Overstimulation Risk

By John Mauldin 


Among the many strange, unforeseen changes of the last year is a new respect for Keynesian economic theory. Practically everyone in power now agrees that deficit spending produces GDP growth. They differ only on its expected magnitude and duration. The few exceptions are mostly outside the halls of power.

This matters because deficit spending, already higher than ever, is set to grow even more when Congress passes President Biden’s pandemic relief package. I take it as given they will pass it, since Democrats have the necessary votes and look united on the major items. They may tweak some details to satisfy Manchin or Tester but the final amount will be somewhere close to the desired $1.9 trillion.

Coming on top of trillions already authorized in prior bills, a budget deficit that was already approaching $2 trillion before the pandemic, and the Federal Reserve stimulating in its own ways, people are asking whether this is too much. The answer depends on the coronavirus “Gripping Hand.” 

If the vaccines work well enough, and are administered widely enough, to stop the new variants and enable economic normalcy later this year, all that money might be excessive. Rising consumer demand combined with supply constraints could spark inflation.

If, however, the pandemic continues into summer, it will mean the Gripping Hand is still squeezing us. Employment won’t recover and more small businesses will fail. This relief package, as large as it is, may prove necessary and maybe even too small.

The experts I trust are split on this question, and of course no one really knows. But the debate is important philosophically. Nothing underscores this more than the comment from my personal economic bête noire, Modern Monetary Theory exponent Dr. Stephanie Kelton. Asked whether she was worried about the stimulus bill causing inflation, she said:

"Do I think the proposed $1.9 trillion puts us at risk of demand-pull inflation? No. But at least we are centering inflation risk and not talking about running out of money. The terms of the debate have shifted."

This is precisely what should concern us. No one except a few old classical economists is afraid of growing the debt. That argument is seemingly over, and its absence may be the real story here.

Today I’ll explore where all this may lead.

The case for inflation

The concern we may overstimulate took off this month when former Treasury Secretary Larry Summers, a Democrat, pointed out that it will far exceed the “output gap” shown in the latest Congressional Budget Office economic projections.

What is an output gap? 

Gross Domestic Product measures (or at least tries to) economic growth. Economists also calculate “potential GDP,” which is how much the economy could grow, if every available worker and other resource were fully employed. Inflation tends to occur when actual GDP exceeds potential GDP because the economy is “running hot.” 

An output gap is when it goes the other way, with the economy operating well below its potential. That’s what we see in recessions.

Of course, all this involves numerous assumptions. GDP itself has problems, too, but it’s still a useful framework for analysis. Government and central bank policy should aim to keep the economy running roughly in line with its potential: not too hot, not too cold.

Larry Summers noted the Biden relief package will inject around $150 billion per month, while CBO says the monthly gap between actual and potential GDP is now around $50 billion, and will decline to $20 billion a month by year-end (because it assumes the COVID-19 virus and all its variants will be under control).

If correct, that would mean (at least to Summers and former Senator Phil Gramm, who wrote almost simultaneously a similar editorial for The Wall Street Journal) we are about to inject far more money than the economy can handle. It will have to emerge somewhere and may do so as price inflation. Here’s Summers:

[W]hile there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem.

But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown. For credibility, they need to be accompanied by clear statements that the consequences will be monitored closely and, if necessary, there will be the capacity and will to adjust policy quickly.


Others share Summers’ concern and add more to the list. Former New York Fed President Bill Dudley wrote a Bloomberg column back in December titled Five Reasons to Worry About Faster US Inflation. I’ll summarize them for you:

  1. The way prices fell abruptly last April and May will change the year-over-year comparisons this spring, making annual inflation figures jump. (Note that if you go back two years to 2019 the inflation in the annual number magically disappears.)
  1. As normal spending returns later this year, the leisure and hospitality industry will regain pricing power. Sharp price increases may be needed to balance demand with diminished supply. (The industry dearly hopes so.)
  1. Companies won’t be able to meet increased demand by simply producing more. Many expansion projects and investments were suspended in the last year and some businesses have simply disappeared.
  1. The Fed recently revised its policy guidelines to allow higher inflation. The target is now 2% average inflation over some undefined period. Since it is presently below 2% and has been for years, they’re saying it can run above 2% for a significant time before they change policy. (And some Fed economists and academics think it can run significantly high, with 3% or even 4% not scaring them.)
  1. Shifts in both political control and fiscal thinking mean the government is now more likely to spend aggressively, and less likely to remove stimulus quickly.

Again, that was Dudley talking two months ago. All still true now. But this week he added Four More Reasons to Worry About US Inflation.

  1. Economic slumps brought on by pandemics tend to end faster than those caused by financial crises.
  1. Thanks to rescue packages and a strong stock market, household finances are in far better shape now than they were after the 2008 crisis.
  1. Companies have plenty of cash to spend, and access to more at low interest rates.
  1. Inflation expectations are rising, which can lead to actual inflation.

Dudley notes the Fed’s latest projections foresee no rate hikes through 2023. This suggests they won’t be quick to tighten if inflation appears, and might have to reverse course quickly if it starts getting out of hand (though I am not sure what “out of hand” actually means today). That, in turn, could set off market fireworks.

Again, all this is premised on emerging from the pandemic. I think Summers and Dudley will both agree inflation is the least of our worries if the pandemic is still raging next fall. We have reasons for optimism but this is hard to predict—which is why we have to consider all the risks.

No Worries?

Not everyone fears inflation. Dave Rosenberg’s economic forecasts have been right on target over the last year, and he sees little inflation threat. In one of his morning letters last week, Dave ran through the global vaccination rates and production bottlenecks. Noting the stock market has priced in July as the month when we put the pandemic behind us, he calls that expectation “fanciful.” But more to the point, he doesn’t think the stimulus package will stimulate much.

The stimulus checks are coming. The Fed is not going to be doing anything but buying assets and pressing the funds rate to the floor. Inflation is already being widely advertised and priced into bonds. And the fact that the markets shrug off bad data means that the incoming economic information will be treated positively if the numbers are good and dismissed as old news if they are bad. That is how the markets have been positioned since the election and even more so after the Georgia Senate run-offs. And so it is.

We have till July to see how all this plays out. The market is betting that the stimulus will lead to huge spending and not saving, that the economy reopens for good in July, and that the next source of optimism will come from the “infrastructure spend.”

From my lens: That $1.9 trillion will end up being more like $160–$180 billion once (i) debt paydown, (ii) bumped up savings, (iii) rent, utilities, health care bills and (iv) import leakage are accounted for

The timeline for herd immunity and full reopening is November, not July, and even then, the absence of this for the entire world means international travel and tourism will remain impaired. The US economy has high domestic content, indeed, but tourism in particular is a huge contributor to the retail/leisure/hospitality industry. Ask any Broadway theater owner in Manhattan about that.

Later in the week, in reacting to weak inflation data from China, Dave said it again.

China’s YoY inflation rate swung back to -0.3% in January from +0.2% in December (consensus was 0.0% so a downside surprise); the non-food index also deflated at a -0.8% YoY pace from 0.0% (the PPI was +0.3%, which was in line with the consensus view—that’s all you get with this commodity boom?).

So the world’s strongest economy is deflating and everyone believes the US is on the verge of a new inflationary experience because of temporary, if large, “stimulus checks”—this isn’t actually real stimulus, it is charity, and less than 30% of it finds its way into the economy and all it does is ensure that rent payments, utilities and food bills get paid. The “New Deal,” this is not.

Dave is saying the idea that stimulus will exceed the output gap is wrong. 

His numbers suggest most of the $1.9 trillion will go into debt paydown, savings, or non-discretionary spending like rent. 

That would leave little for the kind of new spending (travel, entertainment, services, etc.) that would stretch capacity and spark inflation.

To use more technical terms, Dave is saying the “fiscal multiplier” of this spending will be pretty low. 

Lacy Hunt says the same. In a phone call Tuesday, he told me these sort of debt-financed stimulus programs provide only a short (a quarter or two), transitory GDP boost. 

He rattled off numerous examples from Japan, Europe, and here in the US. The 2018 tax cuts, for instance, pushed GDP above potential for a little while but by 2019 the effect had largely faded.

Worse, Lacy has found these programs actually have a negative multiplier once the effects play out over a few years. The new debt issued to pay for them weighs on growth, the velocity of money falls further, and the economy is worse than ever. Raising taxes wouldn’t help, either. Both taxes and government debt divert money out of the private sector.

Necessary Conditions

Let’s pull all these pieces together. 

For inflation to be a near-term threat, several things would have to happen this year:

  • Vaccines and other measures bring the pandemic under control this summer in the US and other developed countries
  • Consumers respond by using their government benefits, savings, and/or borrowing to quickly increase spending on discretionary goods and services.
  • This spending is sufficiently large to exceed post-pandemic production capacity, sparking price increases.
  • The Federal Reserve lets the economy “run hot” and maintains its low rates and asset purchases.
  • Congress and the Biden administration leave the fiscal spigots open by not raising taxes or cutting spending.

All these are possible. Are they likely? 

One certainly is: I think the Fed will stay loose in almost any possible scenario, just as it did long after the last recession ended. 

The FOMC members don’t have the stomachs for another taper tantrum, much less the explosive reaction aggressive tightening would produce.

But the others are much harder to predict. 

The more we learn about the B117 and other variants, the more likely another viral surge looks. But it may be more manageable if we’ve vaccinated enough older and vulnerable people, and if the vaccines are as effective against variants. 

As I’ve said for the last four weeks, it is a true race. 

The US is now administering over 1.5 million vaccinations a day and the number is growing. By the time many of you will be reading this letter, they should have reached slightly over 15% of the population, and a much higher percentage of the vulnerable population.

If we faced only the original virus, we could actually begin to relax. Those cases are clearly dropping. But US government officials, looking at the same B117 growth rate that I am, and also the South African and Brazilian variants, are reportedly considering internal US travel restrictions to slow potential outbreaks. 

I applaud them for not being complacent. But if any travel restrictions are enacted, you can stick a fork in inflation Any worries about it will be over.

It’s also hard to project how much consumer spending patterns will change, and how quickly. Even if the pandemic fear fades, people can only take so many vacations and get so many haircuts. This “pent-up demand” we hear about doesn’t apply to services the same way it does to goods, and services have suffered the most.

People are being cautious. Prior stimulus checks helped pay down debt and add to savings. Another wave of the virus will make everyone even slower to spend. That wouldn’t be inflationary.

It also matters, for both goods and services, how post-pandemic demand matches post-pandemic supply. Businesses may or may not be ready to deliver exactly what consumers want to buy. 

Further, when 150,000+ small businesses have closed, there may be a lot of missing supply. We should expect shortages of some things and surpluses of others. How all that will sort out, and its effect on prices and therefore inflation, is unclear.

It won’t help if the Democrats raise corporate or high-earner taxes, as Biden promised, but I’m not sure their slim majorities can do it, even if they blow up the filibuster. The size of the fiscal relief package is certainly an issue, as well as how it works. Different components will have different effects.

Fed Chair Jerome Powell: We Need More Stimulus and Inflation Is Not a Worry

The heading says it all, which is a six-inch summary of a long speech and question-and-answer session this week in New York. 

My friend David Bahnsen summarized it this way:

I… want to share more about Chairman Powell’s speech to the Economic Club of New York after I got to dive into it deeper last night. 

It is impossible to interpret really any part of the speech as anything other than hyper-dovish. 

All “talking up” was about the need to improve labor market conditions, and all “talking down” was concerns about inflation.

…Ultimately, what the Fed has to do is message a concern about the gap between current unemployment and pre-pandemic unemployment, as observers and actors note the significant reduction in the unemployment rolls since the pandemic began. 

It is this gap the Fed is talking about (circled in blue below), and rather than talk about “finishing this gap off” (getting down from 6.7% to 4%, for example), the Fed is actually talking about how even the drop from 14% to below 7% is not as good as it looks, because of the 2% decline in the labor participation force.


Source: David Bahnsen


I agree with Jerome Powell that the unemployment rate is clearly understated. I know many readers have a problem with the Labor Department’s business birth/death estimates. 

Of course it is aspirational. You can’t know the real number for at least a year, so they make the best estimate they can. However, the “past performance” data the estimates are based on is clearly broken when 150,000 (if not more) businesses close in less than a year. Using that estimate forces the unemployment rate artificially lower. Their models no longer apply to the world we live in.

My friend Philippa Dunne in the latest TLR describes an alternative survey by researchers working with the Dallas Fed. 

It pegs the January unemployment rate at 11.4%, vs. the 6.3% official number. 

I’ll bet you a dollar to 40 doughnuts Powell is looking at that model or something like it.

Add all this together and inflation is a risk, but I don’t see it as a major one. 

An output gap combined with above-10% unemployment is not the stuff inflation is made of. 

Yes, the latest spending plan could temporarily raise the relatively benign inflation we see today, but it will be transitory.

And if inflation does jump? 

It would mean we’re done with the virus. 

That might not be such a bad trade-off.

What’s in Your Investment Kitchen?

In a world of high valuations, zero-bound Treasury rates, and junk bonds yielding 4.1%, what does an investor do? 

You look for new portfolio ingredients. 

At CMG and our partners, we now have scores of offerings designed to help you meet your personal goals. 

Cash flow/income strategies in the mid-to-high single digits, absolute return strategies uncorrelated with market fluctuations, highly targeted dividend strategies and exciting growth opportunities from my network of relationships. 

We have begun to refer to all of the above as the Mauldin Kitchen. 

To show you what’s in our kitchen, whether you need an appetizer (a single idea) or a full portfolio meal, I have prepared a short special report called “What’s in Your Investment Kitchen?” 

Simply click on the link to get your copy. 

I would be very surprised if some of the ideas in my kitchen don’t tempt your investment palate. 

And I’ll be making a few calls myself to get a feel for what it is that you are really thinking about, what’s important to you, and what you need. So don’t be surprised if you get a call from me.

Puerto Rico, New York?, and Maine

We’ve had a lot of rain here in Puerto Rico. Everything is green. My mainland friends talk of snow and ice. I don’t miss that.

I still have not gotten my vaccination, although hopefully next week. A month or so after the second shot, I really would like to get to New York for business reasons, and of course to meet with friends. I just don’t know when that will be.

Then I have (perhaps optimistically) made a reservation for my son Trey and I to go to Maine in August for our (until last year) annual fishing trip. I hope not to postpone it again. I really do miss the friends and comradery.

I really look forward to talking with a few of you. I will learn something and it will be a lot of fun. With that, let me wish you a great week and hit the send button. Stay safe!

Your running as fast as I can analyst,



John Mauldin
Co-Founder, Mauldin Economics

The genius of Amazon

The pandemic has shown that Amazon is essential—but vulnerable

Jeff Bezos’s vision of a world shopping online is coming true faster than ever. But the job of running Amazon hasn’t got any easier


In the summer of 1995 Jeff Bezos was a skinny obsessive working in a basement alongside his wife, packing paperbacks into boxes. 

Today, 25 years on, he is perhaps the 21st century’s most important tycoon: a muscle-ripped divorcé who finances space missions and newspapers for fun, and who receives adulation from Warren Buffett and abuse from Donald Trump. 

Amazon, his firm, is no longer just a bookseller but a digital conglomerate worth $1.3trn that consumers love, politicians love to hate, and investors and rivals have learned never to bet against. 

Now the pandemic has fuelled a digital surge that shows how important Amazon is to ordinary life in America and Europe, because of its crucial role in e-commerce, logistics and cloud computing. 

In response to the crisis, Mr Bezos has put aside his side-hustles and returned to day-to-day management. Superficially it could not be a better time, but the world’s fourth-most-valuable firm faces problems: a fraying social contract, financial bloating and re-energised competition.

The digital surge began with online “pantry-loading” as consumers bulk-ordered toilet rolls and pasta. Amazon’s first-quarter sales rose by 26% year on year. 

When stimulus cheques arrived in mid-April Americans let rip on a broader range of goods. Two rivals, eBay and Costco, say online activity accelerated in May. 

There has been a scramble to meet demand, with Mr Bezos doing daily inventory checks once again. Amazon has hired 175,000 staff, equipped its people with 34m gloves, and leased 12 new cargo aircraft, bringing its fleet to 82. 

Undergirding the e-commerce surge is an infrastructure of cloud computing and payments systems. Amazon owns a chunk of that, too, through aws, its cloud arm, which saw first-quarter sales rise by 33%.

One question is whether the digital surge will subside. Shops are reopening, even if customers have to pay at tills shielded by Perspex. 

Yet the signs are that some of the boom will last, because it has involved not just the same people doing more of the same. 

A new cohort has taken to shopping online. In America “silver” customers in their 60s have set up digital-payment accounts. 

Many physical retailers have suffered fatal damage. 

Dozens have defaulted or are on the brink, including J Crew and Neiman Marcus. 

In the past year the shares of warehousing firms, which thrive on e-commerce, have outperformed those of shopping-mall landlords by 48 percentage points.

All this might appear to fit the script Mr Bezos has written over the years in his letters to shareholders, which are now pored over by investors as meticulously as those of Mr Buffett. 

He argues that Amazon is in a perpetual virtuous circle in which it spends money to win market share and expands into adjacent industries. From books it leapt to e-commerce, then opened its cloud and logistics arms to third-party retailers, making them vast new businesses in their own right. 

Customers are kept loyal by perks such as Prime, a subscription service, and Alexa, a voice-assistant. 

By this account, the new digital surge confirms Amazon’s inexorable rise. 

That is the view on Wall Street, where Amazon’s shares reached an all-time high on June 17th.

Yet from his ranch in west Texas, Mr Bezos has to wrestle with those tricky problems. 

Start with the fraying social contract. 

Some common criticisms of Amazon are simply misguided. 

Unlike, say, Google in search, it is not a monopoly. 

Last year Amazon had a 40% share of American e-commerce and 6% of all retail sales. 

There is little evidence that it kills jobs. 

Studies of the “Amazon effect” suggest that new warehouse and delivery jobs offset the decline in shop assistants, and the firm’s minimum hourly wage of $15 in America is above the median for the retail trade.

But Amazon’s strategy does imply huge creative disruption in the jobs market even as the economy reels. 

In addition, viral outbreaks at its warehouses have reignited fears about working conditions: 13 American state attorneys-general have voiced concern. 

And Amazon’s role as a digital jack-of-all-trades creates conflicts of interest. 

Does its platform, for example, treat third-party sellers on equal terms with its own products? 

Congress and the eu are investigating this. 

And how comfortable should other firms be about giving their sensitive data to aws given that it is part of a larger conglomerate which competes with them?

Amazon’s second problem is bloating. 

As Mr Bezos has expanded into industry after industry, his firm has gone from being asset-light to having a balance-sheet heavier than a Soviet tractor factory. 

Today it has $104bn of plant, including leased assets, not far off the $119bn of its old-economy rival, Walmart. 

As a result, returns excluding aws are puny and the pandemic is squeezing margins in e-commerce further. 

Mr Bezos says the firm can become more than the sum of its parts by harvesting data and selling ads and subscriptions. 

So far investors have taken this on trust. 

But the weak e-commerce margins make it harder for Amazon to spin off aws. 

This would get regulators off its back and liberate aws, but would deprive Amazon of the money-machine that funds everything else.

Mr Bezos’s last worry is competition. 

He has long said that he watches customers, not competitors, but he must have noticed how his rivals have been energised by the pandemic. 

Digital sales at Walmart, Target and Costco probably doubled or more in April, year on year. 

Independent digital firms are thriving. 

If you create a stockmarket clone of Amazon lookalikes, including Shopify, Netflix and ups, it has outperformed Amazon this year. 

In much of the world regional competitors rule, not Amazon; among them are MercadoLibre in Latin America, Jio in India and Shopee in South-East Asia. 

China is dominated by Alibaba, jd.com and brash new contenders like Pinduoduo.

Imitation is the sincerest form of capitalism

The world’s most admired business is thus left having to solve several puzzles. 

If Amazon raises wages to placate politicians in a populist era, it will lose its low-cost edge. 

If it spins off aws to please regulators, the rump will be financially fragile. 

And if it raises prices to satisfy shareholders its new competitors will win market share. 

Twenty-five years on, Mr Bezos’s vision of a world that shops, watches and reads online is coming true faster than ever. 

But the job of running Amazon has become no easier, even if it no longer involves packing boxes.

The money behind Robinhood is pure Sheriff of Nottingham

The discreet family offices that fund the broker may well emerge as the Reddit rebellion’s biggest winners

Gillian Tett

                                                                                      © Ingram Pinn/Financial Times


Who are the final winners from the Robinhood saga? 

If you ask Reddit-reading retail investors, they might mutter angrily about Wall Street banks and hedge funds such as Citadel.

Fair enough. Some hedge funds, such as Melvin Capital, were damaged by last week’s market mayhem. But other established traders profited handsomely, such as market makers. 

However, I suspect that if you review events in a year’s time, there may well be a set of bigger winners: the consortium that has pumped $3.4bn into Robinhood to shore up the broker. 

This financial lifeline, which appeared as fast as the rise and fall of GameStop shares, was led by Ribbit, a little-known Silicon Valley venture capital firm that seeded Robinhood, along with better-known VC giants such as Sequoia and Andreessen Horowitz.

The consortium also included Iconiq Capital, a discreet family office that reportedly manages the wealth of tech titans such as Mark Zuckerberg, Reid Hoffman and Chris Larsen. 

Moreover, the group cut a deal that could turn its original investment into tens of billions of future equity, if a public offering occurs (one was planned for this year). 

Although this deal received relatively scant public attention, it is striking for two reasons.

First, the $3.4bn infusion shows that the smart inside money in Silicon Valley sees a vibrant future — and rising value — for Robinhood, whatever may happen at Washington’s looming regulatory debate and hearings. 

That prospect may horrify financial traditionalists, who hate how Robinhood presents investing as something akin to a video game. 

It may also upset those politicians who fear the app is simply the latest tool that enables Wall Street to fleece the public. 

Whatever the case, the funding round is a warning to these established players that the idea behind the app is unlikely to disappear.

The second important point is that the saga demonstrates the muscle of private pools of capital generally, and of family offices in particular. 

Tracking the latter is notoriously hard: the family office sector is so obsessively secretive that reliable statistics are sparse. 

The decade-old Iconiq Capital, for example, long lacked a website (its current, cursory one shows that it commands a formidable $54bn of assets.

Even so, in 2019, financial consultants Campden Wealth declared there were 7,300 single family offices in the world, 38 per cent more than in 2017, controlling almost $6tn. 

This may well eclipse the hedge fund sector, which is thought to control $5tn, according to the US office for financial reporting — although there may be some double counting here, as family offices give mandates to hedge funds.

As notable as scale, though, is the shift in investment style. The family offices that first emerged in places such as Switzerland to manage European old wealth were as staid as their clients. 

But their newish counterparts, such as Iconiq, serve 21st century tycoons who made their money more recently by embracing risk, long-term horizons and rapid decision-making.

Such features are increasingly embedded in investing styles too, since family offices now make direct investments into ventures, often alongside the VC funds they used to contract to do that. 

A recent Campden survey of 130 family offices found that 10 per cent of their assets sit in VCs, mostly via direct investments. Average internal rates of return were 14 per cent last year, and 17 per cent for direct deals.

The returns for groups such as Iconiq are almost certainly far higher. 

The group has backed ventures such as Snowflake, Airbnb and Zoom, as well as fast-growing sectors such as data centres. 

Making a virtue of being a multi- and not a single family office, it also prides itself on both its ability to leverage financial firepower as well as its clients’ collective brains and networks.

This family office trend will probably worry anyone concerned about income inequality, or the disparities between the investment returns delivered by mass-market pension funds versus the smart ultra-rich money that backs groups such as Iconiq. 

As the celebrated economist Thomas Piketty argued, invested wealth begets more wealth.

However, while such disparities seem distasteful, if not immoral, the presence of such pools of capital can also be beneficial — at least from a narrow, if amoral, capital markets perspective. 

Public markets are currently dominated by passive herd-following investment funds and active investors with a short-term focus such as Robinhood-style day traders.

Family offices, by contrast, provide patient, risk-seeking capital. This, as their managers stress, enables them to fund the type of innovation and corporate activity that the world needs to create growth. 

Their speedy decision-making skills and deep pockets also mean that they can, on occasion, stabilise markets, pace last week’s events.

This will almost certainly not appease the rebellious Reddit-reading investment crowd. In a more perfect world, it would also be mass-market pension funds that provided such patient capital and, crucially, reaped its fat returns.

Meanwhile, in the current world, the irony is inescapable. 

Robinhood’s marketing pitch is to democratise finance by giving punters easy access to public markets. 

Yet that is not where the lucrative action is. 

Long-Term Treasury Yields Keep Rising. Why the 10-Year Could Climb to 1.5%.

By Alexandra Scaggs

Many strategists and economists think that long-term Treasury yields have further to climb. / Chip Somodevilla/Getty Images


Even after weaker-than-expected data on inflation and the labor market, long-term Treasury yields are rising again on Friday. 

The 30-year yield was up four basis points, or hundredths of a percentage point, to 1.99% in Friday afternoon trading. 

The benchmark 10-year yield was up three basis points to 1.19%, as the S&P 500 traded 0.1% higher. 

It is the second time this week that the 30-year bond’s yield has traded around 2%. 

While there has been plenty of macroeconomic news since it breached 2% on Monday, not all of it has been good. 

There has been upbeat vaccine news, but inflation data missed estimates, and the latest week brought more initial jobless claims than expected. 

Yet many strategists and economists think that long-term Treasury yields have further to climb. 

For example, Oxford Economics strategists wrote in a Feb. 12 note that they expect the benchmark 10-year yield to climb another 30 to 40 basis points in the next three months. That would leave it around—or above—1.5%. 

Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow.

That is because investors expect higher and more persistent inflation than other periods in the past decade. As Federal Reserve Chair Jerome Powell  discussed this week, the central bank has decided it will let inflation run above its 2% target to make up for weakness in recessions. 

When it comes to the global economy, higher inflation “may be of limited consequence,” Oxford Economics wrote. But “for markets, the implications are likely to be nontrivial.”

The most severe impact on markets would likely be losses in high-rated corporate debt, they wrote. They took a newly bearish stance on investment-grade corporate bond markets this week, downgrading it to Underweight from their prior neutral position at Market Weight.

Stocks, in their view, may face some bumps from higher yields, but may not face persistent risk of declines. U.S. equities have been in focus as a potential loser from rising yields, but the strategists see any Treasury-related declines as an opportunity to buy shares in Europe and emerging markets, where stocks are trading at less expensive valuations. 

“As long as the rise in [inflation-adjusted] yields is gentle as we expect, then we see no major inflection point in equities and other risk assets,” they wrote. “Any dips should be bought and largely in non-U.S. markets.”

Wall Street strategists say that the speed of the rise in long-term yields will be key to determining the outlook for stocks. Strategists at Goldman Sachs said in a recent note that a 36-basis-point increase would be required in the span of a month to affect stocks significantly.

And the Oxford Economics strategists do say that there is a significant risk to global markets if there is “a disorderly rise in long-end yields driven by a spike in real yields.”

That is not what they expect, however. So for now, they keep their bullish Overweight rating on global equities, and hold a neutral Market Weight rating on U.S. stocks. 

‘Red flags’ over market abuse rise at asset managers during lockdowns

Alerts pointing to possible manipulation have swelled as investors remain at home because of coronavirus

Katie Martin and Philip Stafford 


Possible market abuse in fund management firms accelerated globally after staff first worked from home last year and have not fully fallen back since, according to data from TradingHub, a monitoring group.

Unlike at banks, where an increase in “red flag” alerts over possible market manipulation or insider trading evaporated by the summer, the rate of suspicious events has remained elevated among investors, the figures suggest, with slightly less than 6 per cent of transactions setting off alerts. 

The findings come from data provided by some of the world’s biggest banks and fund managers with more than $20tn of assets under management.

The new data starkly contrast the decline in the number of reports of suspicious trades and possible market abuse sent to the Financial Conduct Authority, the UK financial watchdog, in the first months after the pandemic forced thousands of traders to work from home.

It underscores the difficulty companies have faced in trying to sift out potential bad behaviour by employees working away from offices kitted out with recorded phone lines and strict access to sensitive business, such as trading floors. 

Institutions that handle sensitive information, such as banks and asset managers, are typically required to report any suspicious activity straight away. 

But privacy campaign groups have warned about the level of intrusion from surveillance technology on employees at home.

Even so, the data suggest that working from home with looser controls over communications and less direct oversight from peers may create more fertile ground for wrongdoing in financial markets.

“[Banks] managed to react to the risk more quickly than the buy side,” said David Hesketh, founder of TradingHub. 

“It could also be that the banks have ramped up their investigations.”

Equities trading produces more alerts than in bonds and credit, he added, while insider trading is a more pressing risk than market manipulation. 

At banks, for which TradingHub has a smaller set of data, the rate of potentially suspicious trades has fallen back to about 2 per cent, from a rise up to 6 per cent when lockdowns first forced the financial services industry to work from home last spring.

TradingHub specialises in monitoring trades across a range of asset classes, generating daily reports on transactions that warrant further compliance checks.

Sometimes that may be because trade instructions appear to be so-called spoofs that traders do not truly intend to execute, or they may stem from what appears to be an unusually good run of luck — a possible indication that traders or investors have been acting on inside information.

Some of the alerts prove to be “false positives” under further investigation, the group said.

TradingHub has recently started building aggregate benchmarks to determine the average rate at which certain teams or asset classes generate suspicious activity, designed to help banks compare each other, allowing them and regulators to spot potential areas of concern

“The benchmarks show that, unsurprisingly, market abuse risk rose sharply in 2020 as a result of Covid-response remote working and elevated market volatility and illiquidity. 

Financial firms all responded to this threat to market integrity at varying speeds. 

However, these risks still remain above pre-Covid levels and firms need to remain even more vigilant against market abuse,” said Hesketh.

The number of “suspicious trades” reported to the UK’s FCA last year was 215 in April and 258 and May, the lowest numbers since tougher European rules came into effect in July 2016, according to data from the regulator. 

The decline was due to fewer reports on potential insider dealing.

At the time the FCA said the numbers varied according to market conditions and activity, and there could be several reasons for the decrease, including companies taking more robust steps to tackle financial crime risk.

As the pandemic swept through Europe, the FCA warned that anyone handling inside information was expected to continue “to act in a manner that supports the integrity and orderly functioning of financial markets”. 

It is expected to report full numbers for 2020 in coming weeks.

A Price Too High

Russian Pipeline Is Germany's Greatest Foreign Policy Embarrassment

Berlin is insisting on the construction of the Nord Stream 2 gas pipeline between Russia and Germany. By doing so, the country is isolating itself in Europe and alienating the United States. The political costs will be too great if the project is completed. It should now be scrapped.

    Foto: Alexander Demianchuk / action press


How much can a natural gas pipeline from Russia be worth to the German government? Is it worth sacrificing Germany’s foreign policy prestige? 

Is it worth isolating the country within the European Union and straining relations with Joe Biden, the new president of the United States? 

How can it be reconciled with Germany’s climate targets? 

And why should the German government back a pipeline that benefits the Russian regime, whose policies it otherwise opposes?

For years, the German government has stuck to this economically dubious and politically misguided project, the brainchild of Russian President Vladimir Putin and his pal, former Chancellor Gerhard Schröder. 

The greater the resistance within Europe to the project, the more stubbornly the German government has clung to the endeavor. It is increasingly difficult to find any other explanation for this than pride.

And this, despite the larger, more fundamental issue question facing Berlin: Can the German government achieve its self-proclaimed target of taking on a more significant role in global politics? 

Its behavior on Nord Stream 2 thus far suggests the contrary. 

The pipeline, indeed, has become Germany’s most embarrassing foreign policy problem.

From the very beginning, Berlin’s claim that the Nord Stream 2 was purely economic and not at all political in nature has been hypocritical. 

Pipelines are always political. 

And this is especially true of this pipeline, because Nord Stream 2 would transport natural gas directly from Russia to Germany through the Baltic Sea. 

It would allow the state-owned company Gazprom to bypass pipelines in Belarus and Ukraine, making the countries even more dependent on Russia because they will lose transit fees they otherwise would have received. 

The pipeline would also provide an additional source of foreign currency for the Russian government. 

This runs counter to the spirit of Europe's sanctions against a regime that for years has shown itself to be an adversary of the European Union and has had opposition figure Alexei Navalny poisoned and imprisoned.

The most effective argument used by pipeline proponents in recent years has been Donald Trump and U.S. sanctions against the project. "We're not going to let them dictate where we buy our gas!" they would say. 

But Donald Trump has now been voted out of office, and the Americans are by no means the only ones who oppose the pipeline. 

Indeed, perhaps the strongest argument against Nord Stream 2 doesn’t even have anything to do with the U.S. 

This pipeline is an anti-European project. And the German government is growing increasingly isolated in the EU on the issue. 

Almost every Eastern European country is opposed to the project, especially Poland and the Baltic states. 

The project provides affirmation for critics who view Germany as a two-faced, hegemonic country that speaks of European values but pushes through its own interests in a pinch. 

Last month, the European Parliament once again voted against the pipeline. There has also been criticism from the European Commission, which wants to reduce dependence on individual supplier countries. Even Paris is voicing skepticism.

The pipeline doesn’t even provide any clear economic benefits. It doubles the supply capacity from Russia, but natural gas consumption is stagnating and would have to fall significantly by the middle of the century for Germany to meet its climate targets. 

The existing pipelines are by far sufficient. Russia is now talking about pumping climate-friendly hydrogen through the pipeline in the future. But those prospects are uncertain and it changes nothing about the political dilemma.

Of course, the private companies involved could now try to finish building the last few kilometers of the pipeline, despite the U.S. sanctions – at their own risk. They have invested billions, after all. 

But the lengths to which some politicians in Germany - particularly within the center-left Social Democratic Party once run by Schröder - are willing to go to support the project has been appalling. 

Manuela Schwesig, the SPD governor of Mecklenburg-Western Pomerania, where Nord Stream 2’s terminus is located, has even set up a front foundation for environmental protection to complete the environmentally damaging pipeline despite U.S. sanctions. Such shadiness is harmful to Germany's international standing.

The German government has backed itself into a corner with Nord Stream 2 that can only be explained by economic selfishness or political naivety, but it is ultimately a self-inflicted wound. 

The time, though, has now come for a clear choice to be made – one that doesn’t chain the country to the pipeline. 

Nord Stream 2 must be stopped. 

It would be better to write it off now than to bear the political and economic costs of its completion.

Angela Merkel should withdraw support for the project, even if that could mean that companies end up having to be compensated. 

Doing so will be painful politically, but the German government should view the Nord Stream 2 debacle as quittance for the mistakes it has made – and as a lesson for the future.