It’s about time? Late in the day Tuesday the Wall Street Journal is reporting that the Biden administration is belatedly moving to put Yemen’s Houthi rebels back on the terrorist list.

Ironically it was Biden that removed the Houthis in the first place, as WSJ highlights: “The designation as a foreign terrorist organization, which the U.S. plans to formally announce on Wednesday, reverses a decision taken early in President Biden’s term to remove the Houthis from the list over concerns it hurt the prospects for peace talks and further crippled the economy of an impoverished nation at risk of famine.”

The Houthis were removed from the list in 2021 after they were first designated previously under the Trump administration, also given they have long been armed and backed financially by the Islamic Republic of Iran.

Since last week, the US and UK-led coalition which also includes Australia, Bahrain, Canada and the Netherlands have conducted several rounds of airstrikes and missile attacks against Houthi positions in Yemen.

The repeat Houthi attacks, which are now almost daily, have threatened to completely shut out commercial vessels from the vital Red Sea transitway. 

The Houthis have claimed this is all part of the war against Palestinians, and their military operations are meant as retaliation against Israel and its most powerful backer the US. 

“The international coalition that America announced under the pretext of protecting maritime navigation in the Red Sea is an alliance to protect the Israeli entity and to protect Israeli ships. It is an integral part of the aggression against the Palestinian people, Gaza, and the Arab and Islamic nations,” the group previously said in a statement.

The Saudi-UAE-US coalition has waged a brutal air war against Yemen and the rebel Houthis going back to 2015, unleashing a dire humanitarian crisis. It was during that time, especially when Washington was more deeply involved in helping Saudi pilots with targeting information, that the Houthis were first placed on the US terror list.

In light of everything that has happened over the past couple months regarding Houthi attacks on civilian vessels, it’s interesting to revisit Secretary of State Antony Blinken’s words in February of 2021:

Effective February 16, I am revoking the designations of Ansarallah, sometimes referred to as the Houthis, as a Foreign Terrorist Organization (FTO) under the Immigration and Nationality Act and as a Specially Designated Global Terrorist (SDGT) pursuant to Executive Order (E.O.) 13224, as amended.

This decision is a recognition of the dire humanitarian situation in Yemen. We have listened to warnings from the United Nations, humanitarian groups, and bipartisan members of Congress, among others, that the designations could have a devastating impact on Yemenis’ access to basic commodities like food and fuel.

If the fresh WSJ reporting is confirmed, this will mark a somewhat unprecedented reversal which will see the same group go from a terror listing to being de-listed to being listed again—all within a matter of a few years.

Authored by Simon White, Bloomberg macro strategist,

Retirement savers want more stocks in their portfolios as a hedge against inflation, potentially offering a long-term tailwind for equities as societies age, according to the latest Bloomberg Markets Live Pulse survey.

Almost half of the 252 respondents said they were putting more funds into stocks as a response to rising prices – far eclipsing the 6% who said they’d be adding the traditional inflation hedge, gold.

After the biggest jump in consumer prices for a generation, the survey highlights the range of strategies that pension investors have turned to as a counter. Real estate and commodities – also assets that historically have weathered inflation fairly well – were among the other choices. But shares of companies, whose earnings are expected to rise with prices, were clearly the preferred option.

That doesn’t make them the right one, of course – in the inflationary 1970s, stocks were the worst-performing asset in real terms.

There’s a fierce academic argument over the likely effects of demographic trends on economies and markets – and over one issue in particular: Will aging populations tend to push bond yields up, or down?

In the MLIV survey, that’s the question that provoked the most individual responses. Reflecting the wider debate, the findings were exactly split down the middle.

For those who expect yields to rise as societies age, the focus is on the mounting fiscal expense – and the knock-on inflationary effect – of supporting populations with a longer life expectancy when there are fewer workers.

As one respondent put it: Medical and health costs grow faster than what the government can finance through tax, hence more debt must be issued.

Among those making the opposite case – that yields will trend down – the most common argument was that there’ll be higher demand for fixed income from those close to or in retirement.

Several respondents mentioned Japan, the country that is furthest along the aging track. It already has about 66 dependents for every 100 people of working age, while yields on Japan’s government debt have been below 2% for almost all of this century.

One thing that could determine how yields behave as populations age is simply whether politicians are willing to push them down via what’s known as “financial repression” – essentially, government action that directs private capital flows into public debt markets. There are many ways to achieve this. One example is rules that require pension funds to own government debt to match their liabilities.

One MLIV survey participant suggested that financial repression is exactly what will happen as states aren’t able to sell enough debt.

All of this means that anyone shifting funds from bonds to stocks as a hedge against inflation may find that they’re jumping from the frying pan into the fire.

Nonetheless, that’s the direction suggested by responses to the MLIV question on which asset class will see the biggest positive impact from aging societies.

Stocks and real estate were the two most popular answers. The latter is a more proven inflation hedge. Land is in finite supply while typically demand for housing rises as populations age and the average household size falls.

Around a quarter of respondents chose bonds, while some of the other answers given included healthcare stocks, gold, and Bitcoin.

Another finding to emerge from the survey was a strong belief that the retirees of today and tomorrow will take a different approach to their pension portfolio compared to the baby boomers. Almost 60% of respondents took this view.

Gen Z and millennials are set to have lower incomes and less wealth than their parents.

That doesn’t mean they will mimic traditional approaches to pension investing by increasing bond allocations the closer they get to retirement age – which in any case may not be the most prudent strategy if elevated inflation turns out to be a feature rather than a bug.

That not only has implications for current generations when they retire, but for the whole structure of the market that’s been in place for most of the past three decades.

It’s too early to say exactly what that means for investing – but one thing is clear: aging populations mean the rules have changed.

Maryland’s largest daily newspaper, the Baltimore Sun, has been acquired by a conservative billionaire who is the biggest owner of local television stations in the US and has provided favorable coverage for former President Donald Trump. 

Axios reports David D. Smith, the executive chairman of Sinclair, has acquired The Sun in a private deal from Alden Global Capital. This investment firm is one of the country’s largest newspaper operators. 

The purchase returns The Sun to local ownership. It is unclear how much Smith paid for the newspaper. 

“I’m in the news business because I believe … we have an absolute responsibility to serve the public interest,” Smith told The Washington Post. 

He continued: “I think the paper can be hugely profitable and successful and serve a greater public interest over time.” 

So what could Smith mean when he stated “greater public interest over time”? 

Well, firstly, the purchase of the newspaper comes as the 2024 presidential election cycle has kicked off. The paper has been analyzed by various media bias websites, such as Media Bias Fact Check, and found “slight to moderate liberal bias” in news reporting. 

Under new ownership, the paper could be tilted back from supporting leftist causes to more of a center-conservative bias. 

At Smith’s flagship WBFF TV station in Baltimore, investigative reporters like Chris Papst have made considerable efforts to uncover corruption in Maryland. Taking the TV station as a guide, this might only suggest that Smith’s newspaper venture could begin a new focus on exposing corrupt Democrats who have controlled Baltimore City for more than half a century, as well as radical progressives in Annapolis. 

Triffon G. Alatzas, the publisher and editor-in-chief of the newspaper, told the newsroom on Monday: Smith had bought The Sun “to support his hometown newspaper.”

Authored by Jonathan Turley,

More details are emerging from the recent testimony of Hunter Biden’s art dealer, George Bergès.

We previously discussed how Bergès confirmed that the accounts of buyers flocking to buy Hunter’s art was false and that most of the art was purchased by his Democratic donor patron, Kevin Morris.

Not only did Bergès shatter White House claims of a carefully constructed ethical system to keep Hunter from knowing the identity of purchasers, Bergès testified that Hunter expressly demanded to know the identity.

Various experts objected to the sales as a serious ethical problem of donors using the purchases to assist President Biden and his family.

The media dutifully reported at the time how the White House was grappling with the ethical questions and, according to the Washington Post, “the White House officials have helped craft an agreement.”

It was portrayed as unprecedented and unyielding.

The White House continued to swat down questions by citing an ethical plan created for the sales. Andrew Bates, a spokesperson for the White House, said in a statement that “the President has established the highest ethical standards of any administration in American history, and his family’s commitment to rigorous processes like this is a prime example.”

Then White House spokesperson (and now MSNBC host) Jennifer Psaki stated:

“Well, I can tell you that after careful consideration, a system has been established that allows for Hunter Biden to work in his profession within reasonable safeguards […] But all interactions regarding the selling of art and the setting of prices will be handled by a professional gallerist, adhering to the highest industry standards. And any offer out of the normal course would be rejected out of hand. And the gallerist will not share information about buyers or prospective buyers, including their identities, with Hunter Biden or the administration, which provides quite a level of protection and transparency.”

Yet, Bergès reportedly testified that he had no contacts with the White House and Hunter knew the identity of the purchasers of most of the art.

Notably, Bergès was reading these same reports in the news but never objected to the alleged misrepresentation.

He admitted that he read of those reports and was confused.

A staffer asked:

“When you’re seeing in the press that the White House is putting in certain safeguards regarding an ethics agreement but you’ve had no conversations with [the] White House, I mean, did you ever say to Hunter Biden, ‘Hey, where’s this coming from?’”

Bergès responded:

“I might have. I probably did, yeah.”

He admitted that he was surprised by the coverage “[b]ecause I hadn’t had any communication with the White House about an agreement.”

That, of course, was never reported. Instead, the media dutifully reported how there was this comprehensive ethical plan in place.

What was particularly notable is that, despite the false White House claims and extensive coverage, Hunter appears to have discarded any such limits.

Berges testified that artists usually do not know who buys their art.  So not only did Hunter not comply with the agreement with the first, this was a departure from standard operating procedure to let him know about the purchasers: “…I don’t know how it was phrased or—but I remember that there—that that was the difference…That part was different. Normally, the gallerist does not let the artist know who the collectors are…The first one was that I was required to disclose who the buyers were. In the second one, I was required to not disclose the buyers.”

The most important testimony, in my view, is still the massive purchase by Morris. This Democratic donor was introduced to Hunter at a Democratic fundraiser for the first time not long before reportedly giving him millions to pay off his taxes and support his lavish lifestyle. He then reportedly purchased most of the art as the media was reporting how hot Hunter was as a new emerging artist. The claims of walling off the identity of purchasers and the high demand for his art proved to be false.

For his part, Bergès says that he no longer carries Hunter’s art.

He did confirm that he previously did speak with President Biden in person and on the phone during the period when he was selling his son’s art.

The media, however, now appears to be, again, largely ignoring the story and what it says about not just the ethical questions but its own prior coverage.

An El Niño winter and a split in the polar vortex have created the perfect weather conditions for New York City to break its 701-day streak without significant snowfall. 

“It’s been 701 days since Central Park last recorded an inch of snow on a calendar day,” the National Weather Service of New York wrote in a post on social media platform X. They said Central Park received 1.4″, which was enough to break the snow drought. 

It’s been 701 days since Central Park last recorded an inch of snow on a calendar day.

Latest totals as of 7 am:

❄️Since midnight — 1.0″
❄️Storm total — 1.4″

The streak has ended! #NYwx

— NWS New York NY (@NWSNewYorkNY) January 16, 2024

The longest snow drought on record for the metro area ends. 

Scenes from NYC. 

NYC SNOWLESS STREAK ENDS: Inch of snow at Central Park ends 701-day snowless streak in America’s largest city.

FOX Weather Correspondent @RobertRayWx reports on the latest. #nywx pic.twitter.com/tt3Br2jCxZ

— FOX Weather (@foxweather) January 16, 2024

Snow has just changed to SLEET in Brooklyn 🧊⚠️

Just measured 1.7” — snowless streak over! ❄️ @NWSNewYorkNY pic.twitter.com/d2YgMqzlG6

— Allan Nosoff (@AWxNYC) January 16, 2024

It’s been more than 700 days since NYC had more than an inch of snow. Sidewalks are slippery this morning. Be careful. pic.twitter.com/ku5sYiQEtL

— ☀️🌦 Jason Frazer ⚡️❄️ (@JasonFrazerTV) January 16, 2024

Washington, DC, and Baltimore also ended a snow drought. 

Washington D.C. officially recorded its first inch of snow since January 16, 2022! How will you spend your snow day?

Share your photos and videos with us at: https://t.co/4CsumCwMMi

(Credit: Diego Sanchez) pic.twitter.com/C0cQotLIst

— 7News DC (@7NewsDC) January 16, 2024

With snow on the ground and teeth-chattering cold plaguing the eastern half of the US, we wonder how sanctuary cities will fare with millions of new illegals from areas of the world that are in the tropics. 

NYC in the snow is a dream pic.twitter.com/3LCVpLRn0m

— Alexandra Semenova (@alexandraandnyc) January 16, 2024

Democrats better keep praying for global warming. 

Authored by Ryan McMaken via The Mises Institute,

Over the past two years, the Biden administration has repeatedly insisted that job growth is amazing, and that the administration has “created” millions of jobs.

In reality, of course, much of the job growth that did exist was the predictable job growth that came with the end of forced business closures and lockdowns. Job growth was also fueled by rising aggregate demand fueled by runaway growth in government spending. After all, during 2020 and 2021, the regime’s easy money policies meant that the central bank and private banks created approximately seven trillion dollars during that period. 

Since early 2021, however, the job growth we’re seeing has been increasingly fueled by growth in government-sector jobs. In other words, the job growth we do see in the government sector does not represent the result of private investment, saving, or demand. It’s not organic economic growth. Rather, these government positions are positions that only exist as the result of wealth transferred from the private sector to the government sector.  

Government-funded jobs are not drivers of growth. They are obstacles to growth, as stated by Ludwig von Mises: 

…there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.

Looking at month-to-month job growth since 2021, the graph shows government jobs as a percentage of all new job growth (according to the establishment survey.) This has accelerated over the past six months as government job growth has comprised from 21 percent to 58 percent over that period. Indeed, over the past year, from December 2022 to December 2023, private sector jobs grew at half the pace of government jobs, with private sector payrolls rising 1.5%. During that time, government payrolls increased 3 percent. 

The relationship between government jobs and private sector jobs also can also indicate approaching recessions in many cases.

Here is a graph that shows year-over-year growth in private sector jobs (gray) and government jobs (red), each as a proportion of all job growth. We can see how in numerous cases, the portion of all jobs that is private tends to deteriorate as recessions approach. For example, as the 1991-1992 recession, approached, we see that new government jobs became a larger and larger share of all new jobs during 1990 and 1991.

Government jobs made up about 20 percent of all new job growth in early 1990, but by December of that year, government jobs has provided about half of all new job growth. We can clearly see a similar trend with the lead up to the great recession: private-sector jobs began to collapse as early as late 2006 even though government job creation continued to buoy overall job growth in that period.  

During times of strong economic growth, we find that government jobs rarely comprise more than twenty percent of all new jobs.

Since September of this year, however, government jobs has taken up more than twenty percent of all new jobs in each month. In December, government jobs reached 24.9 percent of all new jobs.

That’s the largest proportion since the covid panic in March 2020. 

Daniel Lacalle has said that the United States is in the midst of a “private sector recession.” What he means is aggregate numbers can still show good economic trends—such as job growth—while the private sector is stagnating or shrinking. That is, if government spending and government job creation is robust enough, it will mask private sector weakness in the aggregate statistics. 

That may be the trend we are facing right now. The job growth we do see is increasingly being driven by government spending, and not by private investment. Even worse, the government spending we see is largely deficit spending, meaning the economic “good news” is reliant on massive amounts of new government debt. 

On Tuesday US forces carried out another round of strikes on Houthi sites in Yemen, but this time the operation is being dubbed a “pre-emptive” attack that came in response to militants preparing missile launches on the ground in real time.

“US forces struck and destroyed four Houthi anti-ship ballistic missiles,” a Central Command (CENTCOM) statement saud. “These missiles were prepared to launch from Houthi-controlled areas of Yemen and presented an imminent threat to both merchant and US Navy ships in the region.”

Over the course of the prior day, two commercial ships were hit by Houthi missiles, including the Zografia, in an incident we detailed earlier.

US defense officials explained of this third significant wave of American strikes against the Houthis, per Politico: 

The Tuesday attacks were on a much smaller scale and “dynamic” in nature, meaning they were not pre-planned and rather taken in self-defense against missiles that presented an imminent threat to international shipping, one of the officials said. All of the officials were granted anonymity to speak about a sensitive operation before an official announcement.

These Houthi launches targeting Red Sea transit are coming daily at this point, and so it’s very likely there will be many more counter-attacks to come from the Operation Prosperity Guardian coalition patrolling off Yemen. CENTCOM has has also continued upping its counter-Iran operations in regional waters, also as Tehran is believed to be supplying the Yemeni rebel group with weapons.

Shell plc multinational oil and gas company has been the latest to suspend tanker operations through the Red Sea. 

In earlier analysis we explained how the number of commercial vessels that have transited the Red Sea/Suez Canal route has more than halved over the past month amid rising tensions off Yemen, but more than 100 ships, including oil tankers, have crossed the water lane since the US and UK navies advised operators on Friday to steer clear of the route.

A total of 114 commercial vessels — including oil tankers, bulk carriers, and container ships — have continued with their routes and transited into or out of the Red Sea through the Bab el-Mandeb Strait, according to vessel-tracking data monitored by Bloomberg.

The Houthis have declared war on Red Sea shipping in connection with Israel’s ongoing operation in Gaza. The White House has so far backed away from calling for permanent ceasefire, also as over 100 Israeli hostages remain in Hamas captivity…

🇺🇸🇮🇱BLINKEN TO STAFF: WE HEAR YOUR CONCERNS ABOUT GAZA – GET BACK TO WORK

“We’ve had a number of people in the department since Oct, raised questions, concerns, criticisms of policies, policies that Israel pursuing, policies that we are pursuing. Ultimately they have to be on… pic.twitter.com/G4mQzqtIvS

— Mario Nawfal (@MarioNawfal) January 16, 2024

While attending the World Economic Forum (WEF) in Davos, national security adviser Jake Sullivan strongly suggested the region will soon see more US offensive strikes in Yemen. “We did not say when we launched our attacks, they’re gonna end once and for all,” he warned in the fresh remarks.

Authored by Jack Phillips via The Epoch Times (emphasis ours),

The federal judge overseeing the classified documents case against former President Donald Trump rejected a request from federal special prosecutor Jack Smith to force the former president to reveal a portion of his legal strategy.

Several weeks ago, Mr. Smith’s team attempted to compel the former president to disclose to the prosecutors whether he intends to use an “advice-of-counsel” defense against the charges that he illegally retained and stored classified materials. It’s because, according to the special counsel, President Trump has signaled he wants to state in his case that he was merely following legal advice regarding how to deal with the classified documents post-presidency.

But on Jan. 12, U.S. District Judge Aileen Cannon issued a paperless order, posted to the docket, that it is too soon to request President Trump’s counsel to tell prosecutors what their plans entail.

“Assuming the facts and circumstances in this case warrant an order compelling disclosure of an advice-of-counsel trial defense, the Court determines that such a request is not amenable to proper consideration at this juncture, prior to at least partial resolution of pre-trial motions, transmission to Defendants of the Special Counsel’s exhibit and witness lists, and other disclosures as may become necessary,” her order stated. “The Special Counsel’s Motion 208 is therefore denied without prejudice.”

Without prejudice means that federal prosecutors can raise the same issue in the future. In his election-related case in Washington, President Trump has been ordered by the federal judge to disclose whether he will rely on advice-of-counsel defense by Monday.

Judge Cannon’s order comes weeks after a November motion filed by the Smith team, who wrote that the former president should disclose part of his legal strategy because, in part, he has “publicly stated he was ‘told’ he had no legal obligation to return classified documents to the Government or presidential records to the National Archives and Records Administration (‘NARA’), thereby indicating a possible defense of good faith reliance on advice of counsel.”

That court filing further alleged that President Trump has stated he is “under no obligation” to hand over classified materials due to “various legal rulings that have been made over the years.”

And it made reference to a Trump post on Truth Social in which he wrote, “My attorneys and representatives were cooperating fully, and very good relationships had been established. The government could have had whatever they wanted, if we had it.”

Other Activity

Also on Friday, Judge Cannon granted the former president a request to file an “oversized consolidated brief” to back up discovery motions in the documents case, according to a post to the docket.

“Defendants may file one consolidated classified brief and one consolidated unclassified brief, neither to exceed 120 double-spaced pages using 12-point font,” the order said. “The Special Counsel is granted corresponding relief for its combined responses.”

In late December, Judge Cannon approved a request from the special counsel’s office to require preparation of jury questions ahead of President Trump’s trial in May 2024.

A week before that, the special counsel’s team had asked Judge Cannon, a Trump appointee based in Florida, to set a deadline for early February regarding the first jury selection steps.

“Because the pre-trial publicity surrounding this case is substantial, the Government recommends a thorough jury selection process, including a written questionnaire completed by potential jurors before in-person voir dire,” Mr. Smith’s office said in a court filing.

“Accomplishing that requires enough time beforehand to allow for meaningful conferral among the parties and for the Court to consider and resolve disputes. Time may also be required to print questionnaires and conduct other processing.”

However, President Trump’s team opposed the proposal, writing a day later that his request was too early.

“Moreover, in addition to wasting the Court’s resources, this type of litigation detracts from the defendants’ efforts to review voluminous discovery and prepare motions that are crucial to the defense,” his lawyers wrote.

President Trump is also currently set for trial on March 4, 2024, in Washington on federal charges related to the 2020 presidential election. He also faces charges in Georgia accusing him of trying to subvert that state’s vote, as well as another state case in New York accusing him of falsifying business records in connection with money payments during the 2016 election.

He has also been sued in a business civil fraud case in New York, where a trial is taking place. President Trump has denied wrongdoing in all of the cases.

In the meantime, polls have shown that President Trump still has an outsized polling advantage over his Republican rivals in the 2024 presidential election, having garnered 61 percent support as of Sunday. That’s about 50 percentage points more than former U.N.

The Pentagon on Tuesday revealed more information about the two missing US Navy Seals, who disappeared off the cost of Somalia in the Gulf of Aden on Thursday after they “fell into the water during a nighttime boarding mission” according to US military officials.

A search and rescue operation has continued, and the US Department of Defense has yet to formally declare them dead. The US has revealed additional information about their secretive mission, saying their team intercepted a shipment of Iranian missile components bound for Houthis in Yemen. 

The nighttime raid was conducted against a dhow, or a small sailing boat, which was found to have contained several advanced weapons components on board, according to the new press release by CENTCOM. 

The Seal team was “supported by helicopters and unmanned aerial vehicles (UAVs)” and “executed a complex boarding of the dhow near the coast of Somalia in international waters of the Arabian Sea.”

The military says that Iranian-made ballistic missile and cruise missiles components were seized from the vessel, and included “warheads for Houthi medium range ballistic missiles (MRBMs) and anti-ship cruise missiles (ASCMs).”

“It is clear that Iran continues shipment of advanced lethal aid to the Houthis. This is yet another example of how Iran actively sows instability throughout the region,” CENTCOM commander Gen. Michael Kurilla said.

He further detailed the following:

This is the first seizure of lethal, Iranian-supplied advanced conventional weapons (ACW) to the Houthis since the beginning of Houthi attacks against merchant ships in November 2023. The interdiction also constitutes the first seizure of advanced Iranian-manufactured ballistic missile and cruise missile components by the U.S. Navy since November 2019.

But importantly, the new statement also confirmed that the two Seals now lost at sea had been directly involved in his operation. “We are conducting an exhaustive search for our missing teammates,” the CENTCOM statement emphasized.

The Seal boat had reportedly been headed toward a suspicious vessel off the Somali coast when the elite operators went overboard when a large wave crashed into them. One Seal fell into the sea, and the second reportedly went in while trying to rescue him. Locating them was complicated because it happened in the darkness of night in a vast ocean.

When the incident was initially reported over the weekend, most news reports assumed or strongly suggested it may have been related to stopping Somali piracy. It was at first only reported that the vessel was deemed “suspicious” by the US Navy and so was approached by the Seal team.

Meanwhile, there have since been reported more strikes on Houthi sites in Yemen by the Western coalition which is patrolling the Red Sea.

Authored by Simon White, Bloomberg macro strategist,

The high degree of certainty the Federal Reserve will deliver an early rate cut – which is a fait accompli historically when pricing is as skewed as it is today – is a sign the market perceives financial-instability risks are rising, and that a near-term reduction in rates is required to help prevent liquidity and funding issues from developing.

The curious case of the March rate-cut rumbles on. Several theories have been put forward for why the market is ascribing such a high probability to it, such as more dovish economic data, or large yield-curve steepening positions skewing front-end rate pricing.

None really pass muster when you look more closely at them.

But under the lens of reserves and financial-stability risks, things start to make more sense.

This is controversial.

A shibboleth of central banking is the “separation principle,” the idea that monetary policy is distinct from financial stability. As Cameron Crise noted last week, in a response to my view that Fed balance-sheet dynamics are playing a much bigger part in the market’s rate outlook, Jerome Powell himself has recently invoked the principle, noting the two are on “independent tracks.”

But the separation principle was always questionable, something the Bank for International Settlements has long argued might be correct in theory, but is wrong in practice. Funding costs, leverage incentives and risk-taking – all influenced by the size and composition of the Fed’s balance sheet – affect credit growth and asset prices.

That’s even more the case when the government is running a large fiscal deficit as it is today. Interest payments are poised to become an ever-greater drain on reserves and reserve velocity, intensifying the risks from the Fed’s ongoing quantitative tightening program.

The savior of market liquidity in the face of vast government supply has been the Treasury’s decision to issue mainly bills, allowing the liquidity parked at the Fed’s reverse repo facility (RRP) to harmlessly absorb much of this supply.

But now the RRP is dropping rapidly, and continues to fall as money market funds’ assets keep rising and bill yields remain attractive.

But the closer the RRP gets to zero, the nearer we are to the point where reserves are approaching their so-called lowest comfortable level, and funding problems could ignite as they did in September 2019.

In a sign risks are already rising, SOFR has jumped higher on more frequent occasions in recent months.

As a result, several banks have brought forward when they believe the Fed will begin to taper and then end QT.

JP Morgan, Bank of America and Barclays believe the process will start as early as April, and end as soon as mid-summer.

This highlights that financial-instability risks are possibly much closer than is commonly thought.

Why?

In practice the Fed does not want to run reserves down to their lowest comfortable level.

Powell has talked about ending QT when reserves are still abundant, but with an added buffer.

Banks will also want to keep a buffer in their reserves so they don’t run into funding issues.

But if perceived risks are rising – which we know is the case as end-of-QT forecasts are brought forward – the incentive is to increase the buffer.

If everyone does this – and everyone knows everyone else is doing it – then it’s prudent to raise your buffer a little more: if you’re going to panic, it’s best to panic first. Reserves could go from superabundant to scarce very rapidly.

Thus a linear correlation between reserves and financial conditions is not the appropriate way to judge whether the relationship is spurious or not, as Cameron argues it may well be.

In non-linear relationships it’s not about what happens through all time, but at turning points.

With reserves, there is likely to be a regime shift when they go below a certain level, where suddenly they do have a strong causal correlation with financial conditions.

That’s why QT’s end could happen rapidly once any taper starts. Cameron disagrees, giving the analogy of running while juggling tennis balls, with the juggling representing banks trading reserves with one another, and the speed of the running the pace of QT. More juggling is needed the more that reserves fall, thus it’s prudent to run slower.

In the analogy, however, there is no penalty for dropping one of the balls. If this cost is perceived to be rising, and yet you’re still being forced to run at a certain pace, i.e. QT is ongoing, then you might decide to stop juggling altogether! In other words, the funding markets would seize up, with negative repercussions for asset prices.

Banks with plenty of reserves will be OK, but it is the unevenness in how they are distributed that is the problem.

5% of the largest US banks own 40% of reserves, and the problem has become even more acute since the repo flare-up in 2019.

Pricing is set at the margin, and smaller banks without reserves will push up the cost of funding – a major risk to financial stability if it happens in an uncontrolled fashion.

The sooner rates are cut, the sooner pressure is taken off reserves from government interest payments, which are set to balloon to as high as an astronomical $1.5 trillion this year.

A simple regression shows that that the drop in yields since November as more rate cuts were priced in could already have taken $250 billion off the government’s interest-rate bill. That eases pressure on the government to tax and borrow more, which is ultimately a boon for reserves and their velocity.

Rate cuts should also bolster banks’ balance sheets as duration positions become less underwater – reducing the risk that banks stop dealing with one another in funding markets.

The Fed may purport to believe in the separation principle, but its unexpected pivot in December without obvious economic justification hints it may not. Either way, neither does the market, hardwired to seek what works in practice, not in theory. If perceived risks are rising, then pushing for an early rate cut makes sense (especially as there is no direct way to express a view on when QT ends).

And we are now at the stage where the market has always got its way.

The chart below shows a market-based Fed easing trigger.

The brown bars are the times when at least the same amount of rate cuts have been priced as there is today, and as imminently. On every occasion the Fed was already cutting rates or very close to doing so.

The Fed could, of course, decide to push back more forcefully on early rate-cut expectations (and the risk-reward for trading a March cut in any event is very poor; an April vs May Fed Funds flattener may be a better option). But the fact so much got priced so quickly when not justified by Fed-speak or the data indicates the market is perhaps conditioning on other factors. Financial stability risks from the Fed’s balance sheet and the heightened impact of Treasury funding decisions fit that bill.

The lesson of the curious case of the March cut is that anticipating the short-term interest outlook in this cycle requires acknowledging we may be in a new paradigm, where unemployment and inflation are only part of the picture.