HSBC, Donnelly - Notes from Camp Kotok 2019

https://www.cumber.com/pdf/Brent-Donnelly%E2%80%99s-Notes-from-Camp-Kotok-2019.pdf



A future where all rates on every yield curve are below 1% forever
There was a group conversation about what it means to be in a world where global interest
rates stay permanently near zero. In other words, if every point on every yield curve in the
developed world is set to remain permanently below 1% for the rest of our lifetimes… What
are the implications? (Note: The idea wasn’t to argue whether or not this will happen, it
was to assume it happens then discuss the implications).



...This is probably good for bonds (obviously), good for long duration equities and
bad for cyclicals and financials. Look at what happened in Japan and Europe.
Modern banking systems are somewhat reliant on positively-sloping yield curves
(at least most of the time) so banks are likely to struggle if the yield curve is flat
near zero.
 The pension fund shortfall situation gets worse. Then much worse



....so a
1 percentage point reduction in the cost of capital is a “biggie.” A quarter
point – not so much.



...The Fed is dribbling
away its “ammo” as we head to the 0 lower bound.”




...“If you could put Mario Draghi under truth serum… And then you asked
him whether or not he thought rates at minus 40 basis points were helping,
he’d say no. If you asked him if cutting rates to minus 50 would help, he
would say no. But then he would say that his job is to do something. And
so that something is to keep stimulating.
He feels pressured or compelled to keep ‘doing something’ which forces
rates more and more negative under the idea that the central bank is
acting and trying to stimulate.
He can NEVER stop and say ‘I've done all I can.’ So he has to keep going,
against his better judgement.”




...Modern Monetary Theory (MMT) and US Fiscal Strategy
First of all, I chuckled when one panelist called MMT: Magic Money Tree. Lolz. Another funny quote after
someone said MMT could be used to fund universal health care and Space Force investments… From Jim
Bianco, channeling John F. Kennedy:
“We choose to go to Mars, not because it’s easy, but because it’s free.”
The debate involved four separate speakers, and was a bit all over the place2
--plus, there were many, many
follow-up conversations—so I will do my best to summarize the whole weekend MMT debate and
conversation in five bullets:



 The overall vibe was negative towards MMT but strongly positive towards fiscal stimulus such as
infrastructure, education and student loan reform. The main beef when it comes to MMT is the timing /
methodology of how fiscal stimulus is delivered. On the other hand, some argued that no matter how you
deliver increased fiscal spending, it’s all very similar to MMT anyway, the only question is how fast the
Fed monetizes the new debt.



If you sell a $2T infrastructure bond and then the Fed buys it via QE during the next crisis… Is that really
all that different from MMT where the Fed/Treasury transaction is done on Day 1? All roads seem to lead
to more spending which is eventually purchased by the Fed so the arguments feel a tad semantic /
theoretical to me.



 Some felt MMT is inevitable given the weak to negative impact of lower and negative rates and bipartisan
support for larger deficits. With demographics turning bad to very bad in most developed nations and
technology also pushing inflation lower, a few argued that disinflationary forces are so strong that MMT
will not generate inflation for a long time anyway. You can see from the next chart how the rise of the
lower-paying Millenials and the fall of the higher-paid boomers is not offset by Gen-X due to its smaller
size (HT Sam Rines).
https://www.pewresearch.org/fact-tank/2018/04/11/millennials-largest-generation-us-labor-force/



 A lot of the feeling of MMT inevitability also arose from many opinions that the next round of QE cannot
be perceived as “bailing out the banks”. References were made to Corbyn’s “QE for the people” and Sam
Rines called the next QE / MMT policy “Reaganomics for the People”. It is not politically palatable for the
Fed and Treasury to boost stocks and banks or for the Treasury to cut tax rates further. The next stimulus
has to help Main Street or there will be pitchforks.



One strong counter to MMT is that it debases all work done and income earned in the past while punishing
savers and thus it is a potential moral outrage. There was definitely disagreement in the room on whether
debt is a moral or economic issue. I think that is an interesting debate. Mises vs. soft money schools.



 Debt is not a problem until it’s a problem. The US has been wringing its hands over the national debt
since at least 1989 when the big ugly debt clock was installed in Times Square. Maybe the problem from
MMT will not be high debt levels, but a supply side shock as MMT-financed projects lead to a dramatic
shortage of skilled workers, cement, steel, etc. and inflation skyrockets thereafter.