April 25, 2021
Hi everyone—I’m so glad to have you here. What a week.
James Bond is the perfect pun vehicle for explaining the arcane world of bonds, in part because of the reason his creator, author Ian Fleming, chose that name in the first place:
"I wanted the simplest, dullest, plainest-sounding name I could find, 'James Bond' was much better than something more interesting, like 'Peregrine Carruthers'. Exotic things would happen to and around him, but he would be a neutral figure—an anonymous, blunt instrument wielded by a government department." [Source]
Sounds like the bond market to me.
In truth, the dullness yet tremendously consequential nature of these things called bonds is why I keep trying to learn more about them. They’re utterly simple as a concept, yet somehow very complicated.
On the one hand, a bond is “a certificate issued by a government or a public company promising to repay borrowed money at a fixed rate of interest at a specified time.” In other words: a loan.
On the other hand, the bond market is somehow twice as big as the stock market and more important to the health of the economy.
“The bond market” generally refers to government bonds, but there are also markets for corporate bonds and financial instruments like mortgage bonds or municipal bonds. They exist because governments (and companies) will issue bonds (i.e. take out loans) to raise money to pay down their debts or finance new projects. This is why you’ll often hear it referred to as the debt market or credit market. They pay back these loans in the form of interest payments to the bond holders.
Here’s the other side of the deal: people buy bonds as a way to earn interest on their money. This is why you’ll hear it referred to as the fixed-income market too. (so many names!) The low-but-steady interest people collect on bonds can be thought of as income during retirement, as bonds tend to be less volatile and risky than stocks.
Here’s where it gets messy:
The Fed will buy and sell government bonds solely to control the money supply and interest rates. They buy bonds from banks to increase the supply of money in the banking system, or sell bonds to banks to reduce the money supply.
Bonds are also sold on secondary markets. These “over-the-counter” markets tend to be less regulated, less transparent, and less liquid than the stock market. They’re more popular, but more risky.
There’s that word again. Risk.
So to recap: bonds have become instruments for controlling the underpinnings of the entire financial system and money supply, not simply loans for new government projects. There are also secondary ways for risk to be introduced into a system that was originally meant to be boring, trusted, and reliable. (And that’s not even mentioning the bond futures market for option traders.)
Figuring out the riskiness of a bond involves something called convexity. Convexity is simply the curviness of the line that relates bond price to its yield (interest).
Greg Foss describes it this way: duration is like velocity, and convexity is like acceleration. Higher yield also means higher risk, as has always been the tradeoff:
So what happens if people start to fear that the government has issued too many bonds too fast and gets so far into debt that they won’t be able to pay out all the interest in the future, so new bond buyers want more interest to compensate for the risk, which would just put the government even further debt?
Here’s what happens: the central bank will create inflation.
To do that they just print more money and use it to buy bonds from banks, which puts more money into circulation but devalues it in the process. They figure if things get out of hand they can eventually sell those bonds back to banks and essentially reverse the process.
In the same way inflation causes your purchasing power to go down because dollars are worth less, inflation causes the saving power of bonds to go down because bonds are worth less. Debt is a great thing to have in an inflating economy because it it makes the obligation easier to pay off over time. Inflation encourages debt. People also start buying things they can’t afford because saving that money instead makes no sense.
The whole scheme reached peak absurdity this week when European Central Bank president Christine Lagarde tried to sincerely convince people that negative interest rates are a good thing. That people should want to pay for the privilege of lending their money. Don’t believe me? Check it out. The argument is that negative rates encourage people to borrow money they don’t have instead of saving the money they do have. And that this is a good thing. “For the economy.”
If all these central bank bond market shenanigans are starting to feel overly complicated, unsavory, crafty, and dangerous, then that’s just one more thing they have in common with James Bond movies.
Both also don’t tend to age very well.
Until next time 🤙,
“Like our stomachs, our minds are hurt more often by overeating than by hunger.” —Petrarch
🤑 Biden aims at top 0.3% with bid to tax capital like wages. [Bloomberg]
🔭 Inflation Watch™
Procter & Gamble said Tuesday it will raise prices on some products in September, blaming material and transportation costs
Kimberly-Clark, which will raise prices in June on products such as Huggies diapers, Depends bladder-control products, and Scott bathroom tissue
General Mills, Hormel Foods and J.M. Smucker have all hiked packaged food prices
Manufacturers have seen surging prices for raw materials ranging from lumber and pulp to dairy
Households are paying more for groceries and clothing—consumer prices jumped 2.6% in the year ended in March, the biggest yearly jump since August 2018, according to the Labor Department. [Barron’s]
Coca-Cola prices set to rise amid soaring cost pressures [ZeroHedge]
₿💱 Former Acting Comptroller of the Currency has joined the U.S. affiliate of the world's largest crypto exchange [Coindesk]; You can now sell, buy, and pay with cryptocurrency on Venmo [CNN]; Square issued a new whitepaper: “Bitcoin is Key to
an Abundant, Clean Energy Future” [Square]; Cathie Wood’s ARK says Bitcoin could help fight climate change [Medium]; Signature Bank which has $85 billion AUM will now offer bitcoin-backed cash loans [Blockworks]; UK considers new digital currency [Yahoo]; Louisiana legislature commends Satoshi for his contribution to economic security [BTC_Archive]
From The Tweetbox 🐦
“The great tragedy of the US government doubling the tax rate on long term capital gains is that by printing trillions upon trillions of dollars it has created a massive amount of fake stock appreciation that it can now collect when anyone chooses to sell or diversify.” [Tweet]
"Hire people who say 'I'm a league of legends player' rather than 'I play league of legends'" [Tweet]
“In hindsight, deeming large-scale computation wasteful will seen as completely absurd” [Tweet]
“If you are wondering why the $USD has been a relative loser lately, this is probably the most likely culprit. Policy makers are torching it.” [Chart]
“Metabolism consists of two major parts: catabolism and anabolism Catabolism is the set of processes that break down large molecules to release energy. Anabolism is the set of processes that uses that energy to build. Lots of systems have metabolisms.” [Tweet]
“Face it: this government has embraced the crackpot “Modern” Monetary Theory of paying bills with printed cash.” [This video is a must watch!]
The Lion King is basically an allegory for financial markets: Reckless young investor gets into danger in the elephant graveyard of options, so his dad has to go bankrupt to save him but he eventually learns to hakuna matata his way to lower time preference and generational wealth:
For The Pros 😎
Thread: How to tell when you're working on the wrong thing. (Link available to Pro subscribers)
How to become extremely well-connected. Tons of specific, actionable advice in here! (Link available to Pro subscribers)
How to remember people’s names, using techniques from memorization champions. (Link available to Pro subscribers)
How one person started multiple profitable businesses with less than $50 using these 30 resources. (Link available to Pro subscribers)
How to drive SaaS conversions from “top-of-funnel” content. (Link available to Pro subscribers)
Step-by-step detail of an SEO strategy that 10x'ed traffic & delivered >50% leads. (Link available to Pro subscribers)
Worth A Read 📃
The basic idea behind BitClout is to create a token-based marketplace for shares in someone’s (or something’s) reputation and influence. Go viral on Instagram for something delightful? Bull run. Say something stupid on Twitter? Could be the start of a bear market. In theory, every public action and utterance from anyone becomes tradable by anyone else.
Groundbreaking effort launched to decode whale language. This might seem out of left field, but since code is protected as free speech, and money is increasingly becoming code, then thinking of trade as a form of communication means that decoding languages is financially relevant.
I also love that the initiative is called Project CETI (Cetacean Translation Initiative), which is a nod to the SETI Institute. Back in the 90’s, SETI harnessed the processing power of PCs across the world (in the form of a screensaver) to process satellite data in search for extraterrestrial signals. A decentralized network of computers processing data has more than a passing resemblance to Bitcoin…
Here’s An Idea 💡
OBS, a hugely popular free application for broadcasting on Twitch, will be incorporating the Bitcoin Lightning network to let viewers stream onscreen bitcoin tips for streamers.
Same title. Same painting. Same subreddit. One gets 300 votes. The other gets 70K.
Pods & Schools 🐬🐠
🔊 The Unwinding of the Monetary System with Luke Gromen, via the On The Margin podcast. They cover the sovereign debt bubble, the petrodollar system, the death of the dollar, and the role of gold and Bitcoin.
🔊 Tyler Cowen: Economic Growth and the Fight Against Conformity and Mediocrity, on the Lex Fridman Podcast. Lex is an AI researcher and Tyler is an economist, and their conversation covers a lot of ground which Tyler ultimately describes as “a humanities podcast.” I loved every second.
🔊 Robert Breedlove: Philosophy of Bitcoin from First Principles, on the Lex Fridman Podcast. Robert is a prominent figure in Bitcoin circles, famous for his long essays that tie together philosophical, economic, historic, cultural, social, and mathematical strands to help people grasp deep truths. This 4-hour podcast is completely fascinating and essential listening for anyone who likes to understand things from the ground up.
🎬 If the Robert Breedlove pod sounds up your alley, I highly highly highly recommend also watching his series of conversations with MicroStrategy CEO Michael Saylor discussing the history of money all the way to the rise of Bitcoin:
Tools of the Trade ⚒
Products I use to make money
Swan. I recently became an official Swan partner because I love them so much. So if you're like me and just want an easy, automated way to buy bitcoin on the regular with the lowest fees in the game, head to https://swanbitcoin.com/Mulvey. You even get $10 for free ✨
StockCharts. I easily make back the small monthly subscription fee with the superpowers it gives me.
Nothing in this email is intended to serve as financial advice. Do your own research.