Why the Fed Risks Losing Control of the Bond Market | Andy Constan

Nov 14, 2024

In this engaging discussion, guest Andy Constan, founder of Damped Spring Advisors and former high-level strategist at major financial firms, warns about the Federal Reserve's perilous grip on the long-end of the bond market. He argues that continued rate cuts could paradoxically tighten financial conditions. The conversation also dives into government finances, the potential economic implications of the upcoming Trump election, and the dynamics of the ongoing equity rally beyond major tech stocks, offering keen insights on valuation and market trends.

Ask episode

AI Snips

Chapters

Transcript

Episode notes

INSIGHT

Fed's Focus on Rates

Andy Constan believes the Fed focusing on the Fed funds rate, not financial conditions, risks a bond market sell-off.
This sell-off could tighten financial conditions, leading to a hard landing despite easing intentions.

INSIGHT

Measuring Financial Conditions

Financial conditions are measured by observing real economy effects, borrowing/lending conditions, and market indicators.
Currently, easy financial conditions are evident in strong economic activity, low borrowing demand, and high equity prices.

INSIGHT

Counterintuitive Rate Cuts

Cutting the Fed funds rate doesn't guarantee lower long-term rates; it can even cause them to rise.
Constan suggests the Fed's easing could backfire, pushing long-term rates up and tightening financial conditions.

Get the Snipd Podcast app to discover more snips from this episode

Get the app

In Episode 389 of Hidden Forces, Demetri Kofinas speaks with Andy Constan, the founder and proprietor of Damped Spring Advisors about why he believes the Federal Reserve is at risk of losing the long-end of the bond market, which would lead to a reacceleration of inflation and a hard landing for the economy.

Andy and Demetri spend the first hour discussing the subject of a recent letter he published in which he warns that the Federal Reserve, by continuing to lower interest rates and ease monetary policy, could cause a sell-off in long-bonds and a rise in term premia, paradoxically tightening financial conditions while intending to ease them. They further discuss Treasury issuance, management of the Fed’s balance sheet, the weighted average maturity of assets in the central bank’s portfolio, and how conditions in the U.S. economy measure against the Fed’s summary of economic projections.

In the second hour, Kofinas and Constan dig into the government’s finances, its fiscal picture, and how Trump’s election may exacerbate or alleviate trends that have been in place for decades. They also discuss equity markets, the broadening of the equity rally beyond the Magnificent Seven that’s been underway this year, earnings expectations for these companies, whether they’re elevated or conservative, and how we should go about valuing them.

You can subscribe to our premium content and access our premium feed, episode transcripts, and Intelligence Reports at HiddenForces.io/subscribe.

If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page at HiddenForces.io/subscribe.

If you enjoyed listening to today’s episode of Hidden Forces, you can help support the show by doing the following:

Write us a review on Apple Podcasts & Spotify

Subscribe to our mailing list at https://hiddenforces.io/newsletter/

Producer & Host: Demetri Kofinas

Editor & Engineer: Stylianos Nicolaou

Subscribe and Support the Podcast at https://hiddenforces.io

Join the conversation on Facebook, Instagram, and Twitter at @hiddenforcespod

Follow Demetri on Twitter at @Kofinas

Episode Recorded on 11/11/2024