Dear Reader,
With the focus on the Federal Reserve (the Fed) this week, I thought it might be interesting to have a look at a policy tool that we don’t usually hear about – Yield Curve Control (YCC).
It’s an interesting topic because it is so rarely used. The markets tend to focus on where the Fed will set the Fed Funds rate, which is an overnight interest rate paid by the Fed to financial institutions that store funds with them.
The thought is that the Fed Funds rate will influence longer-term interest rates. If the Fed aggressively increases rates, it results in demand destruction. Money is incentivized to sit with the Fed or in Treasury bonds, reducing economic activity… and hopefully inflation. But the costs to the economy, stock markets, and ultimately consumer wealth can be devastating.
If the Fed reduces the Fed Funds rate, it incentivizes capital to invest in things other than bonds. It stimulates economic activity, and brings down the 30-year mortgage interest rate… which is great for the housing market. It also tends to be great for both the equity markets, as well as the digital asset markets, and thus for investors at large.
But what can the Fed do in an environment when interest rates are near zero like they are today? And how can the Fed avoid crashing the economy by increasing interest rates too aggressively?
Quantitative easing (QE) comes to mind. That’s exactly what we’ve seen over the last two years: $5 trillion was printed and we can all feel the spike in inflation that it caused.
The Fed can certainly do more of that, and it most certainly will, but what other tool could it use that isn’t seen to be as egregious as QE?
This is where Yield Curve Control (YCC) comes into the picture. This is a concept that is rarely explained in a simple way, but it is very straightforward:
The Fed’s desire is to control medium-to-long-term interest rates from rising too high (rising rates are inflationary)
The Fed, in theory, can accomplish this by buying enough long-term Treasury bonds to keep the interest rates from rising above desired levels
In time, as economic volatility settles down, the Fed can reduce the amount of bonds that it is purchasing, affecting a less volatile recovery
This is possible because bond prices are inversely related to a bond yield. As bond yields increase, the price of a bond declines. The opposite is also true… As a bond price increases, the yield declines, as will interest rates.
This works because lower yields (interest rates) on Treasury bonds will feed through to lower interest rates on everything from corporate debt to home mortgages to car loans, and just about any kind of lending that we can imagine.
Here’s an example from the St. Louis Fed of how this has been used in Japan since 2016. We can see clearly how the Bank of Japan has been able to curtail purchases over the course of the following years:
Source: St. Louis Fed
Yield Curve Control is the least worst of a bunch of bad options, which is why I believe that it is the most likely path the Fed will eventually take.
It’s surprising that so few are talking about this as an option. I believe the reason is, most people have forgotten about it. The last time that YCC was used in earnest was in the 1940s during the time of World War II.
It’s not a perfect solution though, and it comes with downsides. I’m sure that it will be positioned as “YCC” and not quantitative easing. The government will likely tell us it’s not really QE because it’s not committing to purchase some specific dollar amount of Treasuries every month.
But the reality is this – the Fed will have to print as many U.S. dollars as necessary, driving Treasury bond prices high enough to result in the desired yield, and thus interest rates. If I had to guess, I’d say it will start buying the 2-year Treasuries and then find out that it has to move farther out and buy the 10-year Treasuries… which will be expensive ($ trillions).
The result? While it will prolong the pain and “soften” the volatility, it will devalue the dollar.
Watching what has happened with the Yen is a perfect example. In the summer of 2016, one U.S. dollar would buy about 100 Yen. Today, one dollar will buy around 135 Yen – a great time to travel to Japan!
When the Fed prints trillions of dollars buying Treasury bonds to control the yields – and thus interest rates – the exact same thing will happen to the U.S. dollar.
That means that the challenge we have as investors is to grow our investments at a pace faster than that at which the US government can devalue the U.S. dollar… And in low-interest rate environments, that means that we’ll need to be focused on high-growth assets.
Despite the economic chaos we have seen this year, there are still groundbreaking things happening in the world of high technology. And 2022 is already proving to be a remarkable year in the world of computing technology with the commissioning of the world’s most powerful supercomputer – Frontier.
In parallel with the advancements in supercomputers, quantum computing has also hit an inflection point. An early-stage company called Xanadu just revealed its own quantum computer, called Borealis. And it’s the first fully programmable quantum computer based on photonics.
For the sake of new readers, we haven’t talked much about the photonics approach to quantum computing. Most of the quantum breakthroughs we have discussed have come from what are called superconducting quantum computers.
Up to this point, the superconducting approach has shown the most promise. Semiconductor manufacturing techniques can be used, and it has shown the promise of being able to scale.
But the downside is that these computers must be kept in a refrigerated environment, at incredibly low temperatures, for optimum performance. In fact, superconducting quantum computers need to be in rooms with temperature levels similar to that of deep space to reduce errors in the system.
Photonic quantum computers don’t have that problem. They can operate at room temperature… making them far more practical.
And Xanadu has demonstrated that the photonic approach has great promise as well. Borealis just completed a task in 36 microseconds, a task that would take a classical supercomputer about 9,000 years to solve. Talk about a milestone.
To be fair, this was a task that Borealis was optimized to complete… It wasn’t a general task. That’s why the performance difference was so dramatic. Still, this shows us that we should not discount the photonics approach.
What’s more, the photonics approach is relatively easy to scale. If engineers add more pulses of light to the system, it will give the computer control over more photons. That, in turn, increases computing power.
So we absolutely need to keep Xanadu, and the photonics approach to quantum, on our radar going forward. If it can continue to scale, and the systems can be designed with high fidelity and strong error correction, it could lead to major breakthroughs in just about anything we can imagine.
Some fantastic new research out of the University of Glasgow just revealed the future of robotics. It’s all about equipping robots with a sense of touch.
Specifically, researchers developed a new type of electronic skin embedded with synaptic transistors. These are small semiconductors, connecting a system of nanowires, that replicate the human nervous system.
This skin can be produced through normal manufacturing processes. And when applied to a robot, the skin gives it the ability to “feel.”
Check this out:
A “Feeling” Robot Hand
Source: YouTube
Here we can see someone poking a robotic hand. The hand naturally recoils after it senses the contact. There are all kinds of implications here.
Just think about science fiction author Isaac Asimov’s “Three Laws of Robotics.” They are:
A robot may not injure a human being or, through inaction, allow a human being to come to harm.
A robot must obey orders given to it by human beings except where such orders would conflict with the First Law.
A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.
While these “laws” are fictional, they provide common-sense guidelines for developing robotics and artificial intelligence (AI) technology. And if we look at the Third Law, robots should protect their own existence. A sense of touch will help tremendously with this.
If robots can “feel” sharp objects, elevated pressure levels, or even heat, they can infer danger and take action to avoid any potential harm to themselves or any humans in the area. This is something that would be more difficult without the electronic skin.
In just the same way, a sense of touch will help robots safely handle objects. If they can feel that their grip is starting to impact an object they are holding, they can quickly loosen it to a more appropriate level.
And then, if we think about how rapidly AI is advancing, this becomes even more critical.
At some point in the next several years, AI will get to the point where robots can become aware of themselves. That’s when a sense of touch will become absolutely critical as the robots will become able to make spontaneous decisions without human direction.
And then our entire world changes…
So I see this electronic skin as a great breakthrough to ensure that robot-human interactions are as safe and logical as possible in the future. It’s going to be interesting to watch this story unfold.
We’ll wrap up today with some exciting news on the biotechnology front.
In a clinical trial, GlaxoSmithKline’s (GSK) cancer drug Jemperli just did something that no cancer therapy has done before: It achieved a complete response from every single patient in the trial. These are about the best results that have ever been shown indicating a possible “cure” for a single form of cancer.
For context, rectal cancer is one of the most difficult cancers to treat. It’s caused by a genetic mutation that inhibits the body’s ability to kill malignant cells as DNA replicates.
Jemperli is a monoclonal antibody designed to help the body attack the solid tumors associated with rectal cancer. It basically restores the body’s ability to kill malignant cells.
GSK’s clinical trial for Jemperli consisted of 14 patients. And as I already mentioned, every single patient had a complete response to the therapy. Another four patients still being treated in the trial are showing similar results as well.
What’s more, none of the patients have required radiation, chemotherapy, or surgery within six months of treatment. So far, the therapy has provided a lasting solution to the cancer.
This is simply remarkable. This is quite possibly the most promising cancer trial in history.
Even more exciting, there are a lot of similar therapies being developed for other forms of cancer right now. There’s no reason we shouldn’t expect many of them to achieve the same level of success as Jemperli. I know that may sound optimistic, but the increasingly positive results in current clinical trials is something that we’ve never seen before.
Of course, clinicians will continue to track these patients for years to ensure that the therapy proves durable. That remains to be seen.
Still, this is fantastic news for the world’s fight against cancer.
And it’s very bullish for monoclonal antibody therapies in the oncology space. That’s something my team and I will track closely for investment opportunities.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. Tomorrow night, my colleague Nomi Prins will be sharing the next chapter she sees coming in “The Great Distortion.” She believes the financial elite are pulling strings behind the scenes… and that if we see what they’re doing, we can profit alongside them.
And she says a catalyst this August could set a $4 trillion market shock in motion. I’d highly encourage any readers who are interested in hearing what she has to say to go right here and sign up to attend her event for free.
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
