I was drinking with an academic friend last week and the discussion topic moved to ChatGPT. Like many of us who have played with the software, we both marvelled at the rate with which the application can spew out coherent prose. The main problem is that much of it is bullshit. Fabrication and embellishment is […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2023-06-28 05:57:362023-06-28 05:57:36Half-time for ChatGPT’s 15 minutes of fame
Why is everyone else nodding and I am shaking my head at the forced Credit Suisse rescue/bankruptcy/insolvency/systemic-threat/crisis? Those nodding agree that it was a prudent action by the Swiss regulator. My view is that there is nothing systemic that the market hasn’t already dealt with. Walk down the street and ask people, in every city […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2023-03-21 01:43:052023-03-21 01:43:05Credit Suisse was no big threat
So what is the big deal with the failure of SVB? The story goes that SVB’s depositor base was a bunch of tech startups. The asset’s went down in price, chewing up the Bank’s capital and then some. This triggered a classic ‘bank run’ where depositors tried to withdraw their deposits at a price that […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2023-03-15 01:51:022023-03-15 01:51:02Silicon Voodoo Bank and the managed funds industry
When the missionaries arrived at Aitape in Papua at the turn of the century they were appalled to see the villagers carry there boats from the mountain settlement to the beach each day, fish and return to the hills each evening boat in tow. No-one knew quite why so the missionaries decided to resettle the […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2022-11-18 04:02:432022-11-18 04:02:43Respect age (of the system)
In the classic fairytale Jack and the Beanstalk, Jack is charged with the important job of taking the family’s cow to market to sell for some much needed money to put food on the table. Jack, however, gets stopped by some scammers and is convinced to sell the cow for a handful of ‘magic beans’. […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2022-11-15 01:56:322022-11-15 01:56:32What happened to the cow?
A lower than expected CPI result of +0.4% for October in the US sparked an explosive rally across risk assets last night. If this number propogates for the next year then the Fed is finished tightening. If the number continues to fall then the Fed will be led to reverse course. Interest rate dependent securities […]
I cannot remember the number of times I walked into meetings to discuss Asset – Liability Matching (ALM) with pension funds and insurance companies. Insurers fell into two buckets – the savvy ones running sophisticated matched portfolios and the others with serious mismatches. Pension funds, alternatively, either lacked instruments to reduce the mismatch or fell […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2022-10-12 08:24:042022-10-12 08:24:51ALM, LDI and CSA spells trouble for the BOE
The virus, humanity and policy… I remember in February 2019 visiting my daughter in hospital where she had been rushed with suspected apendicitis. The hospital was eery with ward upon ward darkened and empty. The reason being the pandemic was just starting and there was a fear that the hospital system would become over-stretched. The […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2022-09-23 04:26:222022-09-23 04:26:22The virus wins, humanity survives, so what is the policy lesson?…plus the Queen and ‘The Dismissal’
I have argued repeatedly in this blog that one of the great economic unknowns is what causes inflation and why. The classical argument is money supply expansion, which seems to work empirically for hyperinflations, but not for moderate or galloping inflation rates. Indeed, the best general equilibrium economic models we have are completely devoid of […]
The Fed, it seems, has regressed to a New-Keynesian mindset. Despite employing reams of Finance professionals it still doesn’t understand the concept of informational efficiency.
The key to fighting inflation is to manage expectations. Exactly how expectations are formed determines policy. The New-Keynesian way is ‘adaptive’ – that is economic agents extrapolate from the latest CPI print and that’s that. The New-Keynesian way is backward looking and economic agents systematically make errors by forming expectations in this way.
The Finance way is to look forward and come up with a best guess of the future using all available information. The Finance way is couched in the language of informational efficiency and is often called ‘rational expectations ‘ in the economics world. Rational expectations stokes the class war between New-Classical and New-Keynesian economists but no-one would dispute that financial markets operate in this way and no-one disputes that financial professionals spend their lives dealing with uncertainty in the best way they can.
Active New-Keynesian policy making, however, relies on adaptive expectations to justify itself. If the CPI prints at 8% then the assumption is that inflationary expectations are 8% and that the Fed needs to raise interest rates above 8% to beat those expectations lower. But how can the 10 year bond rate be just 3.4% if inflationary expectations are 8%? Clearly the financial markets do not believe the New-Keynesian story and any price spike will not propogate itself into an 8% inflation rate.
The Fed has indicated that it will do everything it needs to control the inflation rate. Those needs depend on expectations. The Finance approach leads to a super-neutrality of money result which means that interest rates don’t need to rise to control inflation. In fact, the CPI print is recording changes in relative prices rather than inflation. The New-Keynesian approach is quite irresponsible, actually, since it risks leading the Fed into a highly restrictive and economically damaging policy of extreme rate rises only to be met with the future of benign inflation outcomes that the financial markets are predicting.
The stock market’s fall in response to the CPI reflects concern about the Fed’s policy. Put simply, the financial markets are not scared of inflation. They are scared of the Fed.
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2022-09-15 04:12:172022-09-15 04:12:17The markets are not scared of inflation, they are scared of the Fed
Half-time for ChatGPT’s 15 minutes of fame
I was drinking with an academic friend last week and the discussion topic moved to ChatGPT. Like many of us who have played with the software, we both marvelled at the rate with which the application can spew out coherent prose. The main problem is that much of it is bullshit. Fabrication and embellishment is […]
Credit Suisse was no big threat
Why is everyone else nodding and I am shaking my head at the forced Credit Suisse rescue/bankruptcy/insolvency/systemic-threat/crisis? Those nodding agree that it was a prudent action by the Swiss regulator. My view is that there is nothing systemic that the market hasn’t already dealt with. Walk down the street and ask people, in every city […]
Silicon Voodoo Bank and the managed funds industry
So what is the big deal with the failure of SVB? The story goes that SVB’s depositor base was a bunch of tech startups. The asset’s went down in price, chewing up the Bank’s capital and then some. This triggered a classic ‘bank run’ where depositors tried to withdraw their deposits at a price that […]
Respect age (of the system)
When the missionaries arrived at Aitape in Papua at the turn of the century they were appalled to see the villagers carry there boats from the mountain settlement to the beach each day, fish and return to the hills each evening boat in tow. No-one knew quite why so the missionaries decided to resettle the […]
What happened to the cow?
In the classic fairytale Jack and the Beanstalk, Jack is charged with the important job of taking the family’s cow to market to sell for some much needed money to put food on the table. Jack, however, gets stopped by some scammers and is convinced to sell the cow for a handful of ‘magic beans’. […]
Spurious Fed policy
A lower than expected CPI result of +0.4% for October in the US sparked an explosive rally across risk assets last night. If this number propogates for the next year then the Fed is finished tightening. If the number continues to fall then the Fed will be led to reverse course. Interest rate dependent securities […]
ALM, LDI and CSA spells trouble for the BOE
I cannot remember the number of times I walked into meetings to discuss Asset – Liability Matching (ALM) with pension funds and insurance companies. Insurers fell into two buckets – the savvy ones running sophisticated matched portfolios and the others with serious mismatches. Pension funds, alternatively, either lacked instruments to reduce the mismatch or fell […]
The virus wins, humanity survives, so what is the policy lesson?…plus the Queen and ‘The Dismissal’
The virus, humanity and policy… I remember in February 2019 visiting my daughter in hospital where she had been rushed with suspected apendicitis. The hospital was eery with ward upon ward darkened and empty. The reason being the pandemic was just starting and there was a fear that the hospital system would become over-stretched. The […]
Inflation IDK – better raise rates!
I have argued repeatedly in this blog that one of the great economic unknowns is what causes inflation and why. The classical argument is money supply expansion, which seems to work empirically for hyperinflations, but not for moderate or galloping inflation rates. Indeed, the best general equilibrium economic models we have are completely devoid of […]
The markets are not scared of inflation, they are scared of the Fed
The Fed, it seems, has regressed to a New-Keynesian mindset. Despite employing reams of Finance professionals it still doesn’t understand the concept of informational efficiency.
The key to fighting inflation is to manage expectations. Exactly how expectations are formed determines policy. The New-Keynesian way is ‘adaptive’ – that is economic agents extrapolate from the latest CPI print and that’s that. The New-Keynesian way is backward looking and economic agents systematically make errors by forming expectations in this way.
The Finance way is to look forward and come up with a best guess of the future using all available information. The Finance way is couched in the language of informational efficiency and is often called ‘rational expectations ‘ in the economics world. Rational expectations stokes the class war between New-Classical and New-Keynesian economists but no-one would dispute that financial markets operate in this way and no-one disputes that financial professionals spend their lives dealing with uncertainty in the best way they can.
Active New-Keynesian policy making, however, relies on adaptive expectations to justify itself. If the CPI prints at 8% then the assumption is that inflationary expectations are 8% and that the Fed needs to raise interest rates above 8% to beat those expectations lower. But how can the 10 year bond rate be just 3.4% if inflationary expectations are 8%? Clearly the financial markets do not believe the New-Keynesian story and any price spike will not propogate itself into an 8% inflation rate.
The Fed has indicated that it will do everything it needs to control the inflation rate. Those needs depend on expectations. The Finance approach leads to a super-neutrality of money result which means that interest rates don’t need to rise to control inflation. In fact, the CPI print is recording changes in relative prices rather than inflation. The New-Keynesian approach is quite irresponsible, actually, since it risks leading the Fed into a highly restrictive and economically damaging policy of extreme rate rises only to be met with the future of benign inflation outcomes that the financial markets are predicting.
The stock market’s fall in response to the CPI reflects concern about the Fed’s policy. Put simply, the financial markets are not scared of inflation. They are scared of the Fed.