Harley Bassman argues the recent hawkish Fed moves are less about mechanically controlling inflation and more about re-establishing the central bank's credibility. The goal is to prove an "adult is in the room" and guide the market off its dependence on forward guidance.
Despite soaring nominal rates, the inflation breakeven rate (TIPS spread) has remained flat. Harley Bassman interprets this as a clear signal that the market's primary concern isn't inflation, but rather the US government's massive fiscal deficits and eroding trust.
Harley Bassman asserts that the Consumer Price Index (CPI) is not a pure measure of inflation. He argues it was re-engineered in the 1990s with hedonics to intentionally lower the stated inflation rate, thereby reducing Social Security and other government expenditures.
Harley Bassman argues that the enormous debt financing the AI boom is being issued by profitable hyperscalers like Google and Microsoft, not startups. He believes their strong underlying cash flows make the bonds safe, even if equity holders suffer from intense capital spending.
Harley Bassman highlights that the rise of non-bank lenders and private credit disintermediates the traditional banking system. Because these new lenders are less directly impacted by the Fed's policy rate, the central bank's ability to influence the broader economy is diminished.
The US mortgage market has shifted from low-coupon bonds to higher-coupon ones trading near their strike price. According to convexity expert Harley Bassman, this 'recouponing' makes the entire mortgage market highly negatively convex, amplifying volatility and posing a systemic risk.
Harley Bassman argues Modern Monetary Theory's (MMT) fatal flaw is its reliance on politicians to implement austerity (raising taxes or cutting spending) to fight inflation. He asserts this is impossible in practice, as it works against the political imperative of seeking reelection.
Harley Bassman dismisses Bitcoin as a viable long-term asset, labeling it an "act of war against a sovereign state." He believes governments will ultimately crush it and also points out its transactional uselessness, comparing its daily volume to what Visa processes in a single minute.
Harley Bassman views government support for US dollar stablecoins as a smart policy. He argues that because these stablecoins are typically backed by US Treasurys, their growth creates a significant new source of demand for government debt, helping to absorb sales from foreign central banks.
To trade Harley Bassman's thesis of rising bond volatility, Patrick Ceresna suggests a long strangle on the TLT ETF. By buying an out-of-the-money call and put, the position profits from a large move in yields in either direction, without needing to predict the specific outcome.