Friday Speedrun: August 11, 2023

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Top Highlights

• Moves driven by endogenous factors are hard to explain because very often the only people that know about endogenous factors are market makers and institutional actors, while journalists and bloggers will always use hindsight to assign some kind of macro or economic logic to moves, even when that logic could be wildly off base. In this case, it seems like it could be as simple as: There is no one left to buy overvalued tech in the short run

• For now, a decent working theory is that monetary policy causes asset price inflation and procyclical fiscal policy causes goods and services and wage inflation

• Anytime you read anything super confident-sounding about how inflation works, question the author’s humility and assume they are probably a tad overconfident

• I lean toward the reacceleration narrative because of energy prices, and rising rents.

• For the last six months, rents have been rising and NYC rents (for example) just hit a new all-time high.

• Of course, if you believe that inflation is accelerating, you might also believe that the Fed is wrong to pause into a reacceleration of inflation and then you would sell your bonds, not buy.

• Bond market price action is not always easy to understand. Sometimes it’s about fundamentals, but sometimes it’s just about supply and demand. It could be as simple as this: The Fitch downgrade rattled a central bank somewhere and they decided to pare down exposure to the USA a bit, just in case.

• The USD trades well in a climate of rising global yields because US rate vol tends to be higher than most other countries and so if global rates go up, USA usually goes up the most. You see this over events where the BOJ will loosen up YCC and US yields move more than Japanese yields. This makes sense.

• Sidenote: I feel like “starting points matter” should be a cliché in finance, but it isn’t. They do matter, a lot! For example, people were freaking out about M2 going negative YoY in 2023. That had never happened before. But M2 went from 15.7 trillion to 21.7 trillion from 2020 to 2022. Then it dropped from 21.7 to 20.7 in 2023 and people were like “IT’S NeVEr GoNE neGAtIVe BeFOre!” Well, true but it also never went up 33% in two years before, either. The YoY decline, when placed in proper context, is meaningless. M2 is still well above trend. This sort of attention to numeracy can steer you clear of a lot of permabear commentariat traps.