Defunct Economists
August 10, 2025
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“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” John Maynard Keynes: The General Theory
I was looking through old Greenspan speeches for a particular passage, where he had said – before the fact – the late 1990’s dot-com investment frenzy will lead to a few winners and many losers and bankruptcies, but there’s no way for the Fed 1) to know which companies or 2) to interfere in the process. The Fed’s job is only to mitigate the fallout. I didn’t find that particular passage but I did clip a lot of other Greenspan quotes which were amazingly prescient. This one is from Jackson Hole 1999. Quite salient in that it was just before the unraveling associated with the dotcom burst:
…to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.
BBG: …a $29 billion financing package for Meta Platforms Inc.’s massive data center in Louisiana… ‘Private credit has been itching to get into this space,’ said John Medina, SVP on the global project and infrastructure finance team at Moody’s Ratings. ‘This deal is one of the first of its kind for private credit and if it is successful, we would expect to see more.’ The biggest technology companies are in an AI arms race now, and they need cash to win.”
With respect to the previous two paragraphs, I heard a thought-provoking interview with Dan Rasmussen of Verdad Capital. First, he roughly quantified the size of private equity: S&P 500 has a market cap of around $50T. The 2000 companies in Russell have a total market cap of around $2T and Private Equity backed companies number about 12000, with a total cap of just over $2T. Because these smaller companies are voracious borrowers, the equity sits behind the Private Credit total of around $2T on the capital structure. He noted that some university endowments (over) allocated >30% of portfolios to private equity. [Perhaps that was reasonable when rates were low. But now they’re stuck. So… Executive Order bailout: allow PE investments in 401ks]. The other thing Rasmussen mentioned regarding AI and big tech, is that AI is “…the first tech innovation that’s capital intensive (since fiber optics). AI companies have gone from one third of the capital intensity of US industrial companies to 3x the cap intensity. The marginal cost of an old google search was near zero, but the computing power needed for AI responses is huge. I did not try to fact-check these comments, but certainly, spending on data centers is massive. There are going to be some spectacular winners and losers.
Now consider these tidbits:
New York state’s cumulative three-year budget gap has swelled to $34 billion, according to Comptroller Thomas DiNapoli.
Chicago faces a $1.1 billion budget gap for 2026. Mayor Johnson:
“We have reached a point of no return. The systems that people rely upon — education, health care, housing, our transportation — they are woefully underfunded, and everyone knows that. Everyone knows what, you know, my commitment is to progressive revenue. I can’t do this by myself.” [after having continued and expanded Lightfoot’s policies to drive the biggest taxpayers out of Chicago]
“If D.C. doesn’t get its act together, and quickly, we will have no choice but to take Federal control of the City, and run this City how it should be run, and put criminals on notice that they’re not going to get away with it anymore.” -President Trump
In my opinion, President Trump thrives on impulse and chaos. On display in markets with the Liberation Day stock swoon, the copper market tariff meltdown, Friday’s Swiss tariff announcement that shook the gold market. We’ll see what happens with the Trump/Putin summit (CLU5 down 5% last week), but on a more mundane level are the domestic issues of badgering Powell, firing the head of the BLS and now axing the head of the IRS.
The funny thing though, is that the jobs report and firing of the BLS head brought a lot of critical issues to light. For example, response rates to employment questionnaires have been dwindling and are sent through the mail. I hadn’t realized that. But now we seem to have a lot of experts on US Gov’t data collection and shortcomings. Confidence in gov’t data in general is waning.
With billions pouring into AI, the gov’t can’t seem to COUNT, and legacy municipalities are drowning. It’s an absurd irony. In my opinion, Truflation (around 1.7%) is likely more accurate than CPI, expected Tuesday at 2.7%. The most up-to-date, technologically-advanced data are market prices, and certainly the Fed tracks pricing signals. Obviously, even those can be horribly wrong, as witnessed in the Nasdaq meltdown at the turn of the century.
Below are just a couple of other interesting Greenspan snippets during the Nasdaq ‘bubble’. Short market commentary pertaining to last week below that.
Greenspan 1997: Globalization of Finance
https://www.federalreserve.gov/boarddocs/speeches/1997/19971014.htm
The increasing substitution of concepts for physical effort in the creation of economic value also has affected how we produce that economic output…
Because the accretion of knowledge is, with rare exceptions [that I have personally witnessed], irreversible, this trend almost surely will continue into the twenty-first century and beyond. Value creation at the turn of the twenty-first century will surely involve the transmission of information and ideas, generally over complex telecommunication networks. This will create considerably greater flexibility of where services are produced and where employees do their work.
Governments are beginning to recognize that the release of timely and accurate economic and financial data is a critical element to the maintenance of financial stability. We do not know what the appropriate amount of disclosure is, but it is pretty clear from the Mexican experience in 1994 and the recent Thai experience that the level of disclosure was too little.
Rather, we should recognize that, if it is technology that has imparted the current stress to markets, technology can be employed to contain it. [not so sure about this one]
1997: Tech Change and the Economy
But do keep in mind that the government has an obligation to limit systemic risk exposure, and centuries of experience teach us the critical role that financial stability plays in the stability of the real economy. Bankers also have an obligation to their shareholders and creditors to measure and manage risk appropriately.
1998: Question: Is there a new economy?
https://www.federalreserve.gov/boarddocs/speeches/1998/19980904.htm
Moreover, it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress. Developments overseas have contributed to holding down prices and aggregate demand in the US in the face of strong domestic spending.
We take for granted that contracts will be fulfilled in the normal course of business, relying on the rule of law, especially the law of contracts. But if trust evaporated and every contract had to be adjudicated, the division of labor would collapse. A key characteristic, perhaps the fundamental cause of a vicious cycle, is the loss of trust.
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When does the idea of biting off more than you can chew contribute to fraying in the institutional architecture? Recent administration ideas: Take over DC. Revamp gov’t agencies with new personnel and systems. Bring manufacturing back to the US. Manage the Fed and monetary policy. Take over Gaza efforts. Send military units to deal with Mexican cartels now labeled as terrorist groups. Parcel Ukraine. Re-work global trade. Privatize Fannie & Freddie. I personally happen to agree with many, though not all, of the ideas. My concern is that haphazard implementation could shake the most important factor which underpins the economy/asset mkts: confidence.
OTHER THOUGHTS/ TRADES
Buyer over 50k SFRU5 9612.5/9625cs for 1.5 last week. This trade needs strong perception of 50 bp cut at the Sept 17 meeting, which occurs just after SFRU5 option expiry of 12-Sept. Jackson Hole Conference is Aug 21-23.
SFRU5 9600c has 505k of OI, settled 4.5, 34d vs 9592.5. Most of ANY SOFR call. SFRZ5 9650c has 448k open, settled 7.5 vs 9624.0. In midcurves, 0QZ5 9700c has the most OI at 264k, settled 18.5 with 42 delta. Had been a lot of 9700/9800 c spd buying in 0QZ.
On the SOFR strip the lowest quarterly contract is SFRU5 at 9592.5. SFRM5 settled Friday 9563.5, so the spread is -29. It’s reasonable to say the market fully expects an ease of 25 at the Sept meeting. FFV5 settled 9590.5 vs EFFR of 4.33% or 9567 (spd of -23.5). Whenever a forward contract prices certainty of a Fed move, it almost always extends the idea. In my opinion SFRU5 could easily trade above 9600 this week. (Inflation data Tuesday and Thurs, CPI/PPI, with Retail Sales Friday).
NOTE: Bowman on Saturday says she favors three rate cuts this year, beginning in Sept.
On the week, SFRH7 fell the most, -8.5 bps to 9689, representing a retracement of about half of the NFP rally. SFRU5 was just -1 on the week at 9592.5.
Roll buying TYU/TYZ 115c calendar for 24 in 30k. TYV 115c settled 25 and has 20d ref 111-27. The futures roll will become more active as TYU5 options expire 22-August. Call rolls like the above tend to push the TYU/Z roll lower as do easing expectations.
MOVE index which measures treasury vol closed at 79.2, its lowest level since early 2022, before the rate hike cycle began. VIX at 15.15 is also near recent lows, but MOVE is surprisingly complacent, almost as if Yield Curve Control is about to be instituted.
| 8/1/2025 | 8/8/2025 | chg | ||
| UST 2Y | 369.8 | 375.8 | 6.0 | |
| UST 5Y | 376.9 | 383.0 | 6.1 | |
| UST 10Y | 423.0 | 428.3 | 5.3 | |
| UST 30Y | 480.2 | 485.3 | 5.1 | |
| GERM 2Y | 192.5 | 195.2 | 2.7 | |
| GERM 10Y | 267.7 | 268.8 | 1.1 | |
| JPN 20Y | 255.4 | 250.8 | -4.6 | |
| CHINA 10Y | 170.2 | 169.6 | -0.6 | |
| SOFR U5/U6 | -95.0 | -88.5 | 6.5 | |
| SOFR U6/U7 | -0.5 | -1.0 | -0.5 | |
| SOFR U7/U8 | 22.5 | 21.5 | -1.0 | |
| EUR | 115.89 | 116.43 | 0.54 | |
| CRUDE (CLU5) | 67.33 | 63.88 | -3.45 | |
| SPX | 6238.01 | 6389.45 | 151.44 | 2.4% |
| VIX | 20.38 | 15.15 | -5.23 | |
| MOVE | 83.83 | 79.20 | -4.63 | |
