Photo by Patrick Hendry on Unsplash
Hello,
Welcome to Known Unknowns a newsletter that loves a contrarian, unless they are into crypto.
No one can agree about the future of interest rates—thank goodness
The big news is no March rate cut and the job market is on fire because the government and health care industry are hiring like crazy. And now the smart money is on a May or June cut. Turns out markets don’t know what to expect.
But, I am not sure it matters when the Fed cuts rates. For me all the action is in the 10-year, and the Fed has less control over long rates. And there is also some confusion there. Last month Torsten Slok sent around a picture showing a wide range of opinions among forecasters about what 10-year interest rates will be next year. Some expect the 10-year to be above 5% others less than 2%. This is unusual because in the last few decades interest rates only went down and everyone pretty much agreed that was the future too—lest you be called a crank who favors austerity.
But once inflation and rates went up, they sent expectations into disarray. Though I think that is not a bad thing. It may mean higher rates, a higher cost of capital, and expectations that are less anchored. But maybe they shouldn’t be so well anchored.
Financial markets don’t offer much certainty, and just like universities, intellectual diversity is a good thing. A range of views forces a better discussion that can reveal hidden risks—or risks we just don’t want to see; or at the very least an awareness of risk, so we don’t invest in stupid things at a high price. Also, if everyone expects rates to be low forever, it enables more government spending and silly ideas like debt doesn’t matter.
We don’t know the future, and I think we should celebrate contrarians, even if they get it wrong, because odds are they will be right someday.
Better monetary policy
I contributed to a symposium in City Journal on the economic agenda for the next administration, I was asked how to improve monetary policy—though that may not be the job of the President. I argue we should scrap the dot plot. The Fed has no better idea what will happen in 12 months than the rest of us, why are they bothering to chart out what they plan to do when they don’t really know? They either end up changing their mind and admitting they can’t see the future either. Or feel committed to policy promises that no longer make sense.
And really, saying your future decisions will be guided by the data is a meaningless too. Why not just say, we follow some well-defined rules and principles, and we’ll see how it goes? Down with Forward Guidance.
Crypto is so over
I’ll admit, I’ve always rooted for crypto to implode. It is not that I didn’t understand it and missed out on getting rich, then poor, then very rich off of it. I just got tired of hearing its boosters tell me how important it is, but not ever be able to explain to me why it is so valuable. Either I am told a simple story that is wrong, or a long, complicated story that may be right, but I just don’t understand it and don’t have the patience to make sense of it.
But from what I understand, even its falling price now is too high. It does not pay dividends. And unlike currencies backed by a government, it has no claim on any real assets. I guess it is a hedge from the dollar imploding. But what are the odds that will happen? About 99.999% of the time you have to tolerate extreme volatility—all to hedge an extremely unlikely tail risk.
Yes, sure maybe the blockchain technology is valuable for transferring money, assets, and securing identity. But then you should invest in a business that provides these services, not a currency that enables on it.
The crazy thing is what really did crypto in, is not all these sensible arguments, it was going mainstream. I wrote for Bloomberg how SEC approval of the Bitcoin ETF and a Davos snub means crypto has hit the mainstream. And so, what is the point then? The whole point was being in on this edgy new thing only criminals or people in countries with failing governments currently use, and we will all use one day when society falls apart and we need to hunt rabbits to survive—though we will also somehow have access to our digital wallets.
Falling crypto prices are not just because it is getting boring. I also suspect being traded on public markets is finally incorporating information into the price. And the information is this thing has questionable value. +1 for Efficient Markets.
Welcome to the Introvert economy
The secret to New York dining was always to eat at 5:30. It was great, you could always get a table—anywhere. And this is not an aging thing, I felt that way when I was 25. But alas, it could be the pandemic, but everyone else agrees. 5:30 is the hottest new dining time, even among Gen Z! No tables then either!!
We call it the introvert economy. It features only venturing out early if at all. Because for years people have been spending more time home alone. I am not judging. But it does mean a different economy. One where it is harder for local small restaurants to stay in business (late night drinking is a higher margin service), so we can expect more chains or fancy, large restaurant groups. And we’ll probably also dress more casually. So the Sex and the City era of New York is officially over, now it is all dog-walking and athleisure wear
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Until next time, Pension Geeks!
Allison
A couple of thoughts:
1. Data that I have seen indicates that most mortgage debt and S&P 500 corporate got locked in at long-term historically low rates by early 2022. The higher interest rate has had virtually no impact on our household. I think I saw that net interest paid by S&P 500 corporations is at its lowest ever as a percent of revenue/profit. So increased interest rates are largely only hitting marginal activity (new home buyers, small business, office CRE). Credit cards have gone up but most were at usury rates in 2021 already. unless you didn't need to use them. Given the limited supply of houses available for purchase, 7% mortgage rates are probably the only thing preventing house prices from exploding upward again which would cause the Fed to raise interest rates further.
2. Crypto: My understanding is that the FBI has gotten quite good at tracking the movement of crypto by criminals. So the demand there may be down quite a bit. They may be back to lugging satchels of C-notes around. I saw some commentary that Hamas has requested their donors avoid sending them Bitcoin due to tracking of it. Other than unbanked communities, criminals were probably the primary best use case for crypto-currency so losing one of them probably negatively impacts demand. But fear not, Wall Street and institutions investing in ETFs will step in to fill the demand void that criminals left behind - what could go wrong?