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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. If Intel is sold — Qualcomm is circling — it will be a blow to the view that tech oligarchs are forever. It took 15 years or so, but the mobile and AI revolutions took a company that had a stranglehold on computer processors and turned it into a second-tier player. What is the parallel scenario that unseats Google, Nvidia, Apple, Microsoft or Meta? And how long does it take? Email us possible futures: robert.armstrong@ft.com and aiden.reiter@ft.com.

Central bank epiphenomenalism

We asked a few weeks ago whether Jay Powell was lucky or good: whether smart Fed policy caused, or merely coincided with, the rapid decline in inflation over the past two years. If you think Powell and the Fed have mostly been lucky — and plenty of economists think they have been — one is tempted to push the scepticism further. What if the central bank rate policy is always a meaningless or near-meaningless sideshow in economies and markets? What if policy rates are (to use the vocabulary of the pretentious philosophy graduate student I was 25 years ago) mostly epiphenomenal — that is, accompanying important changes, rather than causing them?

Today, “heretical” is almost exclusively an honorific people bestow on their own beliefs, to mean “unique and wonderful”. But on Wall Street the view that Fed policy is epiphenomenal is heretical in the old-fashioned sense. If it is true, a lot of what investors, analysts and pundits say, do and believe are just elaborate rituals honouring a deity that doesn’t exist. 

Serious people take this view. Aswath Damodaran of New York University (who will be familiar to Unhedged readers from our interview with him) recently updated his defence of Fed epiphenomenalism on his blog. He argues that:

• The federal funds rate, set by the Fed, is a single, short term rate that does not determine in any significant way the important interest rates — on mortgages, car loans, credit cards, corporate bonds or business loans, and so on. 

• While both the federal funds rate and important interest rates follow the same very long-term trends, over shorter (but nonetheless meaningful) periods, the relationship between changes in the federal funds rates and the “real world” rates is all over the place. Sometimes one rises and then the other falls, or the reverse, or there seems to be no relationship at all. Consider the federal funds rate and the triple-B bond yield, for example. Between the spring of 2004 and the summer of 2006, the Fed rate rose by more than 4 percentage points. Triple B’s moved by less than 1 per cent. The market all but ignored a very aggressive Fed.

• There may be some casual power in Fed signalling: markets might incorporate the belief that the Fed knows something about the economy that others don’t, or that the Fed actually can control interest rates somehow. But outside of crisis situations, these effects are mild. 

• In sum, “the Fed is acting in response to changes in markets rather than driving those actions, and it is thus more follower than leader”. Nominal interest rates have two fundamental drivers, neither of them under central bank control: real rates (which vary with expected economic growth) and expected inflation. For example, rates were not so low during the pre-pandemic decade because the Fed suppressed them, but because growth was weak and there was no inflation in sight.

Damodaran is not alone. Last year, the Financial Times’ own Martin Sandbu, in a piece entitled “What if there is nothing central banks can do about inflation?” argued that

[T]here is solid analysis that can account for virtually all the behaviour of both US and Eurozone inflation as just what the temporary repercussions from sector to sector of a series of large supply shocks would look like . . . [If] this is in fact the true explanation of events . . . there was nothing monetary policy could have done to prevent the bursts in inflation of the past two years, and that current monetary policy is contributing nothing to inflation coming back down.

Sandbu doesn’t go all the way to policy epiphenomenalism. He thinks that rate policy can have effects, but that this time around they will be “exclusively harmful” because they will weaken the economy when inflation is already dead. But it is easy to see how his argument might be extended to other inflationary incidents that followed supply shocks, and perhaps beyond.

Over in The Wall Street Journal, my former colleague Spencer Jakab makes a similar point in the context of the stock market, comparing chair Powell to the Wizard of Oz: 

The great and powerful man behind the central bank curtain, Jay Powell, really can’t do as much as people think to keep their portfolios from shrivelling if the wheels are already starting to come off the economy

He uses the example of the rate cut in 2007, which initially triggered a surge in stock prices, but could not — even when reinforced by many further cuts — stop a recession from starting a few months later. Even in less extreme moments, Jakab argues (citing work by David Kostin, Goldman’s chief US equity strategist) economic momentum, not Fed policy, has been decisive for markets during rate-cutting cycles. Jakab doesn’t go as far as Damodaran, who argues that rate policy is pulling on a lever that is not connected to anything. But his argument points very clearly in that direction.

There is a longer argument to be had about whether central bank epiphenomenalism is true. To prove the case, one would have to describe, and refute, the standard theory of how policy rates control other interest rates. But let’s assume that epiphenominalism is a possibility. The interesting question for investors is: what would you do differently if you know the Fed followed, rather than led, markets and the real economy? 

For one thing, you would be a lot less worried about “Fed mistakes” — specifically Fed over-tightening that leads to recession. Recall that many people, Unhedged among them, were very worried about this in 2022, and were probably underexposed to risk entering the glorious year of 2023 as a result. But if investors had ignored the Fed’s tightening, and looked instead only at the economic fundamentals and company cash flows, might they have stayed bullish instead? 

One good read

On the US balance of payments.

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NEW YORK (AP) — Caroline Ellison, a former top executive in Sam Bankman-Fried ’s fallen FTX cryptocurrency empire, faces the possibility of years in prison when she is sentenced Tuesday for fraud, but prosecutors said she deserves leniency for her “extraordinary cooperation” as they investigated the company.

Ellison, 29, pleaded guilty nearly two years ago and testified against Bankman-Fried for nearly three days at a trial last November.

In a court filing, prosecutors said said her testimony was the “cornerstone of the trial” against Bankman-Fried, 32, who was found guilty of fraud and sentenced to 25 years in prison.

Asking the court for a lighter sentence, Ellison’s own lawyers cited both her testimony at the trial and the trauma of her off-and-on romantic relationship with Bankman-Fried — though they also stressed that she wasn’t trying to evade responsibility for her crimes.

“Caroline blames no one but herself for what she did,” her lawyers wrote in a court filing. “She regrets her role deeply and will carry shame and remorse to her grave.”

FTX was one of the world’s most popular cryptocurrency exchanges, known for its Superbowl TV ad and its extensive lobbying campaign in Washington, before it collapsed in 2022.

U.S. prosecutors accused Bankman-Fried and other top executives of looting customer accounts on the exchange to make risky investments, make millions of dollars of illegal political donations, bribe Chinese officials and buy luxury real estate in the Caribbean.

Ellison was chief executive at Alameda Research, a cryptocurrency hedge fund controlled by Bankman-Fried that was used to process some customer funds from FTX.

Her work relationship with Bankman-Fried was complicated by her romantic feelings for him, her lawyers wrote in a court filing.

“From the start, Mr. Bankman-Fried’s behavior was erratic and manipulative. He initially professed strong feelings for Caroline and suggested their liaison would develop into a full relationship. But after a few weeks, he would ‘ghost’ Caroline without explanation, avoiding her outside of work and refusing to respond to messages that were not work-related,” her lawyers said.

As the business began to faulter, Ellison divulged the massive fraud to employees who worked for her even before FTX filed for bankruptcy, her lawyers wrote.

Ultimately, she also spoke extensively with U.S. investigators.

“Ellison cooperated at great personal and professional cost, enduring harsh media and public scrutiny and attempted witness tampering by Bankman-Fried,” prosecutors wrote.

They said she was forthcoming about her own misconduct and was “uniquely positioned to explain not only the what and how of Bankman-Fried’s crimes, but also the why.”

“In her many meetings with the Government, Ellison approached her cooperation with remarkable candor, remorse, and seriousness,” they wrote. “She dedicated herself to extensive document review that helped identify key corroborating documents in an investigation hamstrung by Bankman-Fried’s systematic destruction of evidence.”

Her testimony at the trial, they said, was credible and compelling.

Judge Lewis A. Kaplan will decide the sentence.

Since testifying at Bankman-Fried’s trial, Ellison has engaged in extensive charity work, written a novel and worked with her parents on a math enrichment textbook for advanced high school students, according to her lawyers.

They said she also now has a healthy romantic relationship and has reconnected with high school friends she had lost touch with while she worked for and sometimes dated Bankman-Fried from 2017 until late 2022.

China’s central bank has unveiled a major package of measures aimed at reviving the country’s flagging economy.

People’s Bank of China (PBOC) Governor Pan Gongsheng announced plans to lower borrowing costs and allow banks to increase their lending.

The move comes after a series of disappointing data has increased expectations in recent months that the world’s second largest economy will miss its own 5% growth target this year.

Stock markets in Asia jumped after Mr Pan’s announcement.

Speaking at a rare news conference alongside officials from two other financial regulators, Mr Pan said the central bank would cut the amount of cash banks have to hold in reserve – known as reserve requirement ratios (RRR).

The RRR will initially be cut by half a percentage point, in a move expected to free up about 1 trillion yuan ($142bn; £106bn).

Mr Pan added that another cut may be made later in the year.

Further measures aimed to boost China’s crisis-hit property market include cutting interest rates for existing mortgages and lowering minimum down payments on all types of homes to 15%.

The country’s real estate industry has been struggling with a sharp downturn since 2021.

Several developers have collapsed, leaving large numbers of unsold homes and unfinished building projects.

The PBOC’s new economic stimulus measures come just days after the US Federal Reserve lowered interest rates for the first time in more than four years with a bigger than usual cut.

In Asia afternoon trading hours, major stock indexes in Shanghai and Hong Kong were more than 3% higher.

1.1K

According to Middle East Eye, Morocco’s drone strikes have targeted 170 civilians in Western Sahara since 2021, resulting in the tragic loss of 86 lives. Some of these individuals were Moroccan, and some were Algerian nationals, but all of them were targeted by advanced drone technology manufactured mainly by Israel.

What was once a low-level and isolated conflict between two equally outfitted parties has, in the past couple of years, morphed into a campaign of high-tech scorched-earth domination. This drastic imbalance between the effective capabilities of Moroccan forces and those they’re fighting against would simply not be possible without Israeli weaponry.

Morocco first received three Israeli drones through a French company in 2014, which had already been used in combat. After a formal agreement between the two nations in 2020, Morocco purchased 150 additional drones. The exact quantity remains unknown, but estimates suggest somewhere in the hundreds; the arsenal contains drones with both surveillance and offensive capabilities.

Morocco utilizes Chinese, Turkish, and American-manufactured drones as well, but their use of Israeli weaponry is especially relevant as these products seem to make up the majority of their supply. These are generally considered to be the “cream of the crop” in combat-drone technology. The precise and accurate nature of Israeli-derived surveillance can be partnered with already-existing munitions systems, exponentially increasing the lethality of conventional, tried-and-true, ballistics.

Not limited solely to the sale of drone technologies, Morocco also utilizes Israeli-manufactured missile defense systems and spyware technologies. Additionally, the Israeli firm Elbit Systems, a drone manufacturer whose products make up a sizable portion of Morocco’s new high-tech arsenal, announced the opening of two factories in Morocco to produce vague “defense systems.”

The Sahrawi still rely on Soviet rifles, ancient Toyotas, and on-the-ground intelligence gathering. The Moroccan government is on track to create a system where ubiquitous surveillance drones allow all perceived insurgent activity to be instantly observed and punished by ubiquitous combat drones. This is a level of relative asymmetry resulting from unprecedented technology that has never been seen.

Overall, the corporate media has largely ignored much of the Western Sahara conflict, failing to delve into its nuanced complexities. While Forbes covered Morocco’s procurement of Israeli and Turkish weapons and the nation’s role in the Azerbaijan-Armenia conflict, it neglected Morocco’s use of Israeli weapons to suppress dissent in Western Sahara.

Furthermore, the lack of corporate coverage surrounding this nearly four-year-long crisis raises concerns about Big Media’s ability to prioritize crucial stories and underscores the pressing need for a more balanced and nuanced approach to reporting on global issues.

Source: MEE Staff, “Morocco Accused of Using Israeli Weapons to Kill Civilians in Western Sahara,” Middle East Eye, March 22, 2024.

Student Researcher: Bennett Silberman (Diablo Valley College) 

Faculty Evaluators: Nolan Higdon and Mickey Huff (Diablo Valley College)

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Halloween is still over a month away, but here’s a scary chart of Bloomberg’s US Government Securities Liquidity Index.

The higher the score, the less liquid the $27tn Treasury market is. So according to this index — which is derived from how dispersed Treasury prices are from a smoothed yield curve — the US government bond market is now less liquid than it was at the peak of the March 2020 chaos.

FT Alphaville has been keeping an eye on this measure because it shows a radically different picture from what analysts and officials are saying, and what the headline data seems to indicate. August was the first month in history when the average daily notional of Treasuries being traded went over $1tn, up 37 per cent year-on-year, according to Coalition Greenwich. Treasury futures trading is up by a similar amount.

Which is why this annual check-up of the Treasury market’s liquidity from the New York Federal Reserve is so timely.

The tl;dr is that bid-ask spreads remain modest — and not nearly where they were in March 2020 — while market depth remains reasonable, if subdued after the Fed’s interest rate hikes.

As a result, the estimated price impact of a $100mn Treasury trade is also un-alarming. Big trades make a bigger splash than they used to, but the deterioration seems mostly caused by higher interest rate volatility, which is now coming down a bit.

The author — Michael Fleming, the head of capital markets studies at the NY Fed’s research group — does explore the discrepancy between these measures of liquidity and that shown by the Bloomberg’s index, but mostly shrugs it off:

While the Bloomberg measure has recently risen, it remains far below its peak during the GFC. Moreover, it remained far below its GFC peak in March 2020 even when direct liquidity measures approached GFC levels and the Fed unleashed massive asset purchases to address the dysfunction then roiling the market. It follows that the recent behavior of the Bloomberg index seems less notable when examined in a longer historical context. The reasons behind the disparate performances of the different measures are an interesting area for future research. 

This research should probably focus on the Bloomberg index’s underlying composition. Barclays analysts have previously noted that the Bloomberg index might have been artificially boosted this summer because of the inclusion of some very old 30-year Treasuries, which are for motley reasons trading extremely rich to what the shape of the yield curve would normally indicate.

FTAV has another, admittedly more speculative take. These kinds of price-dispersion-versus-fair-prices indices supposedly measure liquidity conditions because a lot of wonky prices indicate that there’s insufficient capital in the market to take advantage of them.

But this would seem to be a better measure of fragility rather than liquidity?

In other words, Treasury market liquidity might be basically fine and perhaps improving, but the underlying fragility of the market is increasing, as banks devote less and less balance sheet to lubricating it? In which case we won’t really know how healthy it is until the next shock hits.

Further reading:
— The bond market liquidity ‘trilemma’ (FTAV)
— People are worried (again) about bond market liquidity (FTAV)

Singapore’s former transport minister has pleaded guilty to charges including obstruction of justice after the city-state’s prosecution amended the indictment against him, a surprising twist to the biggest political scandal in nearly four decades. 

S. Iswaran pleaded guilty after the amended charges were read out to him. The prosecution proceeded with four charges against him for obtaining valuable items as a public servant and one count of obstructing justice while 30 other charges were taken into consideration. 

The prosecutors are asking for a seven-month jail term.

The former politician was initially charged with 35 counts including graft. He was alleged to have obtained more than S$403,000 ($312,000) in luxury goods including tickets to musicals and soccer matches in the U.K. The 62-year-old, who resigned from his post back in January, had vowed to defend his innocence in court.

The court hearing comes at a politically sensitive time as Prime Minister Lawrence Wong prepares to lead the ruling People’s Action Party in a general election after he took over from Lee Hsien Loong in May. The case against Iswaran, who has left the PAP, is a test for a party whose reputation for clean governance has helped it win all elections since Singapore’s independence in 1965.

Read More: A Wave of Scandals Is Testing the Singaporean Government’s Ability to Take Criticism

The probe against Iswaran came to light last year when Lee ordered him to go on leave, and he was later arrested together with property tycoon Ong Beng Seng. Iswaran was charged in January for allegedly taking favors from Ong, such as tickets to musicals on the West End. Ong hasn’t been charged.

Known for bringing Formula 1 racing to Singapore, Iswaran is the first minister to get embroiled in a graft probe since 1986 when then-Minister for National Development Teh Cheang Wan was investigated for accepting bribes.

For Iswaran, most of the court charges deal with his interactions with Ong, who owns the rights to the Singapore Grand Prix and is chairman of race promoter Singapore GP Pte Ltd. The allegations range from Iswaran obtaining tickets for U.K. soccer matches and taking a flight on Ong’s private jet to obtaining tickets to the F1 race in Singapore.

Singapore’s Ministry of Trade and Industry has said there was nothing to suggest that the F1 contracts were disadvantageous to the government and said it would review the terms. A ministry spokesman said the review is ongoing.

Another round of court charges in March had accused Iswaran of obtaining nearly S$19,000 of luxury items, including whisky bottles, a Brompton bicycle and golf clubs, from a managing director of a local firm in relation to a construction contract related to a train station. The managing director hasn’t been charged.

While the next general election must be held by November 2025, it could come sooner as observers say Wong is likely to seek an early mandate before brewing economic uncertainties have a greater impact on the trade-reliant nation. The PAP had its worst-ever showing in 2020—despite winning 89% of the parliamentary seats—due in part to concerns about the economy.

When Iswaran was charged in January, Wong said that the city-state’s stance on maintaining clean government was “non-negotiable.”

“This is part of our DNA,” he said. “There can be no compromise, no relaxation, no fudging of this, no matter the political price.”