Learn To Fly

"Economic Kayfabe" and markets that "learn to fly"

Life isn’t about finding yourself. Life is about creating yourself– George Bernard Shaw

I don’t know if you know the term “kayfabe.” If you closely follow financial media, you might have encountered it recently when Paul Tudor Jones mentioned it during an interview on CNBC. Before addressing his remarks, let’s first understand the term.

“Kayfabe” originates from professional wrestling, which refers to the industry’s practice of presenting staged events as real. Organizations like World Wrestling Entertainment (WWE) and All Elite Wrestling (AEW) uphold this tradition today. Historically, wrestling began as a fairground attraction, but promoters soon turned it into a standalone entertainment form. They realized that scripting matches and creating storylines—often in the archetypal “villain vs. hero” format—made the performances more compelling for audiences.

For decades, the scripted nature of wrestling was a closely guarded secret. Wrestlers and promoters worked hard to maintain the illusion that the events were authentic. Wrestlers feuding on stage were often required to avoid friendly interactions offstage, reinforcing the façade of genuine rivalry.

However, maintaining this illusion became increasingly difficult with the rise of the internet and global connectivity. A notable turning point came in 1996 during a WWF (now WWE) event at Madison Square Garden. Wrestlers Kevin Nash (“Diesel”) and Scott Hall (“Razor Ramon”), who were leaving for a rival promotion, broke character by celebrating in the ring with Paul “Triple H” Levesque and Shawn Michaels, despite their on-screen rivalries. This incident, known as “The Curtain Call,” exposed the scripted nature of wrestling and remains a landmark moment in its history.

Today, most fans know that wrestling is staged, yet they still enjoy storylines that blur the line between fact and fiction. Moments where real-life tensions or ambiguous narratives are woven into the script continue to captivate audiences.

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Now, back to Paul Tudor Jones and his interview, recorded before the election. In the interview, Jones went on another rant about the fiscal wall that the US is running into, regardless of the winner. He argued that the projected trajectory of the debt is, in his opinion, far too optimistic. His blunt conclusion is that everyone is delusional about buying long-term government debt, comparing it to “kayfabe”:

I was watching this Vince McMahon [prior owner of the WWE] documentary and in it… there was a term I never heard of called “kayfabe.” And in wrestling in particular parlance that represents the unspoken, unwritten agreement between the wrestlers and the fans about the elusion that’s going on in the ring. The suspension of disbelief that [is] going on in the ring is actually [scripted]. We know it’s scripted and we know it’s a performance but the ask us to think it’s genuine and real… we’re in an economic “kayfabe” right now and it’s not just the US. After this election, the question is, will we have a Minsky Moment… in US debt markets, where there’s a point of recognition that what’s going to happen… is fiscally impossible, financially impossible… I’m clearly not going to own any fixed income.

The Minsky Moment, named after Hyman Minsky, describes a situation where financial agents have taken on excessive risk and leverage, pushing asset prices higher—until the moment they stop rising and begin to fall. At that point, the reckless risk-taking is exposed as asset earnings fail to cover debt obligations. Investors are forced to liquidate assets to meet expenses, triggering further price declines and exposing the system's fragility.

It’s important to note that Minsky’s analysis did not primarily focus on government debt financing. Instead, he identified corporate borrowing and investment as key drivers of financial instability. In his framework, the government was more of a “stabilizer of last resort.”

What Jones is arguing is quite different and could be described as the final stage of fiat money—a scenario that has been warned about for decades. He contends that the central banks and governments stepping in to "rescue the economy" are essentially just transferring risks from private sector balance sheets to the government’s balance sheet.

That’s the theoretical purpose of bailouts: the government takes on debt to support financial actors, allowing the financial system to function appropriately and lending to resume. The hope is that this intervention spurs enough economic growth to reduce the government’s debt burden relative to GDP. However, following the GFC, growth wasn’t high enough to offset the debt, revealing some of the flaws in Keynesian economic theory.

Nevertheless, the rising government debt did achieve one thing: it facilitated a deleveraging of the private sector. When the government loads up on debt, it competes for resources with the private sector, crowding out private investment. Meanwhile, homeowners reduced their debt burdens by refinancing loans at lower rates as their nominal wages increased due to inflation adjustments.

Between 2008 (the GFC) and 2020, government debt as a percentage of GDP increased by 57%, while nonfinancial corporate debt relative to GDP rose by about 11%, and household debt relative to GDP decreased by 25%. Then, in 2020, when the pandemic hit, GDP contracted sharply, government debt/GDP skyrocketed, corporate debt/GDP continued on its expected trajectory, and household debt/GDP saw a slight uptick.

In 2020, the Fed intervened heavily, cutting interest rates back to zero and purchasing a wide range of debt, both government and private sector issuances, to flood the financial system with liquidity. The government then used a significant portion of this money to provide households with transfer payments, while another share contributed to rising asset prices.

Every household in the US received government aid, but its use varied widely. Some depended on it to cover bills, while others, who could continue working from home, used this "helicopter money" to pay off debt or invest in the stock market. Businesses refinanced at low rates, while their profits soared due to artificially boosted demand financed by the Fed and government. Large corporations issued long-term debt, locking in record-low interest costs for extended periods.

This trend carried into 2021. As the rising money supply caused inflation, price increases spread throughout the economy. During this time, the Fed kept interest rates at zero, maintaining that inflation was transitory. As prices climbed, the real value of debt diminished across the board. Rising CPI eventually led to wage increases, which reduced the relative burden of debt repayments for households and businesses.

Meanwhile, the Fed began raising interest rates sharply, curbing additional demand for new debt. Homeowners stayed in their properties, benefiting from locked-in low mortgage rates, while their nominal incomes rose. Businesses saw increasing revenues due to inflation while their debt burdens remained constant.

In contrast to households and businesses, the government continued issuing debt. As the Fed raised rates, the US Treasury issued substantial amounts of short-term bills, which the private sector eagerly purchased to capitalize on high-interest returns. In a simplified sense, households and businesses deleveraged at the government's expense.

The Biden administration ran recessionary deficits throughout this period, even as the economy expanded. According to the CBO’s long-term projections, deficits are expected to grow, reaching 8.5% of GDP by 2054. That is the concern Paul Tudor Jones highlights: the government is running much larger deficits than the economy could realistically absorb during a future economic crisis.

If the US government fails to attract sufficient buyers for its debt at sustainable interest rates and markets begin questioning its ability to repay, there would be only one actor left to intervene: the Fed. The Fed must then purchase treasuries, flooding the system with cash, which would have two key consequences.

First, it would fuel inflation and erode real bond returns. Second, it would reduce the government’s debt burden relative to GDP. By avoiding bonds, one might argue that Jones is betting this day of reckoning will come sooner rather than later, potentially triggering the government’s "Minsky Moment." However, it’s also plausible that Jones is simply favoring alternative investments. As long as his other investments outperform bonds, his strategy is sound. His view is something long-term investors should consider, especially given bonds' poor performance in recent years compared to other assets.

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For short-term traders, Jones’s comments are less consequential. Since his interview, bonds have hit a short-term bottom and edged higher. Traders who shorted the bond market would have lost money, while those who went long bonds would have seen better returns elsewhere, such as in stocks.

For several weeks, I’ve maintained that bonds have the potential to rally, and I still believe they have more room to go. However, over a longer time horizon, I agree with Jones that bond returns are unlikely to be attractive in real terms or on a risk-reward basis. That said, this scenario will play out over an extended period. In the short term, learn to fly," but they might in the long term.

At the moment, it’s the stock market and Bitcoin that are soaring. Bitcoin hit $100,000 this week, and the stock market reached another all-time high. The markets seem awash with euphoria heading into year-end. While it may be tempting to view this as a precursor to a significant stock market pullback, I believe the rally could continue well into the end of the year.

That said, some caution is warranted. One concerning sign is the extreme bullishness among consumers regarding the stock market. According to the latest Consumer Confidence Board survey, the share of respondents expecting higher stock prices has hit an all-time high. Meanwhile, corporate insiders are net sellers. However, this doesn’t necessarily signal an imminent drop in stock prices. History offers plenty of examples of markets continuing to climb despite similar conditions.

Another reason for skepticism is the exuberance among bank analysts. Their projections for the S&P 500 at the end of next year range from 6,400 to 7,000. This means the most optimistic forecast anticipates another 17% increase in the S&P 500 from current levels in 2025. While bullishness isn’t a definitive indicator of an impending downturn, it’s worth monitoring.

This is more of a consideration for the medium term. In the short term, the stock market is being propelled by the strong tailwind of US consumer spending.

Appetite for travel has remained strong and airport passenger volumes have hit several new highs throughout the year, with TSA logging the 10 busiest days ever in 2024. In a survey last month, Deloitte found that nearly half of Americans planned to travel between Thanksgiving and mid-January—similar to last year—with high-income households and young people fueling demand. Nearly one in five intended to fly over the Thanksgiving or Christmas holidays, Deloitte found.

According to Adobe, Cyber Week—the five days from Thanksgiving to Cyber Monday—set new records this year, growing 8.2% compared to 2023.

Cyber Week (the five days from Thanksgiving to Cyber Monday) brought in $41.1 billion online overall, up 8.2% YoY. It was bolstered by record spending online during Thanksgiving ($6.1 billion, up 8.8% YoY), Black Friday ($10.8 billion, up 10.2% YoY) and over the weekend of Nov. 30 and Dec. 1 ($10.9 billion, up 5.8% YoY). Adobe expects the full holiday season (Nov. 1 to Dec. 31, 2024) to hit $240.8 billion, up 8.4% YoY.

This week’s US economic data also shows no signs of contraction. The ISM Manufacturing PMI exceeded expectations and is improving, though it still indicates a slight contraction overall. Inflationary pressures within the manufacturing index have eased, and employment numbers are rising.

Job openings also surpassed forecasts, highlighting the continued resilience of the labor market. Whether Friday’s Nonfarm Payrolls (NFP) report reinforces this strength or signals potential softening remains to be seen. The unemployment rate will be particularly interesting, which could provide critical insight.

Meanwhile, the US service sector continues to expand. The ISM Services PMI reported an increase in prices paid (from 58.1 to 58.5), although employment and new orders fell short of expectations. Despite some mixed results, the overall takeaway is that the US economy remains far from a contraction. This resilience is reflected in the Atlanta Fed’s GDP Nowcast for Q4, which has risen above 3% annualized growth.

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Regarding monetary policy, a December rate cut from the Fed seems highly likely based on recent statements by Fed officials. Governor Christopher Waller noted this week that current interest rate levels are "significantly restrictive."

Fed Chair Jerome Powell spoke more cautiously, suggesting the economy’s current strength allows the Fed to "try to find neutral," this underscores a key tension. There’s no consensus on where the neutral rate truly lies.

Looking beyond December, the Fed’s remarks suggest a slow, steady path of easing, with analysts interpreting this as quarterly 25bps cuts through next year. This approach aims to loosen policy while maintaining labor market stability without reigniting inflation. However, this balancing act is fraught with challenges; the Fed risks either being too cautious or overly accommodative, especially given the uncertainty surrounding the neutral rate.

If these projections hold, we could see up to 100bps of easing in 2025, which should support both the stock market and the broader economy. With equities at all-time highs and economic growth steady, it seems both are "learning to fly."

In the short term, I believe the rally in bonds and stocks can continue through year-end, with euphoria possibly not yet at its peak. While a Trump remark over the weekend briefly strengthened the dollar on Monday, that move has since reversed. The technical picture suggests that ongoing position unwinding could push the dollar and rates lower. Additionally, falling oil prices continue to provide a tailwind for the global economy.

Whatever you think of Paul Tudor Jones’ claim that we’re in a period of "economic kayfabe," in the short term, markets appear to be perched at the top of the mountain, on the verge of learning to fly. It may take time before the music stops and the Fed becomes the last actor standing to prop up the economy. Only then will it be interest rates that genuinely "learn to fly."

Now, I'm lookin' to the sky to save me, lookin' for a sign of life,
Lookin' for somethin' to help me burn out bright
And I'm lookin' for a complication, lookin' 'cause I'm tired of lyin'
Make my way back home when I learn to fly high

Foo Fighters – Learn To Fly

Have a great weekend!

Fabian Wintersberger

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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.