War Games: Zoltan Pozsar And The Echo Chamber

“Looks like the CIA are avid readers of Zoltan Pozsar.”

That’s a real quote from someone’s conspiracy theory about the riots in Brasília last week.

It comes from Twitter, a wellspring of counter-narrative and propaganda. If you use Twitter’s search bar to surface the latest tweets on “Pozsar,” you’ll discover a cornucopia of hysterical nonsense, quite a bit of which has nothing whatever to do with Zoltan’s area of expertise, which is short-term funding markets.

Pozsar took it upon himself in 2022 to pen a series of geopolitical missives — “war dispatches” as he called them. The aim, he said, was to map the evolution of what he dubbed the “New World Monetary Order,” a system of trade and finance built atop commodities, gold and the Chinese yuan.

Pozsar’s pitch is that he’s doing everyone a favor. “Investors are not particularly well trained to deal with geopolitical risk, because for generations geopolitics didn’t matter — anyone who traded securities or ran a portfolio since the end of World War II, did so in the cocoon of a unipolar world order, under the cover of Pax Americana,” he said earlier this month. “The unipolar world order is being challenged. War has been, and will likely remain, a theme until the quest for world order (that is, ‘control’) is settled.”

He’s correct on those points, but it still isn’t clear why Zoltan is the man for the job when it comes to guiding investors through these trying times of ours. I don’t pretend to know what other short-end strategists read and study when they’re not working, but it’s fair to suggest that clients would be wholly perplexed if Pozsar’s counterparts at other large banks stopped penning regular, weekly money market research in favor of sporadic, disjointed forays into war strategy.

Zoltan has always been “different,” of course, and historically, his notes bore almost no resemblance to standard short-end research in terms of form and style. But the “war dispatches” bear no resemblance to anything, really, or at least not to anything you’d expect to come from a bank. At times, they read quite a bit like a brand of rhetorical fusion cuisine popular among self-styled contrarians and day traders. That brand is a mix of paraphrased wire stories, informed market coverage, uninformed macroeconomic musings, conspiratorial narratives, divisive talking points conducive to domestic discord in Western democracies and geopolitical coverage that often echoes Sputnik and RT.

I want to be clear: I’m not (not) suggesting Pozsar is wittingly trafficking in objectionable content of any kind. However, he’s probably aware of the extent to which his avowedly contrarian “war dispatches” are amenable to being hijacked and bounced around the counter-narrative echo chamber. Indeed, pre-war Pozsar owed whatever mainstream recognition he enjoyed in part to that very same echo chamber, where his money market notes gained a cult following for their “inside-baseball” appeal. Now, to the delight of the profiteers and propagandists who run that echo chamber, he’s penning what one strategist at another bank last week called “Russia-centric market narratives.”

Pozsar says he’s just a humble “plumber” trying to better serve clients. That’s surely true — to a point. But often enough in 2022, mentions of “plumbing” issues felt almost ancillary. In his first missive of 2023 (the last in the “war dispatches” series), he nodded to the implications of shifting geopolitics for Treasurys and Fed balance sheet policy.

“The Fed continues to do QT, and so it does the precise opposite of ‘war finance,'” he wrote, on the way to suggesting that dependable sources of Treasury demand may not be so dependable anymore, and that eventually, the Fed will need to support the market. As he put it,

Yes there is $2 trillion in the o/n RRP facility to absorb the Treasurys to come, but Treasurys will have to cheapen a lot relative to OIS (tighter swap spreads) to bring in RV funds, which won’t run positions larger than $25 billion each so they won’t have to report their positions; banks are unlikely buyers too, as they hold lots of underwater bonds in HTM books, and with their reserves down, they are closer to tapping the funding market than funding the Treasury through AFS books; FX-hedged buyers are unlikely buyers too, as they got priced out, and the BoJ will soon “feed” them duration at home; and… geopolitical events last year have fundamentally reshaped global financial flows and reduced large FX reserve managers’ appetite for US Treasury debt too.

That rules out the “classic” marginal buyers, if you don’t count safe-haven demand that might arise from a selloff in risk assets, a prospect Zoltan dismissed with an awkwardly formal hand wave (“…but if there will not be a selloff”).

He warned that in the absence of demand, Treasury auctions might start to tail (don’t tell recent auctions, though) and large tails at Treasury auctions would be conducive to a sense of panic across markets.

The bottom line, he said, is that the Fed will end up instituting some manner of yield-curve control “by the end of 2023.” “The put under risk assets is dead [but] the put under government bonds is about to be born,” he declared, again suggesting that the catalyst may be tailing Treasury auctions or ballooning deficits (presumably necessitated by war spending).

Of course, if you’re looking for a simple reason why US government funding costs might reset structurally higher, prompting Fed intervention, you could blame brinksmanship around the debt ceiling, which Larry Summers aptly described this week as the “dumbest” debate in D.C. But that’s another discussion.

Pozsar continued, noting that any bond-buying from the Fed wouldn’t be designed to support risk assets, but rather to “police swap spreads [and] ‘keep the wheels on the cart’ amid high inflation, growing geopolitical tension and an ugly financial divorce between the West and the global East and South.”

After that, Zoltan apologized — for you, to him. “Finance is about discounting the future, and in finance you can’t get personal,” he chided, adding that,

[My] message to readers is that war is deeply personal, and it naturally forces you to take sides. But taking sides can’t blind your objectivity and judgement when it comes to your portfolio. Don’t be Tolstoy’s “intelligent man” who “knows” that today’s world order is the only possible world order because Francis Fukuyama said so, and, similarly, that US dollar hegemony is the end of financial history.

The gratuitous, cheap shot at Fukuyama was indicative of Zoltan’s penchant not just for lane-drifting, but for swerving erratically all over the highway, with no apparent regard for other drivers. Say what you will about Fukuyama, but I can assure you that Pozsar debating Fukuyama about geopolitics would go about like Fukuyama debating Pozsar on G-SIB surcharges.

My professional readership is comprised in no small part of what I (fondly, by the way) describe as “staid” stewards of capital, where that means financial advisors and wealth managers of various kinds, as distinct from “hard core” Street folk. Almost by definition, then, many of my readers remain intentionally (and wisely) insulated from the daily cacophony. If that’s you, I want to be clear: Pozsar is a somebody. The amount of time I’ve dedicated this week to his geopolitical musings may seem somehow out of proportion. But I can assure you it’s not.

In addition to being a source of web traffic and fawning fascination for financial media outlets and fringe bloggers alike, Pozsar is someone who’s at least loosely connected to the highest levels of monetary policy and finance. Fed officials, current and former, know who he is and in some cases know him personally.

Given that, I find it (highly) disconcerting that he’s now a fixture of the geopolitical counter-narrative echo chamber. To me (and I’m not alone) Zoltan’s 2022 missives seemed biased. Unconsciously biased, perhaps, but biased nevertheless, which made for an amusing juxtaposition with his clarion call for objectivity. As I put it in August, his writings feel like stream-of-consciousness-style manifestos penned by someone longing for a historical “moment” — diary entries from someone excited to bear witness to an epoch.

I’m inclined to give Zoltan the benefit of the doubt, where that means accepting the contention that his overarching goal is to get out ahead of a changing world in the interest of better serving clients (do note, by the way, that Pozsar’s use of “readers” in place of “clients” suggests he’s well aware that the target audience for these notes isn’t rates traders anymore).

But if that’s the case, Pozsar is hopelessly naive. There are two types of participants in the counter-narrative echo chamber where anti-Western geopolitical propaganda is amplified and spread: Witting participants and unwitting participants. All unwitting participants are useful, but the “best” kind are those whose names or titles can be leveraged. “Former New York Fed analyst” might work great in an RT headline, for example. Or how about, “Credit Suisse ‘Oracle’ Says Days Of ‘Dollar Hegemony’ Numbered” for a front-page Sputnik feature?

Those are hypothetical headlines, but there are plenty of real ones. Sputnik published “China Using ‘Petroyuan’ in Oil Imports May Lead to New World Energy Order,” on January 8, for example, and RT published “Freezing Moscow’s forex reserves may dethrone greenback, strategist says,” early last year. Chinese propaganda (e.g., The People’s Daily) has likewise cited Pozsar. Both Sputnik and RT are registered foreign agents (here and here).

Note that RT and Sputnik tend to cite Western media outlets when perpetuating anti-Western narratives. Some of that is just journalistic laziness, but it also adds another layer of faux legitimacy. That is: “See! It’s your analyst and your media! We’re just quoting you!” The Sputnik article cited the UK press and the RT piece cited Bloomberg’s Odd Lots podcast.

The trick, if you’re someone like Zoltan, is to recognize when you’ve been co-opted. It’s not easy. It entails distinguishing between opining on geopolitical matters and inadvertently participating in them through your public observations. If you suspect you’re becoming part of the story, it’s imperative that you extricate yourself. And posthaste.

If you don’t (extricate yourself), you’ll begin to see confirmation bias in everything, and, crucially, you won’t recognize yourself in it. Autocratic governments use your well-meaning attempts at objectivity against you, particularly if you’re a somebody. Your hypotheticals, posed today, can become tomorrow’s real news. If you then cite that news as evidence to support your original theories, the loop is closed. And so is the exit door out of the echo chamber.

In my opinion, Zoltan is an easy mark. His 2022 musings are doubtlessly known to state media machines in Russia, China and, by extension, Iran, and the same notes have been quoted extensively by at least one US-based outlet which the Biden administration has previously identified with the dissemination of Kremlin propaganda.

In my view, Western media outlets would do well to exercise caution in promoting his narratives. If you’re a Western media outlet and you feature his upcoming work, be prepared for your coverage to be quoted by the state propaganda arms of autocratic governments. It happened last year, and it’ll happen again if the Western media puts web traffic over principle.

Again (and I think I’ve made this abundantly clear), I’m not suggesting that Pozsar is a witting accomplice of any kind, nor am I casting any sort of aspersions at his employer. Indeed, the whole point is that he may be unaware of the dynamics. As noted above, it’s difficult to accept the idea that he’s totally oblivious to where excerpts from his notes might’ve landed last year, but to be fair, he can’t control that.

On January 6, while lobbing veiled criticism at a famous political scientist and imploring readers to preserve their objectivity, Pozsar exhorted, “Keep an open mind.” RT’s tagline is “Question more.”


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