Delivering Global Macro Investment Insights

DeSaque Macro Research

DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the view to delivering global macro investment insights aimed at providing new ideas to clients.

Said DeSaque has over 26 years of experience working as a professional economist in financial services. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist at Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he eventually became Head of the London Economics Department.

Said takes a very keen interest in international relations, along with their implications for economic development. His research interests include the economic transformation of China and its implications for global capital markets, particularly in the United States. He is a member of Chatham House in London.

The US economy and capital markets have historically been Said’s main focus of attention. He frequently presents his views to institutional investors in diverse geographic locations. In recent years, Said has also been carefully monitoring economic developments in Asia, particularly China and Japan.

Global Economist, DeSaque Macro Research

Said Desaque

Global Economist

Cross Asset Strategy

<p>The prolonged period of Fed policy mistakes that produced unhinged inflationary expectations in the 1970s spawned the creation of the so-called bond market vigilantes. These were inflation-wary US Treasury investors who were prepared to fight the Fed and, consequently, were able to exert significant influence on the conduct of US economic policy.</p>
<div>The global financial crisis was a game changer for the bond vigilantes due to the arrival of accommodative monetary policy and large budget deficits, but inflation persistently undershot the Federal Open Market Committee's (FOMC) target. Significant purchases of Treasury notes and bonds since the Great Recession by the Fed have reduced the size of the open market for outside investors, thereby reducing their ability to influence yields.</div>
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<div>The combination of accommodative monetary and fiscal policy settings without generating inflation has spawned Modern Monetary Theory (MMT), where funding budget deficits through monetary expansion should continue until that point when inflation becomes an issue. One of the leading advocates of MMT, Professor Stephanie Kelton, is a strong candidate to become Treasury Secretary if the Democrats win the Presidential Election in November.</div>
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<div>The apparent rise of MMT could produce vigilantes in other financial markets, particularly if the Fed is seen to facilitate the new fiscal policy framework. Perceived US fiscal profligacy has been punished in the past by foreign exchange markets and this perception is currently being conveyed by rising gold prices.</div>
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<div>The ability of the bond vigilantes to impact US equities was much greater before the financial crisis due to the higher prevailing level of Treasury yields as a risk-free rate relative to equity yields. Rising inflation under an MMT framework could impart damage to equities, particularly if investors distrust politicians' commitment to raise taxes to curb economic overheating.</div>

The prolonged period of Fed policy mistakes that produced unhinged inflationary expectations in the 1970s spawned the creation of the so-called bond market vigilantes. These were inflation-wary US Treasury investors who were prepared to fight the Fed and, consequently, were able to exert significant influence on the conduct of US economic policy.
The global financial crisis was a game changer for the bond vigilantes due to the arrival of accommodative monetary policy and large budget deficits, but inflation persistently undershot the Federal Open Market Committee's (FOMC) target. Significant purchases of Treasury notes and bonds since the Great Recession by the Fed have reduced the size of the open market for outside investors, thereby reducing their ability to influence yields.

The combination of accommodative monetary and fiscal policy settings without generating inflation has spawned Modern Monetary Theory (MMT), where funding budget deficits through monetary expansion should continue until that point when inflation becomes an issue. One of the leading advocates of MMT, Professor Stephanie Kelton, is a strong candidate to become Treasury Secretary if the Democrats win the Presidential Election in November.

The apparent rise of MMT could produce vigilantes in other financial markets, particularly if the Fed is seen to facilitate the new fiscal policy framework. Perceived US fiscal profligacy has been punished in the past by foreign exchange markets and this perception is currently being conveyed by rising gold prices.

The ability of the bond vigilantes to impact US equities was much greater before the financial crisis due to the higher prevailing level of Treasury yields as a risk-free rate relative to equity yields. Rising inflation under an MMT framework could impart damage to equities, particularly if investors distrust politicians' commitment to raise taxes to curb economic overheating.

US Bond Market Vigilantes: Will Modern Monetary Theory Herald Their Return?