what you are afraid to do”
- Ralph Waldo Emerson
“All appears to change, when we change”
- Henri-Frederic Amiel
A. The Rise Of Carry
Thanks to my friend Sean, I read The Rise of Carry by Jamie Lee, Tim Lee and Kevin Coldiron and did a tweet storm here.
The book makes the case that the financial world today is one giant carry trade. The Central Banks are complicit in this trade, in-fact the FED is the biggest carry trader (the whale).
The FED actions have the impact of:
A. Makes the economy be more about access to capital and less about talent.
B. Creating massive wealth inequality.
C. Market losses create recessions (not the reverse)
You can see the extent of the global carry trade when you see the hugely correlated nature of all asset prices.
An insight that I hadn’t grasped: Volatility is the value of money - high volatility creates deleveraging and increase the value of money, while low volatility means more liquidity is available and investors re-lever.
This also creates the concept of moneyness. Risky assets can be transformed into what “feels” like money.
Because of the global carry trade, Risky assets can acquire the properties of money - liquidity and stability transform those assets....until spikes in volatility transform them back to Risky assets.
Another insight is about this chart that many use to say the FED creates money that drives up asset prices.
But the authors argue that why would that money just flow into asset prices?
A more subtle explanation is that the FED is the largest carry trader in the world and the most unique one because it can step in to provide liquidity when everyone else is deleveraging.
The FED is a massive asset buyer that drives prices higher and volatility lower.
The question that people ask today is can this continue forever or is there a vanishing point to this regime?
One answer is that it continues until:
A. So much GDP has been borrowed from the future that trend economic growth is zero.
B Both real and nominal rates are zero.
The solution they see for today’s carry based world is a inflationary anti-carry regime.
That inflationary regime could then lead to the development of alternative monies to replace fiat money.
While fans of cryptocurrencies they don’t think it is viable money because the monetary base must correspond to a claim on the asset base of the economy and hence be linked to the economy’s cumulative savings. This doesn’t mean that $BTC can’t be digital gold, it just can’t be money.
The last chapter of the book discussed what the end could look like:
We still need to see massive direct monetization of government spending to unleash inflation.
And while both US political parties are for this, how much do the Democrats want the current wealth inequality to end or would they prefer a continuation of our global carry trade?
We will find out.
A long period of above normal inflation, which inflates away America’s debt, is quite possibly a desired policy outcome. A period of higher inflation is not impossible once deflationary forces abate, economies accelerate and the velocity of money picks up (watch bank lending).
Eventually, a prolonged period of inflation seems the least painful way of dealing with future debt/entitlement costs.
Reducing the debt via debt liquidation, à la the 1930s, is unlikely to occur without a Bretton-Woods type event. We can find few examples in history of governments with deteriorating balance sheets (which much of the developed world has), paying off their debt.
Inflating away debt is the usual solution.
The problem is how to create that inflation.
The Fed seems inclined to let inflation run hot and if forced into funding the US budget deficit on a large scale, over a long period of time, we will see just that. A major balance sheet expansion by the Fed is underway.
Is the next policy move the introduction of new policy tools (yield targeting or rate caps)? Further steps might include stabilization of credit spreads and a series of broad-based lending programs directly into the real economy. Fiscal and monetary policy will increasingly be coordinated as the Fed and Treasury act together to reflate the economy.
The Fed has typically cut rates by 500bps in a US recession. The Taylor rule suggests short term rates should be -6.1% or 600 bps below current T-bill levels.
That would suggest short rates could still go negative, though the Fed seems to have little interest in negative yields as a policy tool.
This is now the “Trump Fed.” Political considerations as well as financial/ economic conditions, will affect US monetary/fiscal policy as the virus affects economic conditions and national elections approach in November 2020.
B. Life Changing
My friend Feisal Alibhai, a third-generation family business member, is the founder and CEO of Qineticare, the world ’s first ‘family health office’, based in Hong Kong.
He epitomised society’s definition of success until a life-changing event at the age of 35 led him to change his focus.
He now seeks to make a difference by helping others transform their live.
Qineticare only caters to Ultra High-Net Worth families, but during the COVID-19 crisis Feisal has opened up some of their library of expert webinars.
I have tried to listen to all of them and have learnt a TON.
I try to use August as a time to re-charge, learn and grow as an individual.
If you intend to do the same, I have shared my favourite webinars below.
Practices to Improve Your Immune System (Dr. D)
Conscious living and parenting in unprecedented times…. (Dr. Shefali Tsabary)
How to leverage your talents to improve decision-making (Jonathan Cave)
How to upgrade your biology through awareness… (Anisa Carim)
Discover How Antifragility Equates to Thriving (Dr. Mickra Hamilton)
C. A Few Things Worth Checking Out
1. Everyone is talking about GPT-3. In 16 Minutes, the team at a16z demystifies and clarifies all your questions.
2. My friend Oussama Himani, CIO @ Parkview hosted Marcos Lopez de Prado to discuss the impact of AI/ML on the Future of Investing. Highly recommended discussion.
3. Anthony Pompliano (Pomp) did a great video on What is Bitcoin and Why is it Important.
Hope you have a great summer and send me what you are reading or doing.
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