It is the usual drill: First, some updates on prior posts, then the latest essay, and, finally, some links that I want to unburden myself of—and that some of you may find interesting.
Updates and Erasures:
I wrote not long ago about higher education and its attempts—with unintended consequences—to find new ways to finance operations, given higher endowment taxes and disappearing grants.
Well, the number of schools newly issuing debt continues to grow, with Yale now joining in. This latest issuance takes higher education muni bond sales to more than $24-billion so far this year, sharply higher than in 2024, and the highest since 2014.
As ever, much of the fun is in the supporting quotes. Here, from the linked Bloomberg piece, is an S&P ratings person:
“Dartmouth maintains sufficient liquidity and is assessing financial mitigations to provide it with flexibility to navigate these changes”
That is a clever obfuscation for "sweet mother of god, they have a hell of a liquidity problem". Again, see my prior piece for how and why that is likely to get worse before it gets better, which it likely won't.
“Issuing bonds remains a common, prudent way for institutions to fund significant capital projects as part of responsible financial planning"
This, from a Dartmouth spokesthingie, is also terrific work. It harkens to the "I'm not funny looking, you're funny looking" sort of middle school rejoinder, which will never not be childishly appealing to me. He is saying that anyone who thinks it's weird to issue bonds is themselves weird, which is fair—but higher education has been much more sparing in the recent past, which is ... noteworthy and will have consequences.
Rough Notes:
How to Think About the Monetary Policy Apocalypse
A month or two ago, I was having a Thai lunch with my friend Jeff, a former hedge fund manager who now mostly plays professional poker and has Thai lunches. We were speculating about under-priced risks, and there are many to choose among, given our current polycrisis of polycrises.
I gave him my then-favorite candidate: The current White House would find a way to fire the Federal Reserve chairman, Jerome Powell, despite a recent Supreme Court ruling saying he couldn't. Doing so, I argued, would cause a hot (unpriced but tradable) mess.
It admittedly hasn't happened yet¹ (even if it's apparently imminent-ish). There has been a parade of officials dropping highly wordsmithed hints that they think Powell has broken the law vis-a-vis his upholstering choices, so he should be fired for renovation cause. Why for renovations, not rates? Because the Supreme Court has said a Fed chair can only be fired "for cause", and that has to do with fraud, managerial incompetence, etc., not rates higher than some real estate developer would like. So, office renovations it is.
¹ The word "yet" is doing a lot of work in the above sentence. Current administration policy can seem like a fat-fingered octogenarian accidentally launching apps while scrolling an iPhone. WTAF IS THIS? SUBWAY SURFERS? I DIDN'T TAP THIS! Well, yeah, you did, kinda.
There must, one might think, be something one can do about it. How, in short, to make money from such silliness? Kudos for your sociopathy: This is thinking like a macro hedge fund manager, and thinking like this can be fun, or at least a decent distraction from doomscrolling into the abyss.
For example, say you knew copper tariffs were coming in the U.S., which, if you were paying attention, you knew as far back as February of this year. As soon as you heard it, you began contracting with shippers and rerouting copper supply from useful things to your in-U.S. stockpiles, so you can sell it later at post-tariff high prices. That is why now, months later, there is more copper stockpiled at U.S. ports than at Shanghai, Rotterdam, and Singapore ports combined.
So, kudos for doing that, which you didn't, but would have if you had access to container ships. It has only been called the "metals trade of a lifetime".
This is what it is like cosplaying macro hedge fund manager. And it is a useful distraction from ... all of this [Paul waves his arms at modernity]. It is, in its way, analogous to my current bet on Jonas Vingegaard in the Tour de France: I don't want him to win, but by betting on him to win, I have a stake in an outcome that would otherwise be horrible to me, which makes me feel better while he not-loses.
But let's return from copper to monetary policy. Cosplaying a macro hedge fund manager here, the key insight from our Thai food (fine, it's well understood and has been for decades) is that if U.S. monetary policy becomes overtly political, it will undermine expectations of Fed independence, which in turn distorts the term structure of interest rates. This is a fancy way of saying that investors won't trust the Fed to not do stupid and political things.
For example, markets may begin to price in what's euphemistically called persistent policy error: being wrong, knowing you're wrong, and staying wrong. The government might leave rates low despite high inflation, because that is fun; they might raise rates late in election cycles to screw over the next Administration, because that too is fun.
Of course, many will say, So, same as it ever was. After all, the Fed was too low for too long after Covid, which helped make inflation worse, and the current administration has convinced itself that rates are too high because ... because, well, they're too high.
The impact of such persistent errors is non-linear. If the Fed is seen as a political plaything, long-dated government debt (i.e., the long end of the Treasury curve) will likely rise relative to the front end. Why? Because the front end reflects immediate policy, which may still follow data (or may not, as seems currently likely). But the long end captures inflation expectations and the risk that shit goes bad while you're holding (the "term premium"). Both are highly sensitive to perceived credibility.
Nevertheless, if you think rates are going to be flat or declining at the short end, and high and rising at the long end, you've just talked yourself into a so-called steepener trade. A steepener is a position that benefits if the yield curve steepens—i.e., if the spread between long-term and short-term interest rates increases. There are various kinds, but we only care about what's called a bear steepener, where short rates flatline or even fall, while long rates rise.
There are lots of ways to do this, from long/short ETF positions in treasury-related ETFs, to futures, to going Full Burry, getting an ISDA, and convincing a broker to create something expensive for you. I'll leave that as an exercise for you and your favorite LLM.
Because it probably won't work anyway. First, timing is everything. There is a reason steepeners are called "widow-makers"; you bleed a little every day in hopes of one day getting a huge infusion of EPO. Maybe you will, but mostly you won't.
Second, and like with hoarding tariff-ed copper, firing a Fed chair is no longer news. The current administration has nattered about it publicly for months. The market knows it is likely coming, so, on the news, you could see the curve flatten rather than steepen, which would be eye-rollingly bizarre, not to mention wreck your trade. But that's how markets work. You need to do this sort of thing when everyone thinks it's a stupid idea, not when it's obvious. Of course, that could be only 10-20 milliseconds from now in the current milieu. See also: Subway Surfers above
Meanwhile, of course, U.S. monetary policy is going to become about as reliable as Cher from Clueless: Fickle, whimsical, whipsawed by moods and fashion. And that will have few consequences until it does. While a steepening trade is seductive, because it feels intelligent, sophisticated, and timely, it is also likely near-term wrong—even if it's also likely long-term correct about the eventual consequences of politicizing monetary policy.
Even Rougher Notes:
The demographic collapse and its consequences … Ageing rates vary globally—politics implicated … Neural networks get topographic upgrade to mimic human vision … Global economy somehow keeps not failing despite crises and uncertainty … Mobile money boosts African savings to decade high … Cars keep exploding into flames in UAE heat wave … Red meat linked to rheumatoid arthritis risk … Why do China stocks fall at night? … Junk bonds hit record trading volumes.