Happy weekend!
While usually bonds put everyone but my late grandparents to sleep, for the first time in a long while the Fed is making them interesting again...
Usually, when the central bank spends money, it’s by typing trillion into a spreadsheet to save the global banking system from its own cleverness.
But this time it was actual physical money spent on actual physical marble and premium drywall for the Marriner S. Eccles building. And for a while, the DOJ was treating this like a federal crime.
Then this week everyone just stopped. The DOJ dropped the probe. Jerome Powell is leaving his post next month. Kevin Warsh is measuring the windows for new drapes. And the $700 million in overruns? It has basically been folded into the cost of doing business, which is a fun phrase that usually means we got caught but we are all friends here.
If you are a fan of institutional independence (the quaint 20th-century idea that the guy setting interest rates shouldnt have to check if the President is grumpy before he hikes) this week was a bit of a disaster. The play was simple. The White House wanted the Fed to cut rates.
The Fed did not. The DOJ opened a criminal probe into the Feds office renovations. Powell decided he would rather spend his retirement golfing than talking to federal prosecutors about marble prices. The Fed Chair resigns, and presto, the criminal probe vanishes. It turns out the independence of the Federal Reserve is worth exactly one over-budget renovation.
The market reaction to the death of a century old norm was a six-basis-point drop in yields. We have officially priced the soul of the central bank at about the cost of a mid-sized hedge funds bad Tuesday.
Then there is the Iran ceasefire. It is a ceasefire in the way that two people screaming at each other is a conversation. The Strait of Hormuz is technically open, except for the American blockade that says it is not.
Brent oil is looking at $170 a barrel. Inflation expectations are north of 90%. And yet, if you look at the VIX or the MOVE index, you would think we were living in the mid-90s and the only thing we had to worry about was the Macarena. The market has basically installed a software update called Cope v2.1. It has decided that if it does not show up in the earnings call for a tech giant, it is not technically a war.
The most fascinating part of this is the rise of buy write ETFs. These are funds that hold bonds and sell call options against them. Their actual literal marketing pitch is headline paralysis. It is the most honest business model in the world. They know you are too terrified to sell but too nervous to buy, so they are going to monetize your inability to move until the heat from the dumpster fire eventually melts your shoes. It is a product that yields 10% because everyone else is too busy staring at the news with their mouths open to trade.
The 10 year Treasury is yielding 4.30%. Models say it should be 3.91%. That 39-basis-point gap is the We Are Not Entirely Sure tax. It is the extra interest you have to pay people to hold risk-free debt in a world where the risk-free part is currently being renovated with $700 million of questionable drywall and a side of DOJ leverage. You are paying it on your mortgage, your credit card, and your corporate spreads.
Basically everything is being renovated. The buildings, the Fed leadership, and the very idea that things are fine. We are living in a bifurcated tape where the aggregate index is smiling at you, while the individual components like high-yield tech and financials are quietly on fire in the corner. If you are sitting on cash yielding 4%, do not feel bad. In a world where the all-clear signal is being sent by a guy whose office still smells like fresh paint from a criminal investigation, waiting is not a lack of a strategy. It is the only strategy left.
https://caffeinatedcaptial.substack.com/p/the-daily-morning-brew-weekend-deep-b17