Here are some things I think I am thinking about this weekend:

1) Is the USA Going BANKRUPT?

I joined Ben Carlson and Duncan Hill last week to discuss the never-ending controversy over the US national debt and the day of reckoning. Something really miraculous happened with this interview. This is a topic I discuss A LOT. And you can virtually guarantee that it enrages some people. But something weird happened this time around. I did not get a single piece of hate mail after this one. This could mean one of two things. The interview was really convincing. Or I have exhausted the haters. Then again, I did specifically say that haters should send all hate mail to Ritholtz CEO Josh Brown and so maybe that’s where it all ended up.

But in all seriousness, this was a good discussion and I think the three of us helped put this controversial topic in a very pragmatic perspective. It’s only about 30 minutes so check it out if you have some time.

2) Why are BOND Rates Rising?

One thing we discussed in the interview was rising interest rates. It’s all a bit weird. The 10 year T-note has jumped from 3.6% to 4.5% even though the Fed has signaled that they’re going to cut rates to 3%. What gives? It’s a topic so confusing that Austin Goolsbee, the head of the Chicago Fed said on Friday:

“FED’S GOOLSBEE: THE FED HAS TO FIGURE OUT WHY THE 10 YEAR IS RISING, AND KEEP AN EYE ON LONG RATES.”

This is all about putting things in the proper temporal context. I like to think of the 10 year as the approximate average expected future Fed Funds Rate over 10 years plus a certain premium. So, if the Fed is expected to maintain an FFR of 3.5% then the 10 year will sit at 4.5% on average over that period. If the Fed says rates will be 3% on average then we should expect the 10 year rate to fall to 4% on average. That’s oversimplified, but hopefully you get the point.

So, what happened in the last 6 weeks since rates bottomed? Well, we got that negative employment print in September and then the Fed responded by cutting 50 bps. The market jumped to the conclusion that the Fed might cut very quickly to their expected target of 3%. But then we got a couple of sticky inflation prints and rates adjusted to new expectations that they might not cut so fast OR might not cut as much. So, you had expectations for rates to fall to 3% (or even lower) and so the 10 year fell to 3.6%. But after the sticky inflation prints rates had to correct for the expectation of fewer cuts and a potentially longer time horizon over which we might get cuts.

In short, rates are rising because they fell too much. At 4.4% I’d argue that the 10 year is pretty fairly priced. It’s nothing to panic about, but it is also consistent with expectations that the Fed might only cut to 3.5% or they might take much longer to get to 3%.

3) Why is BITCOIN Valuable?

My friend Michael Antonelli asked a good question on Twitter:

“Can someone [explain]: is there a use case for [Bitcoin] yet or is it just “number go up”?”

When I input Bitcoin into my Defined Duration model it outputs a super long duration instrument that exhibits bouts of huge asymmetric upside and huge downside. The assets that tend to operate like that are T-Bonds, gold, managed futures, options, etc. These assets are all very similar to insurance. T-Bonds are deflation insurance that tend to perform extremely well in deflations. Gold is an inflation hedge that often exhibits huge asymmetric returns when inflation is higher. Managed futures tend to perform best during big market trends, especially stock bear markets. And options obviously can hedge huge outlier moves. They’re all insurance-like instruments. I think of Bitcoin similarly. Except it’s specifically a fiat currency hedge.

Now, being a US citizen might make this hard to understand because the Dollar is generally stable. But imagine this from the perspective of anyone in a third world economy where currencies are regularly ravaged. Having the ability to buy this digital asset that’s available thru your phone seems like a nearly no-brainer allocation for hedging domestic currency risk. It’s insurance against currency collapse. At least that’s how I think of it. So yeah, maybe that form of insurance isn’t the best thing for US citizens, but I think the best use case is foreign economies with unstable governments and unstable economies. That’s a use case that just makes a lot of sense in my view.

Thanks as always for reading. I’ll have a bit of a nostalgic weekend watching Mike Tyson fight. When I was a kid I watched every Tyson fight that ever came on. Great memories. I hope he teaches the young kid a lesson, but that might be wishful thinking. Have a great weekend.