The Fed Creates the Crises It Rescues Us From | James Athey, Fixed Income Fund Manager

If I could be reincarnated, I would want to come back as the bond market — because you can intimidate everybody.

James Athey has spent over two decades navigating bond markets through crises most investors only read about. He was there for the dot-com unwind, the near-collapse of the global financial system in 2008, the zero rate experiment that followed, and the inflation shock of 2021 that caught almost every major central bank completely flat-footed.

In 90 minutes, he dismantled the way most people think about central banks, bond markets, and the financial system we are all operating inside — whether we understand it or not.

On central banks: James argues the Fed is structurally incapable of getting policy right — not because of bad intentions, but because of bad philosophy. Data dependency is a fallacy. By the time the data tells you what's happening, the window to act has already passed. The right approach is judgment, humility, and a risk management mindset. Instead, we get precision theatre.

Worse, the interventions that were supposed to stabilise markets have created the very vulnerabilities they keep rescuing us from. Easy money suppresses volatility. Low volatility encourages leverage. Leverage creates fragility. Fragility triggers crisis. Crisis triggers intervention. The cycle gets bigger each time.

On the bull market: The stock market keeps going up because it is structurally built to. Passive funds, systematic investors, and momentum strategies are all forced buyers the more prices rise. Retail investors have learned — incorrectly — that equities always recover. That self-reinforcing dynamic is real. It is also, in James's view, dangerous. Not because it will end tomorrow. But because the longer it runs, the worse the eventual reckoning.

On recessions: Suppressing recessions, James argues, is killing the economy the same way suppressing forest fires killed forests. Fire is not the enemy of the forest — it is the mechanism by which the forest renews itself. Creative destruction is not a bug in capitalism. It is the feature. Remove it and you are left with an economy that allocates capital increasingly badly, with no mechanism to correct itself.

"Capitalism without default is like Catholicism without hell."

On emerging markets: Despite everything, James is selectively bullish. Developing world policymakers, constrained by markets in ways their developed counterparts no longer are, have been forced into more orthodox behaviour. That discipline is now showing up in valuations and real rates that actually compensate for risk — something increasingly hard to find in developed markets.

Topics covered: macro vs bottom-up investing, the sustainability of the bull market, benchmark-constrained vs unconstrained mandates, pre-pandemic yield levels, US foreign policy and treasury markets, yield curve dynamics, the basis trade, central bank credibility, Kevin Warsh and Fed independence, the recession fixed income playbook, emerging market debt, hard vs local currency, and what it actually takes to think independently about markets.

Timestamps

0:01 — Introduction and James's path into fixed income

0:09 — Why macro over bottom-up: the intellectual case for bonds

1:29 — Is stock picking still relevant in a world of passive and systematic investors?

5:57 — Why does the market only seem to go up?

6:10 — Momentum, retail behaviour, and the self-fulfilling bull market

9:08 — How sustainable is the current bull run?

12:50 — Benchmark-constrained vs unconstrained funds

16:52 — Could we ever return to pre-pandemic yield levels?

21:23 — US foreign policy and its real impact on treasury yields

26:30 — The yield curve is steepening while the Fed holds rates

33:02 — Why central bank policy frameworks are fundamentally broken

49:32 — How the Fed could go from not buying to buying treasuries overnight

56:14 — Is any of this actually sustainable?

1:01:51 — The recession fixed income playbook

1:19:45 — One piece of advice for understanding macro from scratch

FOLLOW & LISTEN

Website: https://www.1bps.us

Disclaimer: This podcast is for informational and educational purposes only and does not constitute financial, legal, or investment advice. The views expressed by the hosts and guests are their own and do not necessarily reflect the views of Marlborough Group or any of its officials. Nothing in this podcast should be construed as a solicitation to buy or sell any security or fund. Listeners should consult with a qualified professional for specific advice tailored to their individual circumstances. We are not responsible for any losses or liabilities incurred by acting on information from this podcast.