[Week 38 of 2025] Committees, Coupons, and Convictions

Welcome back to Price and Prejudice with a few musings from Week 38 of 2025.

Adding a Dove to the Flock

Here's an interesting paper by Toomas Laarits, Ben Matthies, Kaushik Vasudevan, and Will Yang that studies the nature of group-based decision making at the FOMC. The paper's main point is that committees aggregate models rather than information. FOMC members read the same data and talk past each other because their mental frameworks are fixed and persistent. The committee then tilts toward whichever member’s model best fits the most recent numbers, which improves decisions.

If that’s right, Stephen Miran’s addition matters exactly insofar as the near-term data make his dovish model look right. If incoming data line up with Miran’s model (softening activity without sticky inflation), his alignment and influence rise and the committee drifts his way; if the prints contradict him, he becomes a colorful dissent. But the paper suggests something subtler: it’s not just about “one more dove,” it’s about the option value of an extra model in the room. He does not shift the center of gravity every meeting, but when his framework matches the data, the Fed now has a readymade rationale for bolder cuts. In a sense, he’s a latent pivot point—quiet most of the time, suddenly decisive when the facts break his way.

Phantom Income

One of the first ETF superpowers was fixing the mutual fund tax headache. Mutual funds had to sell appreciated securities to meet redemptions, which meant taxable gains for everyone still holding the fund. ETFs solved this with in-kind creations and redemptions, letting them flush out embedded gains without triggering taxes. That made them look like the logical, tax-efficient successor to the mutual fund.

Now ETFs may also be the cure for TIPS’ “phantom income” problem. TIPS adjust principal with CPI, which the IRS taxes immediately—even though you don’t see that cash until maturity. In inflation shocks it’s even better: you owe taxes on theoretical gains while the bonds themselves are tanking (as interest rates typically coincide with inflation shocks). ETFs fix this by converting the phantom into real distributions: sponsors raise cash via small bond sales or the creation/redemption process with authorized participants, and pass it through to investors. The deluxe version is “no-distribution” wrappers, which suppress payouts entirely and shift the liability to capital gains, which gives you access to lower rates and better timing. ETFs, which started life as tax-efficient wrappers, are slowly turning into tax-engineering tools.

Podcasts

• This interview with Tom Hayes, a former trader convicted of manipulating the LIBOR, covers the recent Supreme Court decision that overturned his conviction. It's a pretty bleak recounting of trading life gone wrong and a reminder that many regulators and lawyers often don’t really understand the mechanics of finance (and, frankly, don’t care).
• This episode on Alphabet is a long but entertaining walk through Google’s big bets and big buys. The theme is how impossible it is to tell, at the time, whether a product will be world-changing or just a weird side project—very on point for the current haze around AI and hardware.