Breitbart Business Digest: The Bond Vigilantes Surrender

The Weekly Wrap: What We Learned About Jerome Powell, the Political Fed Chair Welcome back to Friday. This is the Breitbart Business Digest weekly wrap. This week bond yields fell, sparking mumbled warnings about looming calamity from the same folks who warned us of the calamity of rising bond rates. Oil prices shot up to close to their highest levels since the Iran War began. The market decided it knows exactly what Fed Chair Kevin Warsh and the rest of the Federal Open Market Committee are going to do next week. And a centrist liberal Harvard economics professor learned something important about tariffs in Bangkok. Let’s go! The Bond Vigilantes Went on Vacation It seems like it was only yesterday that the financial press was obsessed with the idea that rising bond yields spelled trouble for the U.S. economy. But, in reality, that was like two weeks ago. Now it is falling bond yields that spell trouble. On October 7, the yield on 10-year U.S. Treasuries hit 5.36 percent, the highest since April 2002. There were dire warnings that bond investors were balking at inflation risks and deficits, even though almost all of the rise appeared to be due to rising real yields. That is, bond yields were up because the economy is booming and expected returns on other investments were rising. With inflation still running hot and the labor market turning in record low layoffs, that suggests the Fed’s policy was likely to be more aggressive. But the First Rule of Financial Journalism in the age of Trump is that everything indicates looming ruin, so rising yields were consistently presented as bad news. Then, on Thursday, 10-year Treasury yields fell about 19 basis points intraday, the biggest one-day drop since the collapse of Silicon Valley Bank. “10-Year Treasury Yield Suffers Biggest One-Day Drop in 3 Years,“ declared one storied financial journalism. Get it? When bond yields were rising, that was a big problem. And now that they’re falling, it is a big problem. The operation of the First Rule of Financial Journalism is a wondrous thing to behold. What really happened is that investors began to worry that some of the outer-reaches of the AI-investment complex may have been over-extended. The idea that perhaps AI enthusiasm has become a financial bubble shook stocks and the bond market, especially in junk-rated bonds supporting some highly levered AI-adjacent tech companies. Asset manager GMO’s Ben Inker and John Pease, for example, argued that the demand for fresh capital to support AI investment could outstrip the supply. So there was a bit of a flight-to-safety and a bit of a cooling of expectations for returns. But 10-year yields are still near five percent, which is hardly a sign that the bond vigilantes see a downturn on the horizon. Expensive Oil Is Flowing from the Persian Gulf “Persian Gulf oil exports have surpassed prewar levels, as an improvised shipping system under U.S. protection is helping tankers move oil through one of Iran’s fiercest waves of attacks in the Strait of Hormuz,” the Wall Street Journal reported The math is pretty simple. Shipments from the Persian Gulf area averaged more than 24 million barrels a day in the week through October 18, which is higher than the 23.3 million levels that were normal before the Iran War. Strait of Hormuz traffic is still down, at only around 82 percent of pre-war levels. But pipelines across Saudi Arabia and the United Arab Emirates have been picking up the slack. The Journal reported, based on estimates from a ship tracker Kpler, that 40 percent of the non-Iranian crude shipped out of the Gulf bypassed the strait. Pre-war it was around 17 percent. The bad news is that oil prices did not come down. As of Friday, Brent Crude futures were priced at $117 a barrel, which is near the highs they hit when the Strait was closed back in the spring. Part of the problem is that while oil is getting out of the Gulf, transporting it has become significantly more expensive due to the security risks of attacks by Iranians, Houthis, and whoever else might have grudge against the United States (a not so small share of the region’s population). We Need to Talk About Kevin The end of forward guidance was supposedly going to create a crisis of uncertainty in financial markets. Instead, it has created a crisis of certainty. The fed funds futures market is now pricing in a 90 percent chance that the Fed keeps rates unchanged at next week’s meeting and a 78 percent chance of a hike in December. Perhaps it’s not actually a crisis, but it is a matter of concern. Fed Chairman Kevin Warsh wants the market to watch the data and not focus so much on Fed speak. But the market is not co-operating with this. Instead, it is acting as if Fed policy is even more predictable than ever and less attached to economic data than usual. Perhaps if you want the market to pay less attention to what Fed speakers say it is not enough to for the Fed chairman to say that. He may have to show the market that interpreting Fed speak is the wrong approach. And the most effective way to do that would be a surprise hike next week. Want to Be Rich? Have More Kids Michael Konczal of the Economic Security Project looked at recent Fed data and found that nearly half of families with incomes in the top one percent have three children or more. Drop down just a bit on the income ladder and only 40 percent have at least three children. So do kids make you wealthy? That might not be as implausible as it sounds. Having more children certainly creates an incentive to earn higher incomes. Probably more likely is that some of the traits that lead to high incomes also lead to higher fertility within families. Konczal’s findings undermine the trope that wealth leads to lower fertility, something people have been claiming for years as a way of explaining the drop in fertility in wealthy economies. But don’t get too happy, Mr. Capitalist. It leaves open the possibility that greater inequality between the top earners and everyone else depresses fertility. Liberals, of course, will read Konczal’s findings as more reason to support the things they already support. If poorer families had more daycare available or an even cushier financial safety net, maybe they’d have children like the wealthy do. But wealthy families are less likely to use daycare or government support, so that just doesn’t follow. Trying to duplicate the outcomes of wealthy families through progressive welfare programs has a long history of failure. The World Has Finally Accepted Tariffs Is the great tariff panic of Trump’s second term finally over? Yes, it is reports Harvard economist Jason Furman from the IMF and World Bank meeting in Bangkok. How Jerome Powell Politicized the Fed Jerome Powell held significantly more meetings with lawmakers and other political figures than Janet Yellen or Bernanke, according to a study of the public calendars of recent Fed chairs’ by Thomas Drechsel of Johns Hopkins and Dali Tsakadze of the University of Maryland. Their working paper, published by NBER, explains this as “reflecting an increasing need for the Fed to engage with political actors.” Well, that’s one way of explaining Powell’s political engagement. But not the most likely. Bernanke was chair during the financial crisis and was famously part of “the committee to save the world.” Yellen was chair during some of the darkest days of the secular stagnation and QE era. Both had extensive “need…to engage with political actors.” They needed to cooperate with fiscal authorities for years in a way that Powell only needed for a single year when the pandemic struck. What’s more likely is that Powell just liked talking to politicos. This was an engagement of choice, not something necessitated by the changing times. Powell, in other words, politicized the Fed to an extent his predecessors never did. And then had the nerve to accuse President Trump of trying to do that when Trump criticized him. This also could explain why Powell is still on the Fed as a governor. He likes being a Washington player so much that he’s not going to give it up earlier than he has to. We imagine, however, that he may step down after the midterms, when he will know the composition of the Senate that will confirm his successor. That’s just what you would expect from someone as political as Powell. Breitbart Business History The obvious anniversary to mark this week is Black Thursday, October 24, 1929. You know, the day the stock market crashed. In hindsight, nearly everyone views this as the start of the Great Depression. After the news of the Wall Street crash, a crowd of speculators, worried about the fall of their financial securities, gathered in front of the New York Stock Exchange on “Black Thursday,” October 24, 1929, in New York City. (Keystone-France/Gamma-Keystone via Getty Images) But it may be more instructive to remember that this was not how everyone saw it at the time. Here’s what President Herbert Hoover said on October 25, 1929: “The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis. The best evidence is that although production and consumption are at high levels, the average prices of commodities as a whole have not increased and there have been no appreciable increases in the stocks of manufactured goods. Moreover, there has been a tendency of wages to increase, the output per worker in many industries again shows an increase, all of which indicates a healthy condition. “The construction and building material industries have been to some extent affected by the high interest rates induced by stock speculation and there has been some seasonal decrease in one or two other industries but these movements are of secondary character when considered in the whole situation.” As it turns out, the decrease that was to come was in more than one or two other industries and were not of a secondary character or particularly seasonal.