Ambling Towards A Crisis?

After 2008, there was a small community who always predicted repeats of The Financial Crisis. The problem the doom-mongers faced was the back side of “The Minsky Cycle”: actors react to a crisis by reducing risk and taking steps to avoid repeating the exact same crisis. That was done throughout the financial system (including Canadian regulators who changed their housing market policies, which was my worry at the time). However, memories fade — and new ways to spawn a crisis pop up.

Financial crises of varying strength have popped up on a frequency of (roughly) once per decade in the United States since the 1960s (when the lingering fear of the Great Depression finally subsided). The COVID recession hit at about a decade after the Financial Crisis — and so we had another crisis that stood in for a financial crisis. The question one might ask is whether the clock is ticking. Although I am fairly permanently pessimistic, I still lean towards a financial crisis being delayed.

Canada Muddling

Canadian CPI data came out today, and the general trend is that it is bouncing around “normal levels” for an expansion. Although higher than the average for the 1990-2020 period, no reason to get too excited. Grocery prices have been trending higher on a year-over-year basis (4%) since a low in April. To what extent this is partly the result of turmoil in the United States is not clear to me. Although I am not spending too much time handicapping the Bank of Canada, I lean towards the policy rate sticking near current low levels.

Tariffs And Fiscal Policy

The customs duties data for the United States was recently updated, and we can assess the “success” of Trump 2.0’s tariff policies so far. On an annualised run rate, customs duties were 0.88% of GDP in the second quarter (the latest monthly figure Treasury I saw was around $350 billion annualised versus the $267 billion BEA second quarter figure).

Term Premium Comments

I have been looking at term premium models as part of a non-writing project. I decided to take a look at the Kim & Wright model output (available via the Federal Reserve, paper link: http://www.federalreserve.gov/pubs/feds/2005/200533/200533abs.html). By way of background, there are two very popular term premium models, the Kim & Wright paper, and the one by Adrian, Crump, and Moench (ACM).

Comparing Bond Yields Across Countries

Toby Nangle recently wrote “How to (more) properly compare bond yields across markets” (non-gift link). The story behind the article is straightforward: commentators are going back to their old habit of comparing the raw yields on 10-year bonds and making assertions about what this means about implied credit quality. As Nangle’s article notes, this is not a good idea, since bond yields embed rate expectations.

Inflation: Paint Drying &c

A weak August PPI report today continues the narrative that inflation in the United States is a nothingburger. If I were attempting to be a forecaster, I could have easily been wildly wrong in my inflation prognostications (although the previous chickening out on mega-tariffs meant that my initial reactions would have to have been revised).

Comments On "The Race Between Asset Supply And Demand"

Adrien Auclert, Hannes Malmberg, Matthew Rognlie, and Ludwig Straub presented the paper “The Race Between Asset Supply and Demand” at the Jackson Hole shindig (link to paper). The paper argues that the demand for assets has so far outstripped supply, and the abstract has the eye-catching conclusion: “Making debt sustainable requires a fiscal consolidation of at least 10% of GDP, but debt could reach 250% of GDP without pushing up interest rates.”