I wrote about Evergrande this week and why I think the phrase “Lehman moment” is being misused. If it’s to define what could be the tipping point for an over-levered sector to correct in an society voluntarily moving back towards famine (aka “communism”), then yes it very well could be a “Lehman moment.”
But if this term is being used as a euphemism for a global financial crisis catalyst, then it’s inappropriate. Lehman was a big part of the crisis but by no means was its failure the tipping point. This week’s note is also a primer on what caused the financial crisis, which some clients may find helpful because it wasn’t what was reported in the news.
Ok couple things to discuss this week…
First, here’s the only thread I’ve ever seen on Twitter that has provided any shred of educational value. It’s a lot to digest so take it 5-8 at a time. Buried within the tweet is one of my favorite quotes of all time:
“If you torture data long enough, it will confess to anything you’d like.” – Ronald Coase
Next, the other big story of the week was the Fed’s meeting on Wednesday. Looks like they’re going to taper their bond purchases starting in November and ending mid next year.
This is a good step for the economy. We don’t need the Fed buying $120 billion in bonds every month right now, and I’d even argue we don’t need interest rates at zero. Let’s start ripping off the Band Aid.
What did surprise some (myself included) is their language around raising rates sooner than expected. Half the voting members of the FOMC expect to raise next year. But let’s unpack this projection because it’s a lot less “hawkish” (those who prefer rising rates and slower economic growth to prevent runaway inflation) that it may sound:
- The Fed will want to end tapering before they raise rates. This puts the starting point for the first rate hike around July-ish next year (this could change).
- That leaves 4-5 months before midterm elections next November. The Fed may want to wait until after elections to start messing around with interest rates (those who think the Fed really is independent and not political also probably think the same about the Supreme Court).
- Two voting seats at the FOMC are up next year. Biden wants what every first term president wants – a second term. That may not happen if the economy slows down, so Biden will pick “doves” (those who prefer low interest rates to spur economic growth) to fill these seats. Doves will be in no rush to raise rates.
- As I’ve said like 50 times already… It’s only 25 basis points! It’s mostly immaterial other than the impact on psychology. We’re a ways away from rate hikes impacting the economy.
Gun to the back of my head and I’d say the Fed won’t raise rates until early 2023. The midterm elections are going to be a mess, and the Fed will likely want a clear runway raise rates. But I’m also pretty sure this will be wrong because a lot can change between now and then.
Speaking of the Fed, two of the voting members of the FOMC are in the news for trading stocks. This follows stories last year about members of Congress selling stocks right before the COVID craziness began.
I bet you’re expecting me to unleash on the rampant conflict of interest and how these nefarious public servants deserve the worst, but I’m taking the other side here. If anything, this useless controversy points to a much bigger issue facing the future of our great country.
Joseph de Maistre once said, “Every nation gets the government it deserves.” By paying decision makers in our government less than what lifeguards make in California, and then subjecting them to conflict of interest rules that prohibit them from doing thing like investing so they can send their kids to college, you get what we have today.
Let’s say you have even the smallest bit of drive to succeed in life, whether that be defined by building a career/business or just accumulating a big a pile of money. Why, why, why would you ever succumb to the horrors of public service?
These conflict of interest rules around trading are absurd. For example, Fed governors are barred from trading bank stocks. Ok fine, on paper this may make sense to some until you dig deeper. Voting members of the FOMC impact every stock on the planet because they control financial gravity (interest rates), so what are they supposed to do? Buy NFTs?
But here’s the best part. Somehow this is news while big pharma CEOs sold stock 12 minutes after announcing the COVID vaccine last November. Afterwards, crickets. No probes into those sales by the SEC. No congressional hearings. Nothing happened, which is amazing given these conflict of interest rules actually serve a purpose in the private sector.
Lastly, if anyone has tried to buy a house lately, check this out. It’s arguably the smartest idea that I’ve seen in years.
Oh and this is pretty cool. Each dice is a perfect square.
Enjoy the weekend…