Finance

In the run-up to its attack on Israel on October 7th, Hamas maintained tight operational security. The timing of the assault blindsided Israel’s army and intelligence services, and appears to have surprised even some of Hamas’s political leaders. However, a new working paper by Robert Jackson Jr, a former commissioner of America’s Securities and Exchange Commission, and Joshua Mitts of Columbia University suggests that someone had enough advance knowledge of the plan to make a small fortune profiting from a crash in the Israeli stockmarket.The authors analysed trading patterns in Israeli shares in the weeks before the attack, and found anomalies consistent with a grim form of informed trading. Perhaps the most striking example is a surge in short sales—bets that a security’s price will fall—of a relatively illiquid exchange-traded fund (etf), which is listed on the New York Stock Exchange under the ticker eis, and tracks an index of Israeli share prices.image: The EconomistIn September an average of 1,581 shares per day of EIS (together worth $85,000 or so) were sold short, representing 17% of the daily total trading volume in the ETF. But on October 2nd, five days before the attacks, a whopping 227,820 shares were shorted, accounting for 99% of EIS’s volume that day (see chart). Moreover, rather than reflecting a souring of market sentiment on Israeli equities, the entire increase in activity appears to have come from two transactions: one sale of 50,733 shares just before 3pm, and another for 174,869 shares 35 minutes later. Whoever made these trades could have made a $1m profit within a week, and a further $1m during the following three weeks.Other securities tied to Israeli shares also showed suspicious patterns. During the three weeks before the attacks, the number of outstanding options contracts expiring on October 13th on American-traded shares of Israeli firms—the derivatives that would yield the greatest returns if prices moved sharply in the direction a trader expected, and expire worthless otherwise—rose eightfold. In contrast, the number of longer-dated options on such shares, whose value depended on events beyond mid-October, barely changed.Could there have been another cause? The shorting of airline stocks ahead of the attacks of September 11th may have been prompted by forthcoming earnings announcements. Yet there seems no such alternative in this case, notes Eric Zitzewitz of Dartmouth College. The paper’s authors examined other recent periods of turmoil in Israel, such as that prompted by the government’s attempted judicial reform earlier this year, and did not detect similar behaviour. The only match for the anomalies was in early April—two days before the Jewish holiday of Passover, which according to reporting by Channel 12, an Israeli tv station, was the date originally scheduled for Hamas to launch its attack.The study has prompted an investigation by Israel’s securities authority. Given the secrecy around the attacks, news is unlikely to have leaked to a short-seller on Wall Street. Unless it was dumb luck, whoever placed the trades was probably inside Hamas, or close enough to know its military secrets. In the past two months, America has banned just one trading firm for its ties to Hamas—a crypto exchange in Gaza that was linked to illicit transactions worth a mere $2,000. Somebody has managed to pull off a far bigger coup. Mr Mitts reckons that the trades he and his co-author have detected are “just the tip of the iceberg”. ■ More

A rollover from a 401(k) plan to IRA is common for workers when they retire or change jobs.
More than 5.6 million people rolled money to an IRA in 2020, according to IRS data.
There are pros and cons to consider before moving your money.

D3sign | Moment | Getty Images

Millions of people move money from a workplace 401(k) plan to an individual retirement account each year.
Such “rollovers” are common when workers retire or take new jobs at different employers. More than 5.6 million people rolled a combined $618 billion into IRAs in 2020, according to the latest available IRS data.

A rollover may be “the single largest transaction” many people make in their life, Fred Reish, a retirement expert and partner at law firm Faegre Drinker Biddle & Reath, recently told CNBC.
But deciding whether a rollover makes sense isn’t always straightforward: There are many factors to consider before moving the money. The Department of Labor recently proposed a regulation to improve the rollover advice investors get from brokers, insurance agents and others.
More from Personal Finance:Not saving in your 401(k)? Your employer may re-enroll youWhy working longer is a bad retirement planMore employers offering a Roth 401(k)
Of course, not all savers will have a choice: Some 401(k) plans don’t allow former employees to keep their money in the workplace plan, especially if they have a small balance.
Here are some key details to weigh when choosing to keep money in your 401(k) or move it to an IRA.

1. Investment fees

Investment fees are a big consideration for rollovers, financial advisors said.
Investment funds held in 401(k) plans are generally less costly than their IRA counterparts.
That’s largely because IRA investors are “retail” investors while 401(k) savers often get access to more favorable “institutional” pricing. Employers pool workers into one retirement plan and have more buying power; those economies of scale generally yield cheaper annual investment fees.
Rollovers to an IRA made in 2018 will cost investors an aggregate $45.5 billion over a 25-year period due to higher fund fees, according to an estimate by c.

Of course, not all 401(k) plans are created equal. Some employers more rigorously oversee their plans than others, and fees are generally cheaper for retirement plans sponsored by large companies rather than small businesses.
“Are you able to pay less by staying in your 401(k) plan?” said Ellen Lander, founder of Renaissance Benefit Advisors Group. “The larger the plan, the more resounding that ‘yes’ will be.”
The bottom line: Compare annual 401(k) fees — like investment “expense ratios” and administrative costs — to those of an IRA.

2. Investment options

Savers may benefit from leaving money in a 401(k) if they’re happy with their investments.
Certain investments — like guaranteed funds or stable value funds, which are kind of like high-earning cash or money market funds — aren’t available in IRAs, Lander said.
But 401(k) options are limited to those selected by your employer. With an IRA, the menu is often much broader.
“You’ll want to look at whether your 401(k) is a good plan with diverse, low-cost investment choices and fees,” said Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida. She is also a member of CNBC’s FA Council. “If it isn’t a good plan, we encourage rolling it into a new 401(k) or IRA.”

Certain retirement investments like annuities, physical real estate or private company stock are generally unavailable to 401(k) savers, said Ted Jenkin, a certified financial planner based in Atlanta and founder of oXYGen Financial.
Another consideration: While the investment options may be fewer in a 401(k), employers have a legal obligation — known as a “fiduciary” duty — to curate and continually monitor a list of funds that’s best suited to their workers.
Unless you’re working with a financial advisor who acts as a fiduciary and helps vet your investments, you may not be putting money into an IRA fund best suited for you. Too many choices in an IRA may also lead to choice paralysis and adverse decision-making, advisors said.

3. Convenience

Sturti | E+ | Getty Images

Having multiple 401(k) accounts scattered among multiple employers may be a challenge to manage, said Jenkin, a member of CNBC’s FA Council. And your current employer may not accept rollovers into your 401(k) from a previous employer’s plan.
Aggregating assets in one IRA may simplify management of your nest egg relative to factors like asset allocation, fund choice, account beneficiaries and annual required minimum distributions, he said.
“If you’re babysitting three kids in three different backyards, it would be tough to keep your eye on all three,” Jenkin said. “By getting them in one, it’s a lot easier to watch them all.”

4. Creditor protection

Investors generally get stronger creditor protections in a 401(k) than an IRA, courtesy of federal law, advisors said.
Your 401(k) money would generally be protected from seizure in the event of bankruptcy or if you faced a civil suit from someone who, for example, fell and got injured in your home, Lander said.
IRA assets may not be protected, depending on the strength of state laws.
Exceptions to 401(k) protection may occur during divorce proceedings or for taxpayers who owe a debt to the IRS, Lander said.

5. Flexibility

IRAs generally offer investors control over the amount and frequency of their withdrawals. Many 401(k) plans may not allow retirees as much flexibility.
For example, just 61% of 401(k) plans allowed periodic or partial withdrawals by retirees in 2022, and 55% allowed installment payments, according to the Plan Sponsor Council of America, a trade group.

If this is the case, Lander advises workers to ask their employer’s human resources department about the policy and whether it can be amended.
“That’s a quick fix,” she said.  

6. Company stock

Workers who own company stock in their 401(k) can get a tax benefit for keeping those holdings in-plan rather than rolling them to an IRA, Jenkin said.
The tax move is known as “net unrealized appreciation.” Basically, by keeping stock in your 401(k), you’d ultimately pay preferential, capital gains tax rates on any investment growth (rather than ordinary income tax rates) withdrawn in retirement. This tactic isn’t an option if you roll the money into an IRA.
“That’s a big advantage for people who believe in their company stock and leave it in for a long period of time,” Jenkin said.

7. Loans

There’s sometimes an ability for 401(k) savers who part from an employer to keep taking loans from the 401(k) account they left behind, advisors said. You can’t borrow money or take a loan from an IRA.
The 401(k) provision is generally rare: About 1% of plans allow people to take new loans after separation from service, according to PSCA data.
However, investors who have access to that provision and find themselves in a financial pinch can take a 401(k) loan; assuming they follow the repayment rules, such people would pay themselves back with interest and wouldn’t suffer adverse tax consequences, Lander said.
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Bank of Montreal launched the Max SPX 500 4x leveraged ETNs, which tracks four times the total return of the S&P 500.
The notes will begin trading under the ticker “XXXX” on Tuesday.
It will be the highest leveraged exchange traded product in the U.S., according to CFRA

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., November 17, 2023. 
Brendan Mcdermid | Reuters

A new product puts the leverage of high-powered hedge funds in the hands of the regular investor, allowing them to make a bet that moves 4 times the direction of the stock market on any given day.
The question is, will they want to? And should they, given the many risks that come with such a fast-paced strategy?

Bank of Montreal launched the Max SPX 500 4x leveraged ETNs, which will be the highest leveraged exchange traded product in the U.S., according to CFRA. The notes are based on the S&P 500 Total Return Index and will trade under the ticker “XXXX” beginning on Tuesday.
The launch of the 4x product comes at a time when retail investors and asset management firms are showing a renewed appetite for more volatile products.
Single-stock ETFs tracking major tech stocks like Tesla and Nvidia have started to find traction after launching last year. A fund focused on zero-day options launched in September. And many of the biggest ETF shops — including BlackRock’s iShares — have filed with the SEC to create a bitcoin ETF, which is expected by many industry insiders to be approved early next year.
Investors have shown a preference for the higher leveraged funds, like the popular Direxion Daily Semiconductor Bull 3x Shares (SOXL) ETF.
“Looking at the trends and the data, it’s very clear that the assets and the volumes tend to be more concentrated in the highest leveraged products and also the most volatile sectors,” said Aniket Ullal, the head of ETF and data analytics at CFRA.

Short-term trading only

Like most leveraged products, the XXXX notes are designed for short-term trading. The leverage is reset on a daily basis, and investors should not expect to get the return on the label if they hold onto the note for a long period of time.
“Their performance over longer periods of time can differ significantly from their stated daily objectives. The notes are riskier than securities that have intermediate- or long-term investment objectives, and are not be suitable for investors who plan to hold them for a period other than one day or who have a ‘buy and hold’ strategy,” BMO said in the prospectus.
There are also some key differences between exchange traded notes and the more popular exchange traded funds. While it is rare for an ETN to fail, they do have a measure of credit risk not found in ETFs.
“[ETFs are] just safer for investors in that sense, because you actually have physical holdings of securities that are being marked to market every day. Whereas in the ETN, you’re essentially tracking an index and being promised a certain return,” Ullal said.
The XXXX ETN is technically an unsecured liability of BMO that will mature in 2043.
The ETN is also much more expensive than the traditional passive index funds that many investors use to gain exposure to the S&P 500. The note carries an annualized investor fee of 0.95%. There may also be other costs to fund associating with a daily financing charge or an early redemption fee.
BMO is not the first firm to try out a 4x leveraged product, with some overseas markets offering even higher risk-return products.
And in 2017, the Securities and Exchange Commission did approve two products from a firm called ForceShares that were aimed at delivering 4x leveraged and 4x inverse returns of the S&P 500. However, the SEC quickly paused that decision, and the funds appear to have never launched.
The SEC did not respond to a request for comment on the BMO product, but the regulator did release an investor bulletin in August cautioning that leveraged and inverse products were not designed to be long-term investments. More

U.S. Commerce Secretary Gina Raimondo told CNBC’s Morgan Brennan in an exclusive interview that more controls on tech exports to China will be coming, despite business concerns.
“The truth of it is though, technology changes, China changes and we have to keep up with it,” Raimondo said.

BEIJING — More controls on tech exports to China will be coming as needed, despite business concerns, U.S. Commerce Secretary Gina Raimondo told CNBC in an exclusive interview.
“We have to change constantly,” Raimondo told CNBC’s Morgan Brennan over the weekend on the sidelines of the Reagan National Defense Forum.

“I know that’s hard for industry. They want a clear line in the sand,” the commerce secretary said. “The truth of it is though, technology changes, China changes and we have to keep up with it.”
In October 2022, the U.S. Department of Commerce’s Bureau of Industry and Security announced sweeping export controls that restrict the ability of companies to sell certain advanced computing semiconductors or related manufacturing equipment to China.
“It was a bold move, but we thought it was necessary because these semiconductors are unbelievably powerful, and we can’t afford to let them get into the wrong hands,” Raimondo said, acknowledging that “the threat from China is large and growing.”
The U.S. has said it’s focused on restricting China’s military, but the controls also come as both countries seek to develop their artificial intelligence capabilities in the wake of OpenAI’s launch of ChatGPT.

During a defense forum panel Brennan moderated on Saturday, Raimondo also said she is working on a new way to restrict China’s access to certain technologies by setting up “a continuous dialogue” between business and government engineers.

“If you redesign a chip around a particular cut line that enables [China] to do AI I’m going to control it the very next day,” Raimondo said.
U.S. chipmaking giant Nvidia last month reportedly delayed the launch of a new AI chip for China that had been designed to technically comply with U.S. export controls.

What I cannot have industry do is in any way violate the intention of our export controls.

Gina Raimondo
U.S. Commerce Secretary

“We’re in touch with Nvidia,” Raimondo said in the interview with CNBC. “They are crystal clear. They don’t want to violate our export controls. And you know, we want them to sell chips to China. That’s fine. They just can’t sell the most sophisticated AI chips to China.”
When asked about Raimondo’s comments on blocking certain China chip sales, Nvidia said in a statement to CNBC: “We are engaged with the U.S. government and, following the government’s clear guidelines, are working to offer compliant data center solutions to customers worldwide.”
Nvidia has been one of the most high-profile companies affected by U.S. export controls since its advanced semiconductors are widely used for training artificial intelligence models. The company warned in August last year it could lose $400 million in potential sales in China due to U.S. restrictions.
Raimondo told CNBC she is considering similar controls on the “most sophisticated AI and all the products that flow from that,” as well as biotechnology and quantum computing.
“What I cannot have industry do is in any way violate the intention of our export controls,” she said. “They have to follow the rule and the spirit of the law. And as long as they, or any company, does that, it’s fine.”

‘Always be ahead’

U.S. President Joe Biden, who is up for reelection next year, signed a bill last year aimed at supporting U.S. semiconductor development with tens of billions of dollars.
The Chinese government has meanwhile doubled down efforts to build up its own semiconductor and tech industry.
Raimondo told CNBC “it’s not realistic” to think the U.S. can stop China’s technological development, but rather that the goal was “slowing them down.”
“We still sell billions of dollars a year in semiconductors to China,” she said. “We just cannot let them access the most sophisticated, cutting edge artificial intelligence chips.”
“Ultimately, we just have to run faster. Do more, run faster, so we can always be ahead.”
— CNBC’s Kristina Partsinevelos contributed to this report. More

The Fed is behind the curve when it comes to cutting rates, said Paul Gambles, managing partner at MBMG Group.
Traders are now pricing in a 25-basis-point cut as early as March 2024.
Veteran investor David Roche says “almost certain that the Fed is done raising rates,” and inflation will not go down to 2% anymore.

Chris Wattie | Reuters

The Federal Reserve needs to cut interest rates at least five times next year to avoid tipping the U.S. economy into a recession, according to portfolio manager Paul Gambles.
Gambles, co-founder and managing partner at MBMG Group, told CNBC’s “Squawk Box Asia” the Fed was behind the curve on cutting rates, and in order to avoid an extreme and protracted monetary tightening cycle it will have to deliver at least five cuts in 2024 alone.

“I think Fed policy is now so disconnected from economic factors and from reality that you can’t make any assumptions about when the Fed is going to wake up and and start smelling the amount of damage that they’re actually causing to the economy,” Gambles warned.
The current U.S. policy rate stands at 5.25%-5.50%, the highest in 22 years. Traders are now pricing in a 25-basis-point cut as early as March 2024, according to the CME FedWatch Tool.

Federal Reserve Chairman Jerome Powell said on Friday that it was too early to declare victory over inflation, watering down market expectations for interest rate cuts next year. 
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said in prepared remarks.
Recent data from the U.S. has signaled easing price pressures, but Powell emphasized that policymakers plan on “keeping policy restrictive” until they are convinced that inflation is heading solidly back to the central bank’s target of 2%.

Financial markets, however, perceived his comments as dovish, sending Wall Street’s main indexes to new highs and Treasury yields sharply lower on Friday. The perception now being that the U.S. central bank is effectively done raising interest rates.

Is the inflation battle over?

U.S. consumer prices were unchanged in October from the previous month, lifting hopes that the Fed’s aggressive rate-hiking cycle was starting to bring down inflation.
The Labor Department’s consumer price index, which measures a broad basket of commonly used goods and services, climbed 3.2% in October from a year earlier but remained flat compared with the previous month.
Veteran investor David Roche told CNBC’s “Squawk Box Asia” that unless there were big external shocks to U.S. inflation in the form of energy or food, it was “almost certain” that the Fed was done raising rates, which also means the next rate move will be down.
“I will stick to 3%, which I think is already reflected in many asset prices. I don’t think we’re going to push inflation down to 2% anymore. It’s too embedded in the economy by all sorts of things,” said Roche, president and global strategist at Independent Strategy.

“Central banks don’t have to fight as fiercely as they did before. And therefore, the embedded rate of inflation will be higher than before it will be 3% instead of 2%,” said Roche, who correctly predicted the Asian crisis in 1997 and the 2008 global financial crisis.
It is now left to be seen what the Fed’s interest-rate plans are at its next and final meeting of the year on Dec. 13. Most market players expect the central bank to leave rates unchanged. More

The INEOS Group founder and CEO has long been linked with a takeover of the storied club, and Sky News reports that Ratcliffe will pay £1.25 billion ($1.58 billion) to acquire a 25% stake.

A statue of George Best, Denis Law and Bobby Charlton standing outside Old Trafford, home of Manchester United in Manchester, England.
Mike Hewitt | Getty Images Sport | Getty Images

LONDON — Manchester United will next week announce that British petrochemicals billionaire Jim Ratcliffe will take a 25% stake in the soccer club, Sky News reported Monday.
The Ineos Group founder and CEO has long been linked with a takeover of the storied club, and Sky News reports that the agreement will see Ratcliffe pay £1.25 billion ($1.58 billion) to acquire 25% of the club’s listed A-shares in a $33-a-share deal.

He will also acquire 25% of current majority owners the Glazer family’s B-shares which carry greater voting rights, according to the report. Manchester United shares rose 1.5% on Monday.
Ratcliffe is expected to commit around £245 million of his personal fortune to upgrade the club’s aging infrastructure as part of the deal.
Both Ineos and Manchester United have been contacted for comment.

Having controlled the club since 2005, the Glazer family began formally exploring a sale in November 2022 after years of underperformance on the pitch relative to the club’s glittering history, and mass protests from fans.
Manchester United is currently seventh in the English Premier League and is on the verge of exiting the European Champions League in the group stages.
Though the most successful club in English soccer history, the Red Devils have been eclipsed over the last decade by bitter crosstown rivals Manchester City, winners of last season’s Premier League, Champions League and domestic cup competition. More

In 1790 America’s finances were in a precarious state: debt-servicing costs were higher than revenues and government bonds traded at 20 cents on the dollar. Alexander Hamilton, the country’s first treasury secretary, wanted a deep and liquid market for safe government debt. He understood the importance of investor confidence, so proposed honouring all debts, including those of states, and offering to swap old debt, at par, for new bonds with a lower interest rate. This was controversial. Shouldn’t speculators who picked up cheap debt in secondary markets be paid less? Yet Hamilton could not be swayed: “When the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all the loans it has occasion to make.”More than two centuries later American politicians are busy undermining Hamilton’s principles. Debt-ceiling brinkmanship has pushed America towards a technical default. Rising interest rates and incontinent spending have seen debt balloon: the country’s total stock of it now amounts to $26.6trn (96% of gdp), up from $12.2trn (71% gdp) in 2013. Servicing costs come to a fifth of government spending. As the Federal Reserve reduces its holdings of Treasuries under quantitative tightening and issuance grows, investors must swallow ever greater quantities of the bonds.All this is straining a market that has malfunctioned frighteningly in the past. American government bonds are the bedrock of global finance: their yields are the “risk-free” rates upon which all asset pricing is based. Yet such yields have become extremely volatile, and measures of market liquidity look thin. Against this backdrop, regulators worry about the increasing activity in the Treasury market carried out by leveraged hedge funds, rather than less risky players, such as foreign central banks. A “flash crash” in 2014 and a spike in rates in the “repo” market, where Treasuries can be swapped for cash, in 2019, first raised alarms. The Treasury market was then overwhelmed by fire sales in 2020, as long-term holders dashed for cash, before the Fed stepped in. In November a cyberattack on ICBC, a Chinese bank, disrupted settlement in Treasuries for days.Regulators and politicians want to find a way to minimise the potential for further mishaps. New facilities for repo markets, through which the Fed can transact directly with the private sector, were put in place in 2021. Weekly reports for market participants on secondary trading have been replaced with more detailed daily updates, and the Treasury is mulling releasing more data to the public. But these fiddles pale in comparison to reforms proposed by the Securities and Exchange Commission (SEC), America’s main financial regulator, which were outlined in late 2022. The SEC has invited comment on these plans; it may begin to implement them from early next year.The result has been fierce disputes about the extent and causes of problems in the Treasury market—and the lengths regulators should go to repair them. A radical overhaul of Treasury trading comes with its own risks. Critics say that the proposed changes will needlessly push up costs for the Treasury. Do they have a point?
Repo repairThe modern Treasury market is a network of mind-bending complexity. It touches almost every financial institution. Short-term bills and long-term bonds, some of which pay coupons or are linked to inflation, are issued by the Treasury. They are sold to “primary dealers” (banks and broker dealers) in auctions. Dealers then sell them to customers: foreign investors, hedge funds, pension funds, firms and purveyors of money-market funds. Many buyers raise money to buy Treasuries using the overnight repo market, where bonds can be swapped for cash. In secondary markets high-frequency traders often match buyers and sellers using algorithms. Participants, in particular large asset managers, often prefer to buy Treasury futures—contracts that pay the holder the value of a specific Treasury on an agreed date—since it requires less cash up front than buying a bond outright. Each link in the chain is a potential vulnerability.
The most important of the SEC’s proposals is to mandate central clearing, under which trading in the Treasury and repo markets would pass through a central counterparty, rather than occur on a bilateral basis. The counterparty would be a buyer to every seller and a seller to every buyer. This would make market positions more transparent, eliminate bilateral counterparty risk and usher in an “all to all” market structure, easing pressure on dealers to intermediate trades. Nate Wuerffel of BNY Mellon, an investment bank, has written that central-clearing rules will be put in place relatively soon.Yet the SEC’s most controversial proposal concerns the so-called basis trade that links the market for Treasuries to the futures market. When buying a futures contract investors need only post “initial margin”, which represents a fraction of the face value of the Treasury. This is often easier for asset managers than financing a bond purchase through the repo market, which is more tightly regulated. As such, there can be an arbitrage between cash and futures markets for Treasuries. Hedge funds will go short, selling a contract to deliver a Treasury, in the futures market and then buy that Treasury in the cash market. They often then repo the Treasury for cash, which they use as capital to put on more and more basis trades. In some cases funds apparently rinse and repeat this to the extent that they end up levered 50 to one against their initial capital.At most times, this trade is pretty low risk. But in times of market stress, such as in 2020, when Treasury prices swung wildly, futures exchanges will send out calls to hedge funds for more margin. If funds cannot access cash quickly they sometimes must close their positions, prompting fire sales. The unwinding of basis trades in 2020 may have exacerbated market volatility. Therefore the SEC has proposed that hedge funds which are particularly active in the Treasury market should be designated as broker-dealers and forced to comply with stricter regulations, instead of the simple disclosure requirements that they currently face. It is also considering new rules that would limit the total leverage hedge funds can access from banks.This has infuriated those who make money from the manoeuvre. In October Ken Griffin, boss of Citadel, the world’s most profitable hedge fund, argued that the regulator was simply “searching for a problem”. He pointed out that the basis trade reduces financing costs for the Treasury by enabling demand in the futures market to drive down prices in the cash market.
Will policymakers hold firm? In a sign of diverging opinions between the SEC and the Treasury, Nellie Liang, an undersecretary at the finance ministry, recently suggested that the market may not be functioning as badly as is commonly believed, and that its flaws may reflect difficult circumstances rather than structural problems. After all, market liquidity and rate volatility feed into each other. Thin liquidity often fosters greater rate volatility, because even a small trade can move prices—and high volatility also causes liquidity to drop, as it becomes riskier to make markets.Moreover, high volatility can be caused by wider events, as has been the case in recent years, which have been unusually lively. It is far from certain that periods of extreme stress, like March 2020 or the chaos caused in the British gilt market when derivative bets made by pension funds blew up, could be avoided with an alternative market structure.
In addition to the proposals from the SEC, the Treasury is working on its own measures to improve how the market functions. These include data gathering and transparency, and beginning buybacks. Buybacks would involve the Treasury buying up older, less liquid issuance—say, ten-year bonds issued six months ago—in exchange for new and more liquid ten-years, which it is expected to start doing from 2024. The Treasury has acknowledged that leverage practices, which make the basis trade possible, warrant investigation, but Ms Liang has also said that there are upsides to the basis trade, such as increased liquidity.Hamilton, the father of the Treasury market, could not have envisaged the vast network of institutions that make up its modern version. Yet he did have a keen appreciation for the role of speculators, who stepped in to buy Treasuries when bondholders lost faith or needed cash. He would have been far more concerned with politicians rolling the dice on defaulting and the growing debt stock than he would have been by enthusiastic intermediators. Although plenty of his successors’ suggestions have widespread support—such as buybacks and central clearing—they would do well to remember his aversion to snubbing those keen to trade. ■ More

The author behind the best-selling book “The Psychology of Money” is trying to relieve investor anxiety over market downturns.
“Realizing how inevitable it is makes it more palatable to deal with when you go through it,” author and behavioral finance expert Morgan Housel told CNBC’s “ETF Edge” recently.

It’s one of the major themes in his new book: “Same as Ever,” which was published in November.
Housel, a partner at the venture capital firm the Collaborative Fund, contends a recession is not an “if” but a “when,” and that knowing this can make it easier to manage expectations. 
“The bear market plants the seeds for the recovery because people get scared into action,” he said. “All the new technologies come about because people are motivated by fear.”
He also advises investors to always have a plan for surprise events because they can catch the market off guard.
“[The financial system is] very good at predicting what the economy and the stock market are going to do next — except for the surprises,” Housel said.

Housel added these surprise events, such as natural disasters and pandemics, tend to be all that matter in market shakeups. But just as the market eventually stabilizes, even times of calm can also “plant the seeds for crazy.”
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