The Institutional Risk Analyst

President Donald Trump, Bill Pulte and Commerce Secretary Howard Lutnick have apparently met a couple of times in recent weeks to consider policy initiatives for spurring housing. Meanwhile, the GSEs have begun to buy and/or retain mortgage assets in an effort to push down mortgage rates, an effort that is unlikely to have much effect.

When the Fed took net loan loss rates for banks down to ~ 50% of par in 2021 vs 95% after 2008, they enabled some very stupid and foolish behavior by investors and lenders. These behaviors are only partly described by the nominal level of interest rates because, of course, we must account for leverage in calculating the full scope of the prospectives losses. Lend More Upon Default (LMUD) has concealed the scope of the disaster and even pushed down reported loan default rates.

Hedge fund mogul Bill Ackman changed his tune and told investors this week that the government should not hurry to release Fannie Mae and Freddie Mac from government conservatorship. This announcement is essentially window dressing on the part of Ackman after FHFA Director Bill Pulte announced that the GSEs would not be released from conservatorship, dashing the hope of long-suffering shareholders.

If we were to select one characteristic that describes the financial markets today it would be confirmation bias. The human tendency to interpret new evidence as confirmation of one's existing beliefs or theories is among the most powerful and dangerous trends in financial markets, especially when the predominant passive investment strategies favor a net-long position. Nowhere is confirmation bias more apparent than the market for private-equity backed IPOs. 

If the Powell FOMC crashes the short-term markets, again, because the Board staff mismanages the required level of liquidity, Powell will need to resign same day but the real loser will be the Trump Administration.  Neither the public nor members of Congress will understand who caused the latest market upset, but they will be happy to blame Donald Trump and members of his team.

Researchers at Apple just released a paper that throws cold water on the "reasoning" capabilities of the latest, most powerful large language AI models. In the paper, a team of machine learning experts makes the case that the AI industry is grossly overstating the ability of its top AI models, including OpenAI's o3, Anthropic's Claude 3.7, and Google's Gemini.

What does the upsurge in repo rates at the end of September suggest? None of the media who supposedly cover the Fed seem able to ask.

Remember, for every $1 in debt redeemed on the books of the Fed, a bank deposit disappears.

If it’s artificial, then it’s not intelligent.