The Fed Acts

As we noted last week the Fed was on track to increase the federal funds rate by 25 basis points. ( See: https://shulmaven.blogspot.com/2026/09/the-die-is-cast-for-fed.html)  Today the Federal Reserve's Open Market Committee acted. What is more, according to the infamous dot plot projection most of the committee member signaled that at least one more hike is in the cards. To add emphasis, Chair Warsh noted that "we removed a dose of accommodation." We would note that with the committee forecasting a 3.7% year-over-year increase in the personal consumption deflator by December indicates a mere 0.2% real funds rate at the new 3.75%-4% target range.  

In response the yield on 2-year U.S Treasuries surged by 7 basis point to 4.74%, thereby confirming at least one more rate hike. The 10-year Treasury advanced by a more modest 2 basis points, while the 30-year was unchanged. In other words a continuation of the "bear flattening" trend.

Although the more cyclical Dow Jones Industrial Average sold off by 1.2%, the S&P 500 was only off by 0.45% and the NASDAQ was flat. Thus, the stock market took the hike and the prospect of another hike by yearend reasonably well. The real issue for the stock market is at the long end of the yield curve. Our view is that long rates will work their way higher with the 10-year exceeding 5.25% and the 30-year exceeding 5.5% by yearend as the secular bond bear market grinds on.

My Review of Robert Harris' "Agrippa"

Caesar’s General

This is the fourth Robert Harris historical novel I have reviewed. (See: Shulmaven: My Amazon Review of Robert Harris', "An Officer and A Spy: A Novel", Shulmaven: My Amazon Review of Robert Harris' "Munich: A Novel", and Shulmaven: My Amazon Review of Robert Harris' "V2" ) Here Harris in the voice of Marcus Vipsanius Agrippa retells his life story in the form of a dying man’s memoir starting from his very plebian beginning to rising to the heights of the Roman Empire. His rise is the result of his boyhood and ultimately lifelong friendship with Octavian who would become Agustus Caesar, the supreme ruler of the empire.

 

Agrippa was not only Caesar’s general, but he was also his admiral, and, in many respects, he was the Robert Moses of Rome by building aqueducts, public baths, parks, and waste removal systems. When Agrippa was 19 and Octavian was 18, they both exhibited high-order military skills. By the time there were 30 they were in charge of all Roman and land and naval forces.

 

Here you have to brush up on your Shakespeare because Octavian had to defeat Brutus and Cassius and later defeat Antony and Cleopatra. While Agrippa was the military strategist, Octavian was the political strategist in outmaneuvering all his rivals from the outside and from within. He does this through guile and having his children engage in strategic marriages, including forcing Agrippa to divorce his wife in order to marry Octavian’s daughter.   

 

So great was Agrippa’s military skills that in a period of 18 months he built a port and an entire naval fleet that would successfully defeat Sextus Pompeaus’s pirates in the Bay of Naples. Would that our Navy work with the same alacrity today?

 

Harris gives a very real sense of the power politics of the late Roman Republic and the dawn of the empire. From Julius’s Caesar crossing Rubicon the days of the republic were numbered, and constant fighting made the once great Roman Senate irrelevant. Harris also brings up with anecdotal evidence, but no proof that Agrippa was Julius Caesar’s illegitimate son.

 

Harris does a real service in presenting the grandeur that was Rome in a very readable format. He gets the history right and gives the reader a chance to be a fly on the wall when many of the great decisions were made along with getting a real sense of what life in the Roman army and navy was like.

The Die is Cast for the Fed

 With the headline consumer price index for August coming in at 3.4% and at 2.4% year-over-year for the core, the die has been cast for the Fed to increase its policy rate by 25 basis points at its meeting next week. As we noted two weeks ago, Fed Chair Kevin Warsh and his Open Market Committee members have all the evidence they need to hike rates. (See: https://shulmaven.blogspot.com/2026/08/warsh-strikes-right-chord.html ) Indeed with oil prices moving higher in September and diesel prices at record highs, it is hard to believe that August's increase in energy prices were a one-off event.

 

The bond market responded appropriately by flattening the yield curve with the yield on 2-year notes advancing by 6 basis points and the yields on the 10-year and 30-year Treasury bonds declining by one basis point and four basis points, respectively as of midday. For the moment, the Fed has gained a modicum of credibility, but time will tell as to whether or not it can be maintained. Shulmaven has long believed that inflation is more endemic than what most market participants believe, and thus the hike next week has to be viewed as the start of a tightening cycle, not one off.  

My Review of Porter Stansberry's "Warren's Mistakes"*

 Chinks in Buffett’s Armor

Financial newsletter writer Porter Stansberry has written a detailed critique of legendary investor Warren Buffett’s investments after 1999. In essence Stansberry believes that Buffett changed his investing style in 1999 when Berkshire Hathaway offered its then undervalued stock to buy General Re. From there, instead of finding hidden value in the stock market, Berkshire embarked on a process of buying companies whole with huge investments in electric utilities and the Burlington Northern Railroad. Berkshire became a clunky conglomerate, a business model he once derided. In a notable example he cites Berkshire’s acquisition of the Benjamin Moore paint company for one billion dollars in 2001. Instead Stansberry argues that Berkshire should have bought a 25% interest in Sherwin Williams, a far better paint company.

 

The reason why the years around the turn of the century are so important is that from 1967-2000 Berkshire dramatically outperformed the stock market as a whole. After that Berkshire’s performance roughly tracked the S&P 500. To Stansberry, Buffett is a better investor than an operator.

 

One of the questions Stansberry asks is to what we attribute Buffett’s success as a stock market investor. He found the answer in a 2018 Financial Analysts Journal article by Andrea Frazzini, David Kabiller and Lasse Heje Pedersen, all of AQR, entitled “Buffett’s Alpha.” Using data from 1976-2017 the AQR authors developed a multi-factor analysis that attributed much of Buffett’s outperformance to buying high-quality low beta stocks with a considerable amount of leverage. A good piece of the leverage came from Buffett’s utilizing the float from his insurance companies.

 

Buffett’s genius was to consistently utilize these factors, even the face of temporary downturns that could have broken other managers employing the same strategy. In 1998-1999 Buffett was sorely underperforming and many “value” managers were crushed during that period. (See for example: https://shulmaven.blogspot.com/2026/02/my-review-of-jeremy-granthams-making-of.html ) Such was the strength of Buffett’s reputation and the permanence of his capital that enabled him to ride out the storm.

 

Stansberry is especially critical of Berkshire’s investment in the Burlington Northern Railroad in 2010 and a series of investments in Berkshire Hathaway Energy. (BHE) In the case of Burlington Northern the author notes that is has the worst operating ratio of all the Class I railroads significantly underperforming its competitor, Union Pacific. Indeed, Buffett himself has noted that Burlington’s capital expenditure consistently exceeds its depreciation allowance. Thus, owner’s income is less than reported income.

 

In the case of BHE, Stansberry states that it has yet to pay a dividend to the parent company. BHE’s huge investment in solar and wind energy is done solely for the tax credits that the parent company utilizes. Absent the tax credit the investments in solar and wind would not be economic. Furthermore, in 2022 BHE was valued in excess of $90 billion in 2022 when then CEO Greg Abel sold his stock back to Berkshire. Two years later the company was valued when the Scott family sold its interests back to Berkshire, a huge haircut. In the interim the PacifiCorp subsidiary became on the hook for a maximum of $50 billion for potential liabilities accruing from the Oregon wildfires. Stansberry unfairly harps this maximum liability because should it be awarded the liability would be limited by the bankruptcy of its Pacific Power subsidiary.

 

Stansberry’s solution is for Berkshire to spin off both Burlington Northern and BHE. That would clean up Berkshire’s balance sheet and make it look more like the Berkshire of old.  

 

My primary criticisms of the book are twofold. First, Stansberry after paying lip service to Buffett’s investment acumen, he takes on the role of prosecutor and in many instances, he refers to Buffett as an “old man,” hardly fair. Next, he leaves out perhaps the most important reason as to why Berkshire has failed to outperform the S&P 500.

 

My explanation is that Berkshire’s primary competitive advantage, aside from Buffett’s investment acumen, is the ability to access its insurance float at a low or zero cost. With the Federal Reserve operating at a very low or zero interest rate policy for the past 25 years, Berkshire’s competitive advantage from this source has been severely eroded. Thus, with interest rates normalizing, we should expect Berkshire to once again outperform the market averages. However, this would be a tall order with Buffett no longer at the helm. Greg Abel, Berkshire’s new CEO, has his work cut out for him.

* Shulmaven is a longtime shareholder in Berkshire Hathaway. Subsequent to the original post I discovered that Stansberry was found civilly liable by the SEC for violating the securities law to the tune of $1.5 million in 2007.

 

Warsh Strikes the Right Chord

Fed Chairman Kevin Warsh struck the right chord in his Jackson Hole speech yesterday. He noted that the Fed has missed its 2% inflation target for five years and the economy is operating at full employment. Although there has been some modest improvement in the recent inflation data, Warsh remains skeptical that it is on a clear glide path towards 2%. Although not giving forward guidance in the traditional sense, Warsh put the markets on notice that a rate hike is likely at the September Open Market Committee meeting.

 

The treasury market responded with a “bear flattener” where short rates went up much more than long rates. The 2-year surged by 12 basis points to 4.36% while the 10-year and 30-year yields advanced by 5 basis points and 2 basis points, respectively. The market action on Friday was the mirror image of the response after Warsh’s comments after the July Fed meeting. Then the market put on a “bear steepener” trade with short rates falling and long rates rising significantly. (See: Shulmaven: The Bond Vigilantes Strike)  I would remind readers that the 10-year treasury is trading at 4.72%, precisely the level when Treasury Secretary Scott Bessent announced his expanded bond buyback program. (See: Shulmaven: The Treasury Strikes Back )

 

Whether a September rate hike is one-off or the start of new tightening cycle remains to be seen. However, with the 2-year note yielding 4.36%, it looks like the federal funds rate is now on a slow road to 4.5%.

My Review of Daron Acemoglu's "What Happened to Liberal Democracy?”

The New, New Deal

M.I.T. economist and Nobel Laureate Daron Acemoglu’s idea of a liberal democracy is the New Deal era of 1933-1973 where under some very unique circumstances the U.S. enjoyed a “shared prosperity.” True to form, the book is being hailed by a host of Left and Far-Left economists.  As a result, his liberal democracy is not the liberal democracy of Milton Friedman and Friedrich von Hayek. Thus, if a reader wants a more balanced account on the need to restore liberal democracy, I would suggest Adrian Wooldridge’s the “The Revolutionary Center.” (See: Shulmaven: My Review of Adrian Woodridge's "The Revolutionary Center" ) What both books have in common is that they go back to the seminal works of Kant, Hobbes, and Locke.

 

In many respects this book is a follow-on to Acemoglu’s and James Robinson’s “Why Nations Fail.” Simply put, Acemoglu worries about how the collapse of democratic institutions leads to authoritarians of the Right and the Left. Here Acemoglu makes a plea to the Democratic Party to return to its working-class roots of the Roosevelt era. He notes that the party began going astray when it traded the working class for the college educated elites. This was in response to the post-industrial world’s reduced need for mass production factory workers in favor of highly educated technical workers needed to run the more automated work of the future.

 

To Acemoglu the first sign of this was the student deferments of the 1960’s during the Vietnam War. It was the factory workers that went to Vietnam while the college students of that era lived it up with sex, drugs, and rock ‘n roll. I know from experience as college graduate in the army at the time, college graduates among my fellow enlisted personnel were few and far between.

 

To Acemoglu, the turning point of the Democrats abandoning the working class went into full force in the 1980’s. This dating is no coincidence because it represented the start of Reagan’s first term. To the author the slow demise of the working class begins then.

 

He is wrong on this point. I would date the slow decline in the working class to the early 1970’s which brought with it the first oil shock and increased foreign competition in automobiles and steel. The date that will live in infamy was September 19,1977 when Youngstown Sheet and Tube shut down its 5,000-worker Campbell Works. Within five years the Mahoning Valley lost 50,000 workers. Why is this important? The Democrats held the presidency and both houses of Congress and did nothing.

 

At the same time the Democratic Party, instead of supporting in the interests of factory workers, turned its attention to the environment, abortion, and racial preferences. To be sure those are real issues, but it was of no solace to the relative and absolute decline of manufacturing work. Thus, it is no wonder that many workers moved away from the Democratic Party.

 

To cure this Acemoglu wants to return the Democratic Party to its to emphasize prolabor positions by strengthening labor unions, selectively supporting tariff, investment in public goods improving the safety net, and above all stop having its elites look down on people who work with their hands and live in small and mid-sized cities across America that have been devastated by deindustrialization. No more should a Hillary Clinton call them “Deplorables.” People forget that FDR was socially conservative, religious and very patriotic, characteristics that hardly define the Democratic Party of today.

 

What Acemoglu gets right is his hostility to identity politics and the cancel culture it breeds. As a liberal he believes in free speech and compares the cancel culture with the Spanish Inquisition, Maoism, and Soviet Communism. The logic behind identity politics requires Orwellian speech police to enforce all of its strictures. Acemoglu, within limits, accepts the rights of diverse communities to live their lives as they see fit.

 

My problem with Acemoglu’s New, New Deal is that the original New Deal was a product of a time and a place that no longer exists. The massive factories of that era are gone, and America has lost its postwar monopoly position in tradeable goods. Further the original New Deal was not bogged down by a host of regulations that make it impossible to build. To be sure Acemoglu is supportive of the “abundance agenda,” but that is a long way from being implemented. (See: Shulmaven: My Review of Ezra Klein's and Derek Thompson's "Abundance") Even more problematic is the prevalence of government employee unions which makes effective government hard to deliver. Recall that FDR himself was against public employee unions. And if you need further proof all you have to do is to look at the failed states of California, New York, and Illinois to see how a New, New Deal would work in practice.

 

To conclude I wish the Democrats would take to heart Acemoglu’s criticism of identity politics. Here he completely agrees with Adrian Wooldridge. I am also glad that Acemoglu is at the barricades fighting the illiberality of the Left and Right. It is good fight. On a more technical level, the book is in need of an editor because it bogs down in too many places and it is need of tables and charts to visualize the data in the text and finally why does the author have to cite himself 56 times in the bibliography, a bit over the top.

The Treasury Strikes Back

As we wrote earlier this month the bond vigilantes were on the warpath sending the yields on 30-year sovereign debt to generational highs. ( See: https://shulmaven.blogspot.com/2026/08/the-bond-vigilantes-strike.html ) With the headlines screaming “bond market rout,” Secretary of the Treasury Scott Bessent announced that he was doubling the treasury’s bond buyback program from $2 billion to $4 billion a week starting in early September to be financed in the short-term bill market. In essence the treasury is engaging in a version of “operation twist,” a policy that historically had little long-term effects.

 

In response the yields on the 30-year U.S. Treasury bond declined from 5.3% to 5.19% and the yield on the 10-year dropped from 4.7% to 4.64%. In a clear way Bessent told the speculators that shorting bonds was not a one-way street. In response gold and bitcoin rallied and the dollar declined.

 

However, Bessent, as former hedge fund trader, knows full well that temporary interventions of this type do not work unless they are backed up by the underlying fundamentals. In this case nothing has changed as fiscal deficits continue to mount, AI spending soars and there is a global build-up in military spending.

 

Thus, it will take a lot more that $4 billion a week to halt the secular bear market in bonds that we are now in. If Bessent wants to engage in a policy of yield curve control it would require the full cooperation of the Federal Reserve, which at this time seems unlikely. Why?  It would unleash a collapse in the dollar with a concomitant increase in inflation.

 

Net. Net. Look for yields to work their way higher as the summer turns to autumn.