Morning Call

The bullish mood is still in the ascendant. Real assets are all going up. Bitcoin is bouncy. Bonds and bills are dead: all is calm in the fixed income world.

Risks posed by fiscal and monetary activism

This is a ‘Schools Brief’ about the phenomenon of increasing government debt. I think it’s fairly uncontroversial, although it points out that although returns on investment in the private sector appear to be high, relative to government investment, there are very low levels of physical capital formation in the private sector. Although the article does not spend much time exploring this anomaly, I suspect that one of the two suggested explanations is right: that high returns to corporates is largely the result of monopoly profits, also known as economic rents. The conclusion is rather tepid: governments can, and should do more deficit spending, they should be careful what they spend the money on and they should “prepare for the possibility of an eventual change in the global interest-rate environment.” The fact is, that increasing borrowing now is doing the opposite of preparing for an increase in real interest rates, and it’s hard to see any other actions that governments can take to offset this.

Some people think this is a huge problem, but the insanely cheap long-dated puts on ED futures shows that the markets are intensely relaxed about the possibility.

Wrap

It was a J Powell presser today. From the random remarks on Twitter I saw, it seems that Powell said that they were going to keep rates low for as long as it takes, but certainly for three years [check!]. Equities went down a bit, NQ more than most. Govt. bonds went down too. Quite an achievement. Commodities generally up, gold flat. Strangely, bitcoin was up quite a bit, which may indicate that risk on may be back tomorrow. DX was up too, as was the pound, quite a bit but reversing its moves last week. Commercial real estate looks weak.