The Fed is still conflicted

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Welcome home. Today’s letter consists of a rigorous (but I think correct) proposal for monetary policy, followed by a slightly lighter Bitcoin skepticism. A source of thought for a sunny autumn weekend, I hope. Please send me the email: robert.armstrong@ft.com

Federal Reserve is still in conflict

It ’s good for Fed officials to do so. more than this You are allowed to own individual investment securities or derivatives, or actively trade their portfolios.This is the Fed Said about this Thursday:

The new restrictions apply to both reserve banks and board policy makers and senior staff, buying individual shares, holding investments in individual bonds, holding investments in agency securities (direct or indirect). ) Or the conclusion of derivatives is prohibited.

Policy makers and senior staff are typically required to notify 45 days in advance of the purchase and sale of securities, obtain prior approval for the purchase and sale of securities, and make an investment for at least one year. In addition, purchases or sales are not permitted during periods of high financial market stress.

Stocks and bonds are sensitive to interest rate policy, and if authorities start the Fed’s policy decisions at the forefront, it would be very embarrassing, so actively trade with those who know about the Fed’s interest rate policy deliberations. It’s a good idea not to let them know. It’s strange that no such rule has ever existed.

The situation has changed because the heads of the Dallas and Boston Fed banks were very active in trading individual stocks last year. Boston President Eric Rosengren has invested heavily in mortgage real estate investment trusts. This is especially bad as the FRB buys very mortgage-backed securities invested by mortgage REITs as part of quantitative easing. More broadly, mortgage REITs are very sensitive to the interest rates affected by the Fed. To make matters worse, Rosengren likes to work hard on the real estate market. Both he and Robert Kaplan of Dallas have resigned. This all looks like hell.

But the new rules aren’t quite advanced. Both investors and the Fed itself need to think more seriously about the fact that the Fed’s top brass is rich with many assets. That fact, and the type of assets they own, must influence their policy making.

Ownership of certain securities, such as mortgage REITs, can cause particularly severe disputes, but as all investors know, it is the policy that most wants to be enacted. , The entire asset structure.

In this context, there are four important asset classes. Cash, bonds, stocks, and real estate (or other real estate). Debt, especially mortgage debt, may also be important. Changing the fact that the composition of a civil servant portfolio changes the way they think, even if they make sure that two of these asset classes, equities and bonds, are held through a diversified index and are not actively traded. there is no. Like most people, they will strongly prefer to be rich rather than poor.

To elaborate on this, the Federal Open Market Committee sits down to discuss when to taper asset purchases or raise interest rates. It is perfectly clear that members of the Commission, whose wealth is primarily in cash, bonds and real estate, have a different bias than members of the Commission, which are primarily in equities (). example, Jay Powell). Civil servants overvalue bonds and cash and are more afraid of inflation than those who primarily own stocks or real assets, or who have large homes or fixed-rate mortgages. The latter official will inevitably be devoted to the hiring side of the mission.

The public deserves to know exactly what the wealth structure of senior officials is in real time. In addition, the asset mix of all FOMC members must be the same, and in the long run, they must be chosen to meet the Fed’s two missions of price stability and maximum employment. The portfolio of officials needs to reflect the priorities of our country.

If I was in charge, I don’t know which mix to mandate. However, I’m confident that if we get FOMC members to invest 100% in nominal bond and force all members to lend their homes on floating rate mortgages, we’ll be a very hawkish Fed. Similarly, if all FOMC members were fully invested in the S & P 500, no matter what the inflation data looks like, we would see a very cautious approach to rate hikes.

Well, for example, unlike everyone I’ve ever known, the decisions of Fed officials aren’t so strongly influenced by what makes them rich and what can make them poor. You may think that. But I don’t think so. If this is not the case, and if we all agree that the Fed’s policies are very important, the fact that we leave the portfolio composition of these people to their personal discretion is quite crazy. ..

Blind trusts are useless. Most trusts are similar, so Fed officials can make fairly accurate guesses about what the trusts are. They are a highly diversified 70/30 equity / fixed income portfolio with a slight slope. But do you need 70/30 monetary policy? I don’t know, but I think it’s better to talk. If everyone knows exactly where the benefits of monetary policy oranges are, both transparency and predictability will be better provided.

How senior Federal Reserve Board officials’ liquid assets are invested should be a policy decision, not an individual one. The only option I can see is to make monetary policy a rule-based non-discretionary issue. Otherwise, FOMC member financial advisers allow the country to implement monetary policy to a large extent, which seems to be a very bad idea.

Bitcoin, gold, inflation

From FT Thursday:

Investors are dumping gold for cryptocurrencies as inflation recovers, fleeing metals that have historically been touted as stores worth buying digital assets more than a decade ago.

According to Bloomberg data, more than $ 10 billion has been withdrawn from the largest gold exchange-traded fund of the year, and the fund’s physical gold reserves are sold out. Gold prices fell 6.1% this Wednesday to $ 1,782 per troy ounce.

Meanwhile, Bitcoin’s price has doubled, surpassing a record $ 67,000 this week. .. ..

Veteran gold traders have admitted that the times are changing. John Hathaway, Senior Portfolio Manager at Sprott Asset Management, a precious metals investment group, said: He added: “The Bitcoin crowd sees the same thing I see when it comes to the money printing risk of inflation.”

.. .. ..Hedge fund manager Paul Tudor Jones said CNBC On Wednesday he prefers cryptocurrencies gold As a hedge against inflation.

I’m sure this article explains exactly how many investors are thinking right now. But both sides of the argument that gold was once, but no longer a good inflation hedge, and Bitcoin is a good inflation hedge are wrong. This is worth emphasizing. That’s because you can hear a fair amount of this kind of nonsense in the coming months. Yes:

Point 1. Gold prices are tracked slowly and irregularly, even with CPI inflation. Both rise over time, but the relationships are non-uniform. Gold is a real asset, its quantity is constant, and people have liked it for thousands of years, so it has retained its value. But it’s probably not a reliable inflation hedge over the period of most investors.

Point 2. It is the real interest rate that gold prices are closely tracking these days. That is, the opportunity cost of owning a shiny metal that has limited industrial use, no yield, and is inedible.

Point 3.. Bitcoin has shown no clear link to inflation in its short lifespan (except that both rise). This is what you can expect from what could become a currency at some point in the future, but now it’s mostly a vehicle For speculation:

Point 4. That said, Bitcoin is a real asset, it has a certain amount, and people have liked it for several years, so as far as we know, Bitcoin retains its value. There may be. However, there is no particular reason to describe it as an inflation hedge. When it correlates with something, it broadly correlates with the speculative appetite found in memetic strains like AMC. AMC will probably not be a good inflation hedge:

Talking about gold as an inflation hedge is poor. It’s ridiculous to talk about Bitcoin as an inflation hedge.

One good reading

The NBA has a difficult business problem as it seeks to increase its audience in China. Its owners and players have opinions and are not always silent. This story, I predict, it will be executed and it will be executed.

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