The time has come, the walrus said, to emigrate to Substack

 

This blog is moving.

After some thought, I am shifting future writing over to Substack, which you can find here:
https://polemicpaine.substack.com it continues to be free. If I took payment I'd have to up the quality, uphold a responsibility and would start sounding like a self promoter. 

There is nothing dramatic in the decision. Platforms change. Habits change. Substack has simply become where readers and writers now seem to gather, and it feels like the right place to continue.

When I first started blogging back in 2010, Blogger was the obvious choice. It was simple, open, and perfectly suited to the way people wrote then. Over the years, this space accumulated its own small archive of thoughts, arguments, detours, and obsessions. That mattered, and still does.

All of those posts have now been migrated to Substack, so the full record of Polemic's Pains lives on there as well, intact and in one place.

After a long pause, I have started writing again and doing so on a platform built for that purpose feels oddly energising. Less fiddling, more writing. More conversation. 

This blog will remain here as a record of those earlier years. New posts, though, will live on Substack.

If you have followed my writing before, I hope you will join me there. And if you are new, then this is the right moment to arrive.

Thank you 

The Fed-Watching Club

Market commentary has always organised itself into clubs. Not formally, of course, but socially and reputationally, with all the signalling that comes from deciding which conversations are worth being seen to have. At any given time there is a fashionable place to be, a subject that confers seriousness and relevance and the reassuring sense that one is close to where things are happening.

These clubs change. Trade data was once the most exclusive room in town, full of people talking knowingly about containers, ports and mysterious lags that only insiders understood. Then came the Non-Farm Payroll club, which enjoyed a long run as the place where real macro people gathered, eyes fixed on a single Friday morning print that briefly mattered more than anything else. CPI had its moment too, as did the Philly Fed survey, which for a while allowed people to sound granular and regional without actually leaving New York. The Beige Book club has always bumbled along, attended mostly by people who insist it contains insights if read carefully enough, which it sometimes does.

Above them all sits the grandest and longest-running club of the lot, the Fed-watching club.

For a long time this was the place to be. It felt exclusive, serious and central. Knowing how to parse a statement, how to read a Chair’s tone or how to anticipate the market’s reaction to a particular phrasing marked one out as someone who understood how markets really worked. Membership conferred status. It was the Groucho Club of macro commentary, selective, expensive in terms of time and effort and faintly smug about it.

The problem is that it still behaves as though nothing has changed.

The Fed-watching club is now more Soho House. There are branches in every city, online versions in every timezone and an endless stream of people desperate to be seen inside, nursing the same drinks and having the same conversations. It costs more than it used to, in time and attention and it impresses rather less. Everyone wants to belong because belonging still signals seriousness, even as the substance has thinned.

Inside, the conversation has become oddly repetitive, as if chemically encouraged rather than argued through. Endless debates over quarter-point moves, over commas in statements and over the emotional timbre of press conferences fill the room, all of it delivered with great confidence and very little reference to whether prices are actually moving for those reasons. It feels industrious, authoritative and reassuringly legible, which is precisely why it remains so crowded.

By design, the Federal Reserve sets the overnight price of money. It anchors the very short end of the curve and only under conditions that assume orderly markets, available balance sheets and cooperative plumbing. Beyond that narrow strip of maturity, rates are not set but discovered. They reflect supply, demand, issuance, collateral availability, hedging costs and the willingness of private actors to intermediate. Long rates do not follow guidance, they follow gravity, and gravity has never applied for club membership.

This began to matter enormously once central banks stopped merely setting prices and started trading bonds, a moment that should have been an embarrassment for the Fed-watching club. QE was not a subtle extension of rate policy but a large buyer entering the market and removing duration by force, compressing term premia and pushing private capital elsewhere. When that process later reversed under QT, it became equally clear that balance sheets were constrained, intermediaries selective and capital far less eager to absorb what had previously been warehoused. Prices moved in both directions for the same reason, quantities changed, not because guidance improved, which should have settled the matter. Instead, Fed watching doubled down, debating phrasing while the furniture was being moved back into the room.

Fed-watching culture prefers not to dwell on this because it is difficult to dramatise. Rate decisions come with meetings, forecasts and microphones. Balance-sheet operations arrive via footnotes and operational notices, which are inconveniently where prices tend to move. One flatters commentators and fills airtime, the other interferes with tidy narratives.

At the same time, enormous fiscal issuance is treated like an embarrassing relative who has turned up unannounced and is best not discussed. Governments issue at scale, duration floods the market and the assumption seems to be that someone else will absorb it, yet commentary prefers to debate rate cuts as though they were the main event rather than a sideshow running alongside a much larger supply story.

There is also the small matter of the global dollar system, which operates far beyond the Fed’s domestic jurisdiction. Offshore dollar funding, FX hedging costs and cross-currency dynamics routinely drive price action, none of which responds particularly well to domestic narrative management. The Fed sets a price in one place, the dollar system clears everywhere else and the club conversation barely notices.

The persistence of the Fed-watching club has less to do with effectiveness than with convenience. It offers an alibi. If trades go wrong, the Fed surprised us. It offers safety. Being wrong in a crowd is cheaper than being right alone. It offers performance. Talking about rates sounds serious and travels well. Talking about balance-sheet capacity, collateral velocity or fiscal dominance does not.

Markets, however, remain stubbornly uninterested in club membership. They move when marginal buyers change, when balance sheets fill up, when issuance overwhelms demand or when intermediaries step back. These are not side effects of policy, they are how policy becomes price. Rate cuts often soothe nerves rather than alter arithmetic, a comforting drink rather than a structural repair.

None of this is to argue that the Federal Reserve does not matter. It is to argue that the club built around watching it has become fusty, over-subscribed and oddly resistant to the idea that the scene has moved on. Like Soho House, it still trades on reputation long after exclusivity has vanished.

Fed watching endures not because it offers a good return on intellectual effort, but because it offers a reliable social one. Very clever people spend vast amounts of time interrogating marginal policy signals that explain less and less, largely because doing so looks serious, travels well and carries little professional risk. The misallocation is striking. The same intelligence applied elsewhere would be far more productive, which is precisely why this fixation should fade as returns continue to disappoint.

The doors remain crowded, the conversations earnest but the signal, as usual, is elsewhere.

Preparing for War, Trading for Peace

 

This weekend's headlines announce that the UK government is preparing the country for war, which is the sort of sentence that once would have belonged to the archival past tense but has now returned to the present with a straight face and a briefing note, accompanied by earnest talk of resilience, mobilisation and national readiness, as if modern conflict were something you could prepare for with a laminated checklist and a stern reminder to pull together.

The tone is serious enough, yet one cannot help noticing that when Britain speaks of preparedness it often does so with an institutional memory that drifts unhelpfully toward Dad’s Army, a world of improvised courage, borrowed kit and the comforting assumption that enthusiasm will substitute for industrial depth. This is charming on television and catastrophic in reality, especially when the conflicts being gestured at are defined less by moustaches and morale than by munitions throughput, energy intensity and semiconductor supply chains.

This is where the market’s recent behaviour becomes faintly absurd. European armaments stocks have pulled back on the back of peace headlines and diplomatic choreography, as if the mere suggestion of talks were sufficient to reverse a decade long repricing of European vulnerability, even though the political language has hardened, the spending commitments have broadened and the industrial machinery is only just being rebuilt after years of strategic neglect disguised as efficiency.

This is temporal dissonance again, the same old habit of compressing short term political theatre into long term economic conclusions, a reflex that flatters the trader’s sense of agility while quietly ignoring the stubborn physical reality that shells, explosives, missiles and air defence systems do not appear because sentiment improves and do not disappear because a framework is floated over coffee.

If Europe and the UK are serious about readiness, then the awkward truth is that the hardest parts of rearmament are not rhetorical but industrial and they collide directly with other fashionable policy commitments that markets have not yet reconciled. Explosives and propellants are energy intensive to manufacture, which would be an unremarkable observation were it not for the fact that net zero policies have pushed European energy costs to levels that make domestic production structurally expensive before a single safety audit or planning inquiry is even completed. You cannot will cheap munitions into existence while simultaneously pricing energy as though heavy industry were an optional vice rather than the foundation of sovereignty.

Then there is the small matter of inputs. Europe lacks meaningful domestic production of many of the metals and specialist materials that modern weapons systems depend on, from rare earths for guidance and sensors to high grade alloys for propulsion and armour, while the technology stack that binds it all together, semiconductors, optics, electronics, remains globally fragmented and strategically exposed. Preparing for war while importing the ingredients from jurisdictions you do not fully control is less a strategy than a hope dressed up in uniform.

This is why the market’s recent pullback in defence stocks is more interesting than alarming. It does not reflect a collapse in demand or a reversal of policy but rather the familiar urge to find narrative closure, to treat peace talk as policy unwind and to take profits without admitting that valuation and crowding had become uncomfortable. Markets enjoy endings, preferably moral ones, and they enjoy them even more when those endings justify doing nothing further.

The error is to imagine that investing in armaments is a bet on endless conflict. It is not. It is a bet on governments having crossed a threshold where the cost of being under prepared now exceeds the political discomfort of spending too much later, a threshold that once crossed is rarely receded from because no minister enjoys explaining why savings were prioritised over readiness.

If today’s preparation risks resembling Dad’s Army, the lesson is not that the threat is imaginary but that the gap between rhetoric and capacity remains wide and closing that gap requires precisely the sort of long dated industrial investment that markets habitually undervalue when distracted by short term headlines.

Peace may come, pauses may occur and negotiations may multiply, yet none of that removes the fact that Europe has repriced its own fragility and discovered that it outsourced too much, stocked too little and assumed too much about continuity. When defence stocks fall because the market pretends that lesson can be unlearned quickly, the humour is dry, the irony is thick and the opportunity is structural.

The Bezzle and Temporal Dissonance

 

Markets have always possessed a peculiar talent for flattery, though the form of that flattery evolves with each cycle and the present era has refined it into something unusually elegant. We are encouraged to believe not merely that we are correct but that we are early, patient and principled all at once, which is an astonishingly generous self-assessment for any system built on leverage, expectation and borrowed confidence.

There are two distinct mechanisms by which this illusion is sustained. One is old enough to have been properly named, examined and absorbed into the intellectual furniture of market thought. The other is newer, faster and more psychological and is still widely mistaken for sophistication rather than recognised for what it is, which is a failure of temporal discipline masquerading as foresight.

Galbraith gave us the first in the form of the bezzle, a term he introduced most clearly in The Great Crash of 1929, where he described it as the interval during which perceived wealth exceeds real wealth without producing discomfort because nothing has yet forced recognition of loss (https://creditwritedowns.com/2009/01/quote-of-the-day-john-kenneth-galbraith-the-bezzle.html).

The bezzle is not simply about prices being excessive, which is a phrase that explains very little, but about a collective misapprehension of wealth that persists precisely because it feels stable, respectable and deserved. During such periods balance sheets appear sound, refinancing proceeds without friction, narratives align neatly and dissent is treated less as analysis than as a lack of imagination. A concise modern definition captures this well by describing the bezzle as perceived wealth that exists only because fraud mispricing or misunderstanding has not yet been revealed (https://www.forbes.com/sites/eriksherman/2019/10/25/galbraiths-bezzle-is-the-machine-that-props-up-income-and-wealth-inequality/).

Wealth during a bezzle feels real because it behaves as though it were and behaviour is far more persuasive than arithmetic. People act richer, institutions lend more freely and risks appear smaller simply because they have not yet been realised. The danger is not optimism itself but the absence of resistance, which delays the point at which illusion and reality are required to reconcile. As several modern commentators have noted, the bezzle expands most easily in environments where rising asset prices are treated as confirmation rather than signal (https://blogs.cfainstitute.org/investor/2019/09/12/the-bezzle-and-the-central-banks/).

Temporal dissonance operates differently and far more intimately. It is not a distortion of value but a distortion of time. It emerges when markets price outcomes that may indeed occur eventually as though they are imminent, while investors justify their exposure using the language of long-term inevitability despite holding instruments, structures and liquidity promises that are inherently short-term.

You hear temporal dissonance most clearly in how positions are defended. This is a ten-year story, we are told, by people who will not tolerate a two-quarter disappointment. Near-term earnings are dismissed as irrelevant by funds that publish daily performance. Volatility is celebrated as the price of conviction right up until it demands behaviour inconsistent with self-image and stated horizon.

When the bezzle and temporal dissonance overlap markets become particularly fragile because strong narratives are capable of sustaining perceived wealth far longer than fundamentals alone would permit, while temporal dissonance keeps investors exposed well beyond the point at which prudence would normally intervene. Narrative strength matters not because it alters cash flows but because it alters tolerance for discomfort and it is discomfort rather than valuation that ultimately forces exits. This interaction has been observed repeatedly in modern asset cycles where belief systems outlast balance-sheet reality (https://carnegieendowment.org/china-financial-markets/2021/08/why-the-bezzle-matters-to-the-economy).

Artificial intelligence equities sit squarely within this overlap. There is plainly a genuine technological shift underway and denying that is merely performative scepticism, but the speed with which distant, uncertain and highly competitive future revenues have been capitalised into present valuations speaks less to sober analysis than to narrative momentum. The bezzle reveals itself in assumptions about margins, scale and market dominance that leave little room for competition or commoditisation. Temporal dissonance appears in the insistence that these are long-term holdings even as price action, sentiment and positioning remain acutely sensitive to quarterly guidance and incremental news.

Crypto assets represent a purer bezzle and a more chaotic expression of temporal dissonance. Here perceived wealth often lacks any anchor in cash flow and is sustained instead by reflexivity, scarcity narratives and a permanently deferred promise of future utility. The language is resolutely long-term while the behaviour is unmistakably speculative. When the narrative weakens perceived wealth contracts sharply, only to be reconstructed later under a revised ideological wrapper and pricing once again advances ahead of adoption. Commentators have repeatedly warned that such cycles are textbook bezzle dynamics rather than novel financial evolution (https://www.steadyhand.com/national_post/2019/12/02/beware_the_bezzle/)

Private technology markets conceal bezzles more effectively because they suppress price discovery. Infrequent marks, internal models and funding rounds that validate prior assumptions allow perceived wealth to persist without meaningful challenge. Temporal dissonance emerges when so-called patient capital depends on continuous refinancing and when disruption narratives collide with the very real liquidity constraints embedded in fund structures. The story remains intact but increasingly defensive rather than expansive.

Uranium equities provide a particularly instructive case because they sit uncomfortably between genuine structural change and aggressively front-loaded pricing. There is a credible long-term case for nuclear energy, driven by baseload requirements, decarbonisation constraints and geopolitical reshoring of fuel cycles, but the bezzle risk emerges where scarcity narratives extrapolate constrained supply into permanent pricing power without sufficient regard for demand elasticity, reactor build timelines, financing bottlenecks and political reversibility. Temporal dissonance is evident in the way decade-long nuclear investment cycles are traded through highly volatile equities expected to deliver near-term returns while being justified as strategic holdings. The result is a market that speaks fluently about the inevitability of nuclear’s resurgence yet reacts sharply to short-term inventory data, policy headlines or fund flows, revealing a mismatch between the time horizon required for the thesis to mature and the patience actually available to its holders.

Green transition assets introduce a further complication because the narrative carries moral reinforcement. Subsidies, mandates and policy commitments extend the life of perceived value even when underlying economics disappoint. Temporal dissonance is acute because urgency is priced aggressively while infrastructure, commodity supply chains and consumer behaviour evolve slowly, unevenly and at times reluctantly. The transition may well occur but the timetable embedded in prices reflects politics rather than economics.

Even sovereign debt in the developed world exhibits a subtler version of these dynamics. Here the bezzle lies in the assumption that safety itself is immutable and that duration can remain benign despite fiscal dominance, demographic pressure and political constraint. Temporal dissonance appears in the belief that sustainability concerns belong to the distant future even as refinancing cycles shorten and tolerance for adjustment weakens.

The persistent error is to treat long-term correctness as a substitute for short-term resilience. The future does not arrive on schedule and cash flows do not materialise on narrative demand. Perceived wealth has a habit of evaporating precisely when it is most widely agreed upon, most confidently defended and least questioned.

This is not cynicism. It is simply memory.

Markets change their language, their technology and their aesthetics but they remain remarkably consistent in their ability to confuse value with timing and conviction with durability. The bezzle flatters us by telling us we are richer than we are. Temporal dissonance flatters us by telling us we are more patient than our behaviour suggests.

Both are abundant today and neither should be mistaken for wisdom.