Popping Balloons
June 20, 2026 – Weekly comment
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This is Larry’s Lawn Chair. Decidedly pre-AI. Larry, an aviation buff, decided to scratch his itch to fly by buying 42 weather balloons, attaching them to this sturdy chair, which he bought on sale from Sears, and taking off on July 2, 1982. [links to Larry at bottom. If you have time the David Letterman interview which also features the Godfather of Soul James Brown is pretty fun]
Recalling a time as a boy when he saw weather balloons strung up at an Army-Navy surplus store, Larry devised a plan. At 11 a.m. on July 2, 1982, he would take flight from the backyard of his girlfriend’s home in San Pedro, California, by tying 42 8-foot helium-filled weather balloons, tiered into four layers, to a Sears-purchased aluminum lawn chair angled back at a 45-degree angle, using gallon jugs of water as ballast. Larry called his self-made aircraft “Inspiration I” and stocked it with sandwiches, cold beer, a CB radio, altimeter, camera and a pellet gun to shoot out balloons for controlled descent. Having learned to skydive as a precaution, he donned a parachute and climbed aboard his chair from a rooftop. The chair was tethered to his Jeep using three lines. Larry claimed in a later interview that his intention was to remain tethered at 100 feet for an hour and contact the FAA and a few airports prior to launch. By his calculations, once the lines were cut, he would lift up a few hundred feet, and the winds would slowly drift him east toward the Mojave Desert. The flight cost him approximately $4,000. He figured he would spend a couple of hours enjoying his snacks, sipping his beverages, and snapping a few photos before finally shooting out enough balloons to make a gentle, safe descent.
https://planeandpilotmag.com/lawn-chair-larry
From Google:
The Takeoff: Intended only to hover a few dozen feet above his yard, the anchor line unexpectedly snapped, launching him straight into the sky. He quickly shot up to 16,000 feet, entering the controlled airspace around LAX.
The Flight & Landing: Commercial pilots reported seeing a man in a lawn chair to air traffic control. [“This is TWA 231, level at 16,000 feet,” the pilot is reported to have radioed to air traffic controllers. “We have a man in a chair attached to balloons in our ten-o’clock position, range five miles.”] Walters safely descended by popping balloons with his pellet gun, [after shooting out several balloons, Larry placed the gun in his lap to check his altimeter, and dropped the gun] though his descent ended when the balloon strings snagged on power lines in Long Beach, triggering a 20-minute blackout. [1, 2]
Sometimes, really great plans are thwarted by something NO ONE could have predicted, like a snapped line. Of course, in this case, the result was an epic tale of lore.
“It was something I had to do,” Walters told The Los Angeles Times later. “I had this dream for 20 years, and if I hadn’t done it, I would have ended up in the funny farm.”
Our new Fed Chair Kevin Warsh seems to share a few parallel strands with our hero Larry. Warsh was on the Fed Board during the GFC, but resigned in 2011 due to differences in policy decisions. Not quite 20 years ago, but it seems Warsh had an itch to be Fed Chair ever since.
Warsh has the lawn chair, the pellet gun, and he certainly is going to need a couple of beers. With inflation at risk of becoming untethered, as things sometimes do, his goal is to descend back to price stablity without the unemployment rate and/or President Trump tangling up his touch-down. Not quite the same joie de vivre as ensconced in Larry’s mission, but I wish him bonne chance. Of couse, Larry chased his dream on a shoestring, with his ‘ground crew’ consisting of his girlfiend, who bought the now-in-short-supply helium and another friend who shot video. (It was a GREAT time to be alive in the 80’s). Warsh, on the other hand, has a whole herd of cats as ‘stakeholders’ some of whom can’t wait to cut the lines.
Last week I wrote this:
Warsh’s first FOMC as Chair is Wednesday. Several Fed members have recently said the Fed may need to be more restrictive given persistent inflation (Logan, Hammack, Kashkari…). What should Warsh do? My guess is that he will shift the balance of risks toward inflation without changing rates. Talk tough. Forward guidance in all but name, which would likely pressure the curve further and may cause long rates to decline.
Finally something right!
In any case, the market took to heart Warsh’s hawkish message and vow to return to price stability. Curves imploded. Chart above is red/gold SOFR pack spread (2nd yr vs 5th yr forward) overlaid with 2/10 treasury spread. Since the beginning of Feb, red/gold SOFR pack spread has gone from 72 bps to zero. It settled +1.625 bps with the red pack 9606.5 and gold pack 9604.875. 2/10 is now 26; high in Feb was over 60. The 4% level has sort of been a cap with respect to the SOFR strip, although the weakest contract, now SFRH7, settled at a new low 9585.5 (4.145%). So, initially the surge in oil related to Iran hostilities simply removed forward odds of easing. But recent inflation data and Warsh accentuated the trend towards actual hikes. Note as well that ten year breakeven (treasury minus tip yield) ended Thursday at a new recent low 226 bps from a high of 252 exactly one month ago. For the past three years, this breakeven has ranged from 200 to 250 bps and is now in the middle. If Warsh could attain an inflation level close to this longer-term measure of inflation expectations it would be a smashing success! The question is, what else gets smashed in collateral damage?
Step number one, which was already on its way, shoot out the oil balloon. However, to really have an impact, the Fed has to shoot out the semi boom, which is in direct conflict with Trump. I recall having a friend who was long a LOT of dot com stuff in 1999. I told him I was uncomfortable with that because the Fed was hiking. And I will never forget his response: “You don’t get it. These companies have no debt. Rate increases don’t affect them.” Well, it’s a different story now.
Here’s a Warsh quote in response to a question from Colby Smith:
If I look at the housing markets as one example, Fed policy isn’t the single determinant of the state of the housing market. But broadly, I would say Fed policy appears to be somewhat restrictive. I would have a hard time managing to say those words if I were to see what’s happening in financial markets. So, I’d say it’s uneven. That’s perhaps a function of different transmission mechanisms of monetary policy, whether monetary policy is coming from our interest rate tool or our balance sheet tool.
I can’t help but think back to 2018 when Powell was attempting to ‘normalize’ rates. The Fed used BOTH the interest rate tool and the balance sheet tool to tighten. In Dec of 2017 the Fed hiked 25 bps to 1.25/1.50. In 2018, quarter point hikes occurred in March, June and Sept of 2018. In March, a hike to 1.5/1.75 and an increase in QT from $20b to $30b per month. CPI was 2.2%. In June, a hike to 1.5/1.75. QT from $30 to $40b per month. CPI ~2.5%. In Sept, a hike to 1.75/2.0. QT from $40 to $50b per month. CPI ~2.3%. Throughout this period SPX rallied. The breaking point came in the beginning of October, shortly after Powell’s Oct 3 comment: “We may go past neutral. But we’re a long way from neutral at this point, probably.” SPX sold off 20% from then until late December. The administration was startled. Treas Sec’y Mnuchin held an emergency call with major banks in December to confirm ample liquidity. From December forward, almost every SOFR option trade was predicated on easing, which started in July 2019.
It’s no secret that Warsh thinks the Fed’s balance sheet is too large. Will a more restrictive policy come from rate hikes or the balance sheet? While the lowest SOFR contract, SFRH7 ended at a new low of 9585.5 (4.145%) on Thursday and traded to 9582 on Friday, which is just over a half percent above current EFFR and SOFRRATE, the forward SOFR one-year calendars lean towards ease. For example, SFRH7/SFRH8 settled at -25.5 (9585.5/9611). The current mkt signal, if that’s what the Fed is going to be watching, indicates the economy won’t be able to handle even modest rate hikes from here and/or that inflation will be receding. However the AI ‘bubble’ is likely driving high-end consumption and with it, goods and services inflation. It’s a hard needle to thread.
Warsh:
When we deliver on our price stability objectives – which we will – the American people will feel as though the hardships that they’ve been living through in part because of inflation in the last five years are in the rear-view mirror, and that credibility will have dividends across what we do.
If the Fed quickly delivers on price stability at the expense of stock prices, the American people will panic, Fed credibility be damned.
Waller speech Monday morning. Trump threatens to bomb Iran again, Monday thru Thursday. PCE prices on Thursday (Core yoy expected 3.3, same as last). Williams speaks as well. 2, 5, 7 year auctions start Tuesday.
OTHER THOUGHTS / TRADES
Sept treasury options expire 21-August. Fed’s Jackson Hole Symposium is 27-29 August. Market vulnerabilities appear to be building which I think will spark a bid for TY calls over puts at some point. Rolling TY contract low in Jan of 2025 was 107-06 and low in this calendar year, on May 19 was 108-18. MOVE index declined this week to 65.39 as Warsh’s hawkish tone flattened the curve. Way too low and a stark contrast to vol in SOFR contracts which climbed immediately after Warsh. For example, SFRU6 9625^ was 14/15 before the Fed when the contract was 9624, but on Thursday with a settle of 9606, the 9606.25 straddle settled 22.75. By contrast, from Tuesday to Thursday the TYU6 atm straddle was unch’d at 1’44. (Tuesday 110^ vs 109-30 was 1’44 and on Thursday 109.5^ vs 109-20 was 1’44).
Week before last, an interesting large trade on Friday 6/12 was a buy of 90k USN 111/110ps for 10. With the rally to 113-12, this sprd settled at just 1. Undeterred, on Friday there was a buyer of 30k USN 113/112ps which settled 13 vs 113-12 on Thursday. Not sure if these options traded Friday, but in the shortened session USU fell to 112-25. July options expire this Friday, 6/26.
| 6/12/2026 | 6/18/2026 | chg | ||
| UST 2Y | 408.3 | 417.5 | 9.2 | wi 418.1 |
| UST 5Y | 421.1 | 422.4 | 1.3 | wi 422.8 |
| UST 10Y | 448.5 | 444.9 | -3.6 | |
| UST 30Y | 497.2 | 490.0 | -7.2 | |
| GERM 2Y | 261.5 | 260.4 | -1.1 | |
| GERM 10Y | 299.4 | 292.8 | -6.6 | |
| JPN 20Y | 352.6 | 350.5 | -2.1 | |
| CHINA 10Y | 174.1 | 172.5 | -1.6 | |
| SOFR U6/U7 | 22.0 | 10.0 | -12.0 | |
| SOFR U7/U8 | -11.0 | -20.5 | -9.5 | |
| SOFR U8/U9 | 2.0 | -0.5 | -2.5 | |
| EUR | 115.68 | 114.6 | -1.10 | |
| CRUDE (CLQ6) | 83.35 | 75.9 | -7.47 | |
| SPX | 7431.46 | 7500.58 | 69.12 | 0.9% |
| VIX | 17.68 | 16.40 | -1.28 | |
| MOVE | 69.36 | 65.39 | -3.97 | |
