CRACKPOTS #89: TWIST AND SHOUT (Patreon)

Hey it's Liz. I was supposed to send this out last weekend, but didn't due to some baby related drama. All good! Thank GOD the Trump admin decided to get active in the bond market. Speaking of getting active, have you seen this picture of Emmanuel Macron?

This feels important to me. There is something sort of classically sad-clown about Emmanuel, calling up the tabloids so he can mime getting caught performing some obsolete fantasy of European vitality — le President on le JetSki in le Riviera — all while France literally burns and the political order he represents expires underneath him. For sure, for sure. Below: some thoughts on the Treasury, hedge funds, a dash of MMT, crack spreads, etc. Plus: a call for not-annoying climate people, the sad life of influencers and more.

Random thought experiment: what if the Treasury is just a really big hedge fund? This may be obviously not true in several senses (literal, legal, political, etc). But, what this presupposes is, what if it is? A classic leveraged Treasury trade is to borrow short in repo and then use the money to buy long-term bonds (we've done several episodes way back when on this blowing out). Here is the FT yesterday:

The US Treasury said it would 'at least double' purchases of long-term government debt as policymakers seek to contain a sell-off that has sent borrowing costs soaring in the world's most important bond market. The more aggressive buyback operation affects Treasury securities maturing in 10 to 20 years and 20 to 30 years, increasing from $2bn to "at least" $4bn.

I like that the FT quoted the "at least" directly. Bitchy! The idea here was to stop or at least pause the sell-off that was underway in long-bonds, ideally by raising long-bond prices and pushing yields lower. Yields have been rising with inflation risking back on from the continued war with Iran and of course, the general political uncertainty characterizing the moment.

In practice, this looks like the Treasury issuing more short-term bills and using its balance sheet to buy back long-term bonds. Fixed long-term liabilities get replaced with short-term liabilities whose cost continually resets. Borrowing short to take out long, with the idea that the Fed will eventually lower the funding cost. Look, there's a reason why Bessent spent his career at a global macro desk before being gifted the biggest one on earth.

Ok so none of this is particularly novel, as far as debt management goes. Governments have always issued new bonds and bought back old, illiquid ones. What is unusual though, as far as the US goes, is doing this during a period of sustained deficits (enormous ones at that) and a nasty public administration fight over interest rates. "At least" $4bn sounds scary, but is actually far too small to truly influence the yield curve. Still, the question is whether the buybacks remain routine maintenance or, given the political situation, become a more directional attempt to massage the situation whenever the market demands a yield the admin doesn't like.

It is worth pausing for a moment to go over some basic accounting: Treasury liabilities are everyone else's assets and that includes interest expenses which are actually private income. Deficits add dollars and Treasuries to the economy while private credit adds spending alongside private debt.

When more debt hits the market than investors will buy at the current price, the price drops until a buyer shows up. For bonds, lower prices mean higher yields. This does not mean the market is pricing a US default. Mr Market is simply asking for a higher return — not because of the debt per se, but because it has to cost more to absorb all the supply in a time of political uncertainty and inflation risk. Emerging Market premium. But higher yields do two things at once, in opposite directions: 1) they immediately make credit more expensive while pushing down stocks and bonds. And 2) as the Treasury issues new debt at those higher rates (both to replace maturing debt and to finance new deficits) the government also makes larger interest payments into the private sector. Those payments are simply more government spending which shows up as income on the other side of the ledger to be spent or reinvested back into the economy. This is interest-rate driven growth.

Now Trump and Bessent want that first thing to stop — the pressure on assets and stock prices. And they may get it, along with the Fed cuts all the political maneuvering over the past year supposedly promised. But the flip side of lower rates is less federal interest income flowing into the economy, an economy that is currently leaning on those payments for spending. Even for Scott, this is a risky trade. Markets may rally immediately but hit the brakes as that income disappears, as liquidity is effectively drained, especially as an oil-product price shock may already be underway.

Much was made this week of the diesel crack spread aka the difference between the price of crude and the price of product produced from it. This is useful for understanding refinery margins and, importantly, how scarce refined diesel is compared to crude. Normally this is around $15-$25 per barrel, but as of last week it hit over $100 for the first time. This means that the problem isn't that there isn't enough oil in the market, it is that the entire system has lost refining capacity and transport routes. Consumers and businesses do not use crude directly, they use diesel and gasoline and jet fuel and heating oil and various petrochemical products. $180 diesel gets passed down through the economy in trucking and in agriculture and construction and shipping. Transport and production costs show up in food prices and physical goods while gasoline cuts into every single household budget. Whew. If the missing capacity is refining — due to, say, some unfortunate attacks on facilities in Russia and throughout the Middle East — then producing more doesn't actually solve anything. And it twists further: the weakness in the dollar means cheap commodities driving overseas demand for US crude and refined products while raising the dollar cost of importing fuel, various components and related goods. This makes the resulting inflation even worse in dollar terms.

Now what happened today? USD tanked and Treasuries erased gains from the big buyback announcement. Ah well. Bessent has already signaled that more action may soon be underway, though you could make the argument that, considering the limited material impact, the intervention was less to manage prices directly than to manage the people trading them. But if a signal, for who? Robin Wigglesworth at the FT had a long piece before all this got underway about the increasing role of hedge funds in the Treasury market itself. It used to be that marginal Treasury buyers were foreign governments or pensions looking to passively store safe assets. But more and more leveraged funds are trading Treasuries against futures, swaps and other Treasuries. Wigglesworth quotes the Fed:

the ownership composition of Treasury securities has shifted ... from relatively price-insensitive official-sector holders to more price-sensitive private investors.

As Treasuries increasingly function not only as money-like collateral to be held but as specifically prices to be traded, arbitraged and managed, then price support and market positioning are suddenly the purview of public policy.

You could probably go a step further (why not) here: once a market depends on these types of trades, the Treasury (and the Fed) are going to have to increasingly design securities, financing facilities and major interventions around those traders' needs. Everyone is familiar with the phrase "lender of last resort" for the Fed; after 2008 and especially after Covid, you have heard of "dealer" or even "market maker of last resort," as it had to buy up securities when dealers weren't able to maintain orderly markets themselves. "Treasury as market maker of last resort" would be a strange twist though: instead of the Fed creating reserves and buying whatever the market can't absord, the Treasury would be changing its own issuance and repurchases in order to support trading directly. The Fed may be dealer of last resort, but the Treasury would cross from simply servicing a hedge-fund shaped market into trading against — or effectively alongside — that market itself. Fun!

Adam Tooze, Chartbook 467: "Mad dogs and...": Heatwave Economics - summer 2026

This July in Paris, I felt something else, something quite different: the suffocating, blanketing, smothering, suppressing force of really high temperatures. Not the 50 degree plus that some places have suffered in the Middle East, but something that, nevertheless, felt unimaginable, like drying or cooking in your own skin, or both at the same time. The difference that struck me is that whereas my previous vision of the climate crisis had been dynamic - huge forces unleashed in roaring winds and irresistible storm surges - this experience of extreme heat was the opposite: immobility, silence and emptiness. Under the "pressure" of the sun, no one and nothing moved.

Feels funny to link to a Chartbook but I did like this one about the upcoming Super El Nino. I don't really know how to talk about all this, maybe even how to think about it, and I'd like to get someone on the show who can speak about climate politics in a way that doesn't make me want to blow my brains out. Sorry for being frank. This is a real problem, not just for me. The thing is anyone with any kind of clear eyes about this stuff has very little good news to offer so you are left to chose between entertaining comforting bullshit or analysis that makes the future hopeless. Does anyone have any suggestions of people? Maybe I'm just not in the know. Let me know.

Relatedly, Equator magazine is hosting a reading group in conjunction with Verso beginning on 6 Sept for Mike Davis' Late Victorian Holocausts: El Nino Famines and the Making of the Third World. It's only 100 pages a month and on a pay-what-you-can arrangement. I'm going to try and make time for this because seems as good as time as any:

Revisiting Davis’s book is particularly timely given the impending ‘super’ El Niño. Each month, the group will read about 100 pages together and meet in large Zoom sessions to hear from scholars, writers, or thinkers for whom Davis has been a key influence. These guest speakers will not lecture, but be in conversation about their own reading of the text – highlighting key moments, clarifying subtleties, and suggesting questions for further dialogue in advance of a general Q&A and small group discussions. We also encourage members to self-organise in-person or virtual satellite meetups. Video recordings of each session will subsequently be available to registered participants.

And if you are unfamiliar with the book:

Examining a series of El Niño-induced droughts and the famines that they spawned around the globe in the last third of the 19th century, Mike Davis discloses the intimate, baleful relationship between imperial arrogance and natural incident that combined to produce some of the worst tragedies in human history. Late Victorian Holocausts focuses on three zones of drought and subsequent famine: India, Northern China; and Northeastern Brazil. All were affected by the same global climatic factors that caused massive crop failures, and all experienced brutal famines that decimated local populations. But the effects of drought were magnified in each case because of singularly destructive policies promulgated by different ruling elites. Davis argues that the seeds of underdevelopment in what later became known as the Third World were sown in this era of High Imperialism, as the price for capitalist modernization was paid in the currency of millions of peasants’ lives.

Natasha Stagg, The Lamentation of Natasha Stagg Volume 0

When I speak with younger writers, it's always about money, as in windfalls: huge advances, speaking fees, film rights. They sound, increasingly, like the people I know you work for startups. Now, everyone relies on the internet's algorithmically produced numerical values to tell us what is popular or worthwhile. Analytics play a part in acquisitions. The definition of literary is being renegotiated so it may include, for example, influencer memoirs. All of this is a supreme distraction from the concentration it takes to write a great American novel. On my way to a lunch meeting with a literary agent—someone who connects writers to publishers, thereby smoothing the path toward a bigger, longer, more moneyed career, ideally—I think about the word agency, how it has been pried from regular language recently and pasted all over startup ads.Things are agentic now. Taste is a commodity. The state of ownership is being questioned. I'm being asked to discuss the commercial viability of my work, or maybe myself. All I can do is say I have it, even though I don't believe that. Honestly, I don't even want it.

That's all for now. More soon.

xx

L