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Politics:

Yesterday's decision by the Federal Reserve's top bank regulator to step down from his job — but not from the Fed entirely — is simultaneously less and more than meets the eye.

Why it matters: Michael Barr's self-demotion clears the way for President-elect Trump to appoint a vice chair for supervision. It is no radical departure from past precedent: Fed governors have, in the past, stepped aside on the principle that a new president should get to appoint their own chief financial regulator.

Historically, the Fed's regulatory side pays greater deference to the wishes of the president and Congress, in contrast to monetary policy, in which political independence is fiercely guarded.

• Barr's move was intended to get ahead of Trump possibly demoting him, which would have created a disruptive legal battle.
• Indeed, Barr's decision to remain a Fed governor — which limits Trump's options in appointing a new vice chair for supervision — is in some ways more of a break with precedent.

Flashback: Randall Kroszner, a President George W. Bush-appointed Fed governor who focused on bank supervision, stepped aside in January 2009, making way for Dan Tarullo, President Obama's appointee to the comparable role.

• In January 2017, Tarullo resigned, allowing Trump to eventually appoint Randal Quarles to the equivalent job.
• Quarles hung around through the first 11 months of the Biden administration then resigned from the Fed in December 2021, opening up the slot now occupied by Barr.

Between the lines: The common thread is that these top bank supervision officials view their role as more explicitly carrying out the regulatory agenda of the president who appointed them — and that a new president is entitled, in reasonable time, to their own choices.

• In monetary policy, there's a deep institutional tradition of Fed governors seeking to adjust interest rate policy in the best interest of the economy, regardless of who is in the Oval Office.
• With Barr remaining at the Fed as a governor, Trump will either have to wait until there is a vacant governor slot to choose a chief regulator or elevate a current governor, likely Michelle Bowman, whom he first appointed in 2018.

Yes, but: One difference now, compared to the Kroszner and Tarullo cases, is that neither held the title of vice chair of supervision, which was only created as part of the Dodd-Frank Act.

• Barr's term in that role wasn't scheduled to expire until July 2026.

What they're saying: "It is unfortunate in terms of Fed independence that Barr has stepped down before the end of his term as vice-chair in July 2026 at a time when he was subject to external pressure," wrote Krishna Guha and Marco Casiraghi of Evercore ISI in a note.

• "But we thought it would be unfeasible for him to remain in [that] seat for a year and a half," they add.
• "The problem lies in the way the term of vice-chair for supervision became badly misaligned with the election cycle when the Fed accepts the administration sets the direction on regulation, as opposed to rates."

US 10yr

• The US 10-Year Treasury Yield ($TNX) closed at an eight-month high today, reaching a potential inflection point of around 4.7%.
  
  
• After peaking at 5.0% in Oct. 2023, 4.7% has acted as resistance several times. The 10-year yield could revisit 5.0% if it clears this well-defined resistance level.
  
  
• A breakout would likely pressure risk assets, while another rejection would likely be positive for risk assets.

The Takeaway: The 10-year Treasury Yield is testing a potential inflection point at 4.7%. Clearing this hurdle would likely put pressure on risk assets, while another rejection would likely be bullish.

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At what level of inflation?

All stocks?

Those stocks that provide inelastic goods, services, sure they are good inflation hedges. Highly elastic ones, not so good.

JC on stocks:

Here's one thing we know for a fact about the market:

In order to have a bear market, or a correction of any kind, you need the prices of stocks to be falling.

Fact.

Without the prices of stocks falling, you cannot possibly have a bear market, or any kind of correction at all.

That's just how math works.

So if one would take the time to count how many stocks are actually going down in price, one would have a better understanding as to whether or not stocks are correcting.

See how that works?

And while the list of new 52-week lows is still nonexistent, that doesn't mean stock prices aren't falling. So we want to look at shorter-term time horizons to see if we're seeing an increase in the number of stocks falling in price.

Currently, we are not seeing any expansion at all in the number of stocks whose prices are falling. Here are Large-caps, Mid-caps and Small-caps all within the same range of new lows that they've been in throughout this bull market:

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We'll know if we're in a correction. You'll be able to just count and see for yourself.

And you'll see the list of new 1-month lows expanding, new 3-month lows, and then new 6-month lows, before you ultimately see those big surges in new 12-month lows.

It's a process, not a single event.

You'll see breadth deterioration, and then well after the fact, they'll announce that stocks are in what gossip columnists call, "Correction Territory". The worst offenders wait even longer and then proclaim that stocks are in "Bear Market Territory".

These are all made up fairytales about arbitrary numbers without any statistical significance whatsoever. It just gives the gossip columnists something to gossip about.

Whether an index is down 10% or 20% or 9% or 20.5% doesn't matter. It's what the components underneath the surface are doing. We know. We've actually taken the time to look. I would encourage you to do the same.

Also, individual stocks don't go into "Bear Markets". You see, corrections and bear markets are a function of the overall environment. But they don't teach them those sorts of things in gossip column writing school, because, well, why would they?

Let's remember. We're investors. We're traders. They are not. We don't have to make things up. They do (or think they do). We can just focus on the math itself. They have to tell stories for a living.

You see the difference?

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Stocks are close to the most overvalued against corporate credit and Treasuries in about two decades. The earnings yield on S&P 500 shares, the inverse of the price-earnings ratio, is at its lowest level compared with Treasury yields since 2002, signaling that equities are at their most expensive relative to fixed income in decades.

For company debt, the S&P 500’s earnings yield, at 3.7%, is close to the lowest relative to the 5.6% yield of BBB rated dollar corporate bonds since 2008.

The equity profit yield is usually above the BBB figure, because stocks are riskier. Since the turn of the century, when the gap between the two figures has been negative, as it is now, it tends to spell trouble for the stock market. Over that period, such a negative read has only ever occurred when the economy was experiencing a bubble or soaring credit risk, Bloomberg’s Ven Ram wrote last month.

“When you look at BBB yields, and any of the other benchmark ones — the 10-year, the 2-year — there’s a very significant gap between them and equity profit yields,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “Historically that’s often preceded a pretty significant drawdown.”

A correction isn’t necessarily coming in the near term: the spread between the S&P’s profit yield and BBBs has been negative for about two years, and the difference can persist for long periods of time.

But the current relationship between earnings and bond yields is yet another worrying sign of just how expensive shares are, and how fragile the post-US election rally in the stock market really is. Morgan Stanley strategists including Michael Wilson cautioned on Monday that higher yields and a strong dollar could weigh on equity valuations and corporate profits, hitting equities.

Investors got a sense of the risk when the Federal Reserve said on Dec. 18 that it was planning to cut rates at a slower pace than previously expected. Fears that the Fed was keeping rates higher for longer than the market previously expected helped push US stocks down nearly 3% that day, their worst Fed day since 2001, although shares have since clawed back much of that loss.

Even with a potential correction brewing at some point, investors are content to take the risk for now, said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors – whether that’s pouring into equities at sky-high prices or putting money into crypto. Equities are trading at about 27 times their earnings for the last 12 months, compared with an average of about 18.7 times for the last two decades.

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Article on crypto full:https://www.theatlantic.com/ideas/archive/2025/01/cryptocurrency-deregulation-future-crash/681202/?gift=TGgP34XZPBAppowZPOH7pwrUTtFTEHeJeU7FtTwKOaQ&utm_source=copy-link&utm_medium=social&utm_campaign=share

Supposedly. In the spring of 2022, the widely used stablecoin TerraUSD collapsed, its price falling to just 23 cents. The company had been using an algorithm to keep TerraUSD’s price moored; all it took was enough people pulling their money out for the stablecoin to break the buck. Tether, the world’s most-traded crypto asset, claims to be fully backed by safe deposits. The U.S. government found that it was not, as of 2021; moreover, the Treasury Department is contemplating sanctioning the company behind tether for its role as a cash funnel for the “North Korean nuclear-weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups and Chinese manufacturers of chemicals used to make fentanyl,” The Wall Street Journal has reported. (“To suggest that Tether is somehow involved in aiding criminal actors or sidestepping sanctions is outrageous,” the company responded.)

Were tether or another big stablecoin to falter, financial chaos could instantly spread beyond the crypto markets. Worried investors would dump the stablecoin, instigating “a self-fulfilling panic run,” in the words of three academics who modeled this eventuality. The stablecoin issuer would dump Treasury bills and other safe assets to provide redemptions; the falling price of safe assets would affect thousands of non-crypto firms. The economists put the risk of a run on tether at 2.5 percent as of late 2021—not so stable!

Already, Wall Street is talking up “tokenization,” meaning putting assets on a programmable digital ledger. The putative justification is capital efficiency: Tokenization could make it easier to move money around. Another justification is regulatory arbitrage: Investments on a blockchain would move out of the SEC’s purview, and likely be subject to fewer disclosure, reporting, accounting, tax, consumer-protection, anti-money-laundering, and capital requirements. Risk would build up in the system; the government would have fewer ways to rein firms in.

We have seen this movie before, not long ago. In 2000, shortly before leaving office, Bill Clinton signed the Commodity Futures Modernization Act. The law put strictures on derivatives traded on an exchange, but left over-the-counter derivatives unregulated. So Wall Street ginned up trillions of dollars of financial products, many backed by the income streams from home loans, and traded them over the counter. It packaged subprime loans with prime loans, obscuring a given financial instrument’s real risk. Then consumers strained under rising interest rates, crummy wage growth, and climbing unemployment. The mortgage-default rate went up. Home prices fell, first in the Sun Belt and then nationwide. Investors panicked. Nobody even knew what was in all of those credit-default swaps and mortgage-backed securities. Nobody was sure what anything was worth. Uncertainty, opacity, leverage, and mispricing spurred the global financial crisis that caused the Great Recession.

And the next iteration:

Meme coins with a chat bot attached — AI agent coins — have been blowing up, at least among the most risk-hungry crypto traders.

Why it matters: On the surface, it's all very silly, but it's a real (ish)-world experiment with giving AI agents actual responsibilities.

How it works: With an AI large language model, a digital coin can be attached to a character or a mood, and it can seem to be alive, responding to its fans on social media or in Telegram chats — in character.

• This enables an idea to grow. Even if the idea is just: The  emoji is funny.

In a way, all cryptocurrencies are memes (just like all currencies), but AI agents aren't for every coin.

• Asking bitcoin what flavor of ice cream it might like seems a bit ridiculous. But asking pepecoin? You could have that conversation, because pepecoin has a vibe.

And meme coins that had vibes were the hotness last year. While outsiders caught vapors over the silliness masked as "investing," insiders saw it differently: of course it was silly — it was a game.

• It was a massive multiplayer game of Apples to Apples (only everyone is a player and everyone is also a judge, and there are no turns, but there is money on the line.)

The inflection point for AI coins came when large language model's, or LLMs, allowed a token or coin to interact with fans. A bespoke LLM created around a particular character or vibe could keep being inventive about its core idea, keep pumping out content and interacting with its community in real time.

• And that's the heart of any meme coin: If an idea takes up more mind share, then it becomes more valuable.

State of play: AI agent coins represent a small subset of the market, with just a $16.6 billion collective market cap, according to CoinGecko.

• A few driving the hype include goatseus maximus (GOAT), aixbt (AIXBT) and ai16z (AI16Z).

What they're saying: "They are the thing because there is nothing else to do," Matti of Zee Prime Capital, an investor who specializes in investing based on what people are talking about, tells Axios.

• "But it does open a new design space and people tinker."

• (Matti described the larger meme game in detail back in ancient times: 2020.)

 Our thought bubble: Go search around for news on AI meme coins and the like, and you'll be barraged by coverage of what's up and what's down.

• All of that is nonsense unless you're a degen trader who measures profits in hours. Scroll past it.
• Price charts in crypto are only really informative on the scale of years if you want to assess the value of a given concept, unless you're gambling to make money today.

The big picture: Crypto traders are always trading a "meta" or "narrative." These things are often years out from their true usefulness. AI agents are the meta of the moment.

• Decentralized finance (DeFi) was the top meta of 2020. NFTs were the meta leader of 2021. Last year, it was meme coins.
• Yet we're still at the point where, globally, bitcoin and stablecoins remain the only blockchain products with stable product-market fit.

What's next: Some AI agents are actually going a step further than chatting already and making crypto trades. It's too early to say how it's going and so far valuations have exploded wildly beyond performance (surprise, surprise).

• Yes, but: "They could evolve into something truly valuable, something unexpected," Matti says.

META:https://www.theverge.com/2025/1/7/24338062/facebook-instagram-threads-meta-abandon-fact-checking

Passive Investing full:https://www.institutionalinvestor.com/article/2e5um1swovwbm3x5yyk1s/corner-office/why-michael-green-is-known-as-the-cassandra-of-passive-investing

“It’s not like I was born from the brow of Zeus preaching about passive. I had no reason to really suspect this,” Green insists. But he saw other sophisticated investors, like Stanley Druckenmiller, noting that “the markets started acting weird. They just weren’t conforming to the behavioral set that I had experienced post-1999, which was largely around people doing fundamental analysis and really digging in and trying to understand companies. All that behavior started to change pretty significantly between 2012 and 2016. Things were just very, very different,” Green says. What happened was that value investing — selling stocks that are overvalued by traditional metrics and buying those that are cheap — was losing money.

And because passive strategies buy in proportion to the market capitalization of the companies in the indices, they “buy more of stuff that went up since I bought last. And so that reinforces the momentum characteristics of the market,” Green explains. As passive becomes a bigger proportion of the stock market, it leads to increased concentration and correlation.

More draconian is Green’s argument that the markets are headed off a demographic cliff because younger people are bigger passive investors than their elders. Only 25 percent of investors over 70 are in passive strategies, whereas 95 percent of those under 40 are invested in passive vehicles, including target-date funds, which have become the default for many workers, he says.

“Every single day people are employed, they’re making their contributions to their 401(k)s,” Green explains. But, he cautions, “if people lose their jobs and stop contributing to their 401(k)s, the passive flows would decrease.”

Adds McMurtrie, “It’s not at all clear who would buy the shares because you purged all the people that would normally step in and buy.” That potential problem is exacerbated by the fact that, unlike traditional active managers who typically have at least 5 percent of their assets in cash to buy stocks if markets tumble, passive buyers are required to invest all their assets and don’t have spare cash in case of an emergency.

The rise of passive is also cited as a reason that value investors have been sidelined, creating what Einhorn and others call a broken market. As Einhorn said at a recent conference, “We are such marginal players in terms of the amount of trading that’s going on, so the price discovery from professional people who have a valuation framework, not as the dominant part of their process but as any part of their process, is much, much smaller than it used to be. And so effectively, instead of the valuation becoming the signal, the valuation people were just noise and everybody else is sort of the signal. And this is why I think we have a structurally dysfunctional market, a bit of a broken market.”

Companies are also learning how to play the game. For example, Thiel-backed Palantir went public through a 2020 direct listing, which gave it fast-track status to be included in the S&P 500 Index in September. Now 22 percent of its stock is owned by the big three indexers: BlackRock, Vanguard, and State Street. The software maker recently moved its listing to the Nasdaq from the New York Stock Exchange, which included it in an index popular with momentum investors: the Nasdaq 100.

jog on

duc