Financial Odds and Ends
Federal Reserve Just thirteen days before the September FOMC meeting and the markets don’t know what the Fed is going to do with Fed funds. CME futures are almost evenly split between stand pat and a quarter point hike.
Refreshing!
Treasury 1,000 Days Of Milei
“Argentina had spent years attempting to solve fiscal problems through increasingly creative monetary solutions. The outcome was predictable.”
Someone should tell TSec Bessent.
Taxes The IRS just sent a $43 billion ‘Trump bump’ to millions of Americans
As if this were something to celebrate. America.gov giveth with one hand and taketh with a hundred others. Tax refunds are but mere table scraps from the federal feast. The money the feds are borrowing for deficit spending is money not available for mortgages, car loans, rent or groceries. The hapless consumer is competing with the federal behemoth for loans. You can read countless articles bemoaning rising interest rates and unaffordability without encountering one that connects the dots.
Dear reader, expect economic enlightenment from the financial media at your own risk!
Markets Markets have played out essentially as Synthetic Systems projected at mid year. Stocks have rallied and gold has rallied. From here SS projects a decidedly different regime, with stocks turning weak in the vicinity of the autumnal equinox through around the mid term elections, while bonds find a temporary respite from their bear market.
Markets may have no idea what the Fed will do, but we know what it should do. Hike. Over five years of inflation well above the Fed’s own inflated 2% target. Unemployment running near five decade lows.
I think it will hike. This will be Warsh’s third time at bat. He’s laid down the gauntlet. If there is no hike, buy gold and commodities with both hands.
Might the Fed defer in light of the closeness of the upcoming mid-term elections? No excuse. Wait until the eleventh hour then plead it’s too close to twelve?
Three strikes …
I would like the Fed to very aggressively reduce its balance sheet thus removing money from the system. I think that is more important than raising the Fed funds rate. Beyond that, maybe raise the reserve requirement at the banks. Money and credit are too plentiful and too cheap.
I believe that’s on Warsh’s agenda. The pace of buying has been slowing if not halting … a likely step towards outright sales. I’d prefer the Fed get out of the rate targeting game altogether, but rate hikes would be a step in the right direction. It should cleanse its balance sheet of anything that’s not treasuries or gold post haste.
https://www.schiffgold.com/exploring-finance/the-fed-has-added-344b-in-treasury-bills-in-a-year
“The pace of accumulation has slowed in recent months, and was even negative in August.”
Fed rate policy is particularly significant right now because it is the enabler for Bessent’s Treasury shenanigans. Bessent’s shifting of long term to short term debt would raise short term interest rates if it weren’t for the Fed’s thumb on the scales. Bessent is taking advantage of the Fed’s suppression of short term rates to cover the effects of massive federal borrowing. Rate suppression foments money creation.
No excuse for Bessent either. If he seriously wants to keep a lid on interest rates, instead of tricks and gimmicks he should be using his bully pulpit to agitate for cutting deficits at every turn.
He is Trumps man…………..wot do expect?
Mike
Lol I expect him to be a target for criticism!
Coulda said the same for Trump himself. He begs for lower interest rates, but will do anything except what would actually help get them.
Bessent is a financial guy though and should know better. No excuse!
So this morning’s payrolls report raises the market pressure on the Fed to hike. (Never mind that payrolls data is way overrated by financial media and that far more meaningful unemployment rate data remained steady.) Trump responds by threatening to cut off trade with countries with whom the US runs a trade deficit unless the Fed cuts.
This is not Trump’s strongest suit. Trump spent a lifetime as a real estate developer and only sees the interest rate proposition from the standpoint of a borrower. There are two sides to every trade and what benefits one hurts the other.
It could well be counterproductive anyway. As much as Warsh might like to please the president that appointed him, he equally wants to demonstrate his independence. No one knows better then he how vulnerable his credibility is to even the appearance of political bias.
High fuel prices could stoke inflation, at least in the short term, economists warned.
No they won’t. This is junk economics of the lowest order. High fuel prices do not cause inflation. They are a way station along the road from monetary excess to final consumer prices.
“Financial Odds and Ends”
“Picture a 64-year-old with $1.2 million invested in Vanguard’s flagship S&P 500 fund. They chose it for broad diversification: roughly 500 companies in a single ETF. Then they open the latest shareholder report and find that 38.0% of the fund is concentrated in one sector. On a $1.2 million balance, that amounts to roughly $456,000 invested in Information Technology. For an investor who assumed 500 stocks meant limited concentration risk, that exposure deserves a closer look.”
The first mistake was putting the entire portfolio in one asset class. Stocks. Failing to diversify within that asset class was the second mistake. Of the entire world of stocks, the investor singled out just one country, the United States. Then within that subset of stocks, choosing only 500 of the biggest and most popular, leaving thousands of others on the table.
To avoid this problem, the investor could have added other funds to cover small caps and the rest of the world. Or instead of VOO, chosen VT, which is virtually every tradable stock in the world, including, but not limited to, the S&P 500. This would still not be adequately diversified however, because it’s still in just one type of security, common stocks. Proper diversification demands at least some exposure to bonds and commodities. This could be easily remedied with the addition of GOVT, COMT and IAU. Other ways are explored in Model Portfolios.
Diversification does not mean underperformance. It happens that the Model Portolio mix of 3:1:3:1 VYM:VFMF:VYMI:VSS outperformed VOO (S&P) over the past year at 21.52% versus 18.22%. VT outperformed at 19.22% versus 18.22%. IAU outperformed at 19.84%. COMT outperformed at 37.43%. Only GOVT underperformed at -3.73%. With the same percentage of bonds, the Model Portfolio as a whole outperformed an 80:20 mix of VOO:GOVT at 16.51% versus 13.76%. With the same percentage of stocks, the Model Portfolio as a whole outperformed the traditional 60:40 mix of VOO:GOVT at 16.51% versus 9.44%.
Even these figures understate the outperformance because they are price returns only. Because the Model Portfolio stocks funds yield considerably more than the barely 1% offered by the S&P, total returns outperformed by a higher margin.
The model portfolios were a useful template to think about and rebalance my exposure earlier this year. I haven’t done a like for like comparison but the diversification appears to be working.
Being with Vanguard in the UK the offerings were limited to their own range. So used a different platform to get exposure COMT and oothers.
In a sign of the times, Vanguard have introduced VXUS (All-World ex-US) along with VALL (Global All-Cap) and VSML (Global Small-Cap) based of FTSE and all three are proving to be popular. In Trading212, having vaulted into top-10 most boughtsecurities, their respective positions are 1st, 4th and 10th (as of Aug 25th).
Slight error in the rankings above. VALL is 1st, VXUS is 4th and VSML is 10th.
Thanks for the UK fund info. Alas the Model Portfolios are not as useful for non-US investors as US. In any case you have it exactly right; they’re more of a starting point or template to illustrate a multi-asset-class approach and how to avoid the concentration risk in an S&P 500 stock allocation. As the above linked article indicates, many US investors are led to believe they can just buy an S&P index fund and be diversified when in fact they’re highly concentrated in one small group of large stocks.
The stock part of the Model Portfolios flattens this out by vastly expanding the number of stocks (to over 10,000) and the geography from one country to the world, and substituting part of the market cap weighting with dividend, quality and value factors.
For non-US investors, it may be solving a problem they don’t have, and including funds not on their investment menu. The principles apply everywhere though.
The Model Portfolios are designed for the long view and don’t reflect any adjustments for the short to medium term outlook or for individual circumstances or preferences. A final caveat for non-US investors; they may want to replace at least some of the US Treasury allocation with sovereigns denominated in their own coin of the realm, to the extent they aim to limit volatility as seen in their local currency. The bond allocation in the Model Portfolio is, unlike the other asset classes, deliberately limited to domestic securities for US investors. At 80%, the equity and commodity allocations provide plenty global exposure, with the 20% bond part the sole nod to home bias. Bonds denominated in other currencies aren’t truly “fixed income” with an intervening currency translation.
Good point on the bond component. My bond allocation is split equally between the UK and the US though.
Just what I would do, fwiw. US Treasuries are still a global asset, and splitting the difference acknowledges their place in the global market portfolio as well as the role of domestic bonds in buffering nominal portfolio volatility.
COMT btw has been burning up the tape since I highlighted it last December. I have a permanent allocation but at some point will move from overweight to underweight. I don’t know yet when that will be but be aware it can fall just as hard as it can rise.
The S&P 500 is at a near-record high. Here’s what history says every long-term investor should do right now.
“It is difficult to describe the emotional drain of holding stocks during a bear market. The value of your portfolio gets smaller day after day, increasing your fear that, eventually, you’ll have nothing left. It’s brutal, but history is very clear that the market will eventually turn higher again.”
So now past performance assures future results?
Is it a good time for an old quote?
“Markets can remain irrational longer than you can remain solvent”
Invest not for the rational but for the possible.
Bessent Triples Debt Buyback But Market Shows Disappointment
Idiot.
When what you’re doing isn’t working, do more of it?
https://www.msn.com/en-us/money/top-stocks/s-p-500-ends-down-as-oil-tops-100-per-barrel/ar-AA2bUAKJ?cvid=6aa2207a50e240e9b4c85a71b4f50d6c&ei=13
“The yield on the benchmark 10-year U.S. Treasury note climbed to its highest since November 2023 after the Treasury Department said it would buy up to $6 billion in 10- to 20-year government bonds.”
Nice going, Mister Secretary. The more desperate Treasury appears, the higher yields go.
Why can’t the US get competent TSecs? Mnuchin whiffed on the opportunity to sell long term debt at much lower yields. Yellen said “Go big” to running up debt. Now Bessent, a guy with a solid financial background, throws gasoline on a burning bond market.
The irony of the US Treasury, over $40T in the hole, presuming to buy Treasury bonds is not lost on the market.
Paying off the house with your 401(k) feels smart but can cost six figures. These 3 ETFs are why you keep the money invested
This article concludes that tapping your 401(k) to pay off a mortgage isn’t a good idea. I agree with the gist of the conclusion, but the reasoning is full of holes big enough to drive a truck through.
They are basic math errors in which unlike variables are compared as if they were the same. Quick … if you start with six apples and subtract four oranges, how many bananas will you have left?
This is essentially the kind of math involved in comparing past stock returns with future interest costs. To wit:
“IVV’s 324% decade return and DGRO’s dividend nearly doubling since 2014 make liquidating either fund to retire a 5% mortgage a costly trade.”
This is faulty logic. That 324% return for IVV (an S&P index fund) is for the past ten years. It is not comparable to the 5% interest cost that would be saved in the future on a mortgage.
There is no way to capture that bygone IVV return on any decision made today. But not paying 5% interest over the coming years on a mortgage is something that can be done in real life.
Money saved by paying down debt compounds just the same as money earned on investments. Paying down a 5% mortgage is a certain return. What you might earn by investing in stocks is not. If it were possible to achieve a certain return on any investment greater than what you’re paying on your mortgage, why is your lender even bothering to lend to you?
I have personal experience with this. In 1998 I used exactly this reasoning to sell off all our portfolio investments to pay off our mortgage. It was one of the best financial decisions I ever made. Had I just looked at what the stock market had returned over the past ten years and compared that with what I would save by paying off my mortgage, I would not have been able to retire in 2005.
In reality, the legitimate reason to be reticent about liquidating 401(k) funds to pay down a mortgage has more to do with taxes and limits on one’s ability to replenish 401(k) funds. But it’s far from the slam dunk decision this article implies. The “invisible” costs it refers to are worse than that; they’re imaginary. If you try to subtract four oranges from six apples you’re bananas.
Couldn’t agree more.
Another variant of this type of comparison is to rent and invest cash that would’ve gone into a house deposit and capital repayments in stocks.
Ultimately, it’s one’s own decision to make as some value the freedom from mortgage payments more than investment returns.
More rear view mirror investing:
SCHD’s 3% yield hides a $216,000 decade-long performance gap investors miss
“Holders of the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) who sank $300,000 into the fund ten years ago and reinvested every distribution ended August with roughly $1.03 million.”
The article does not justify its assumption that SCHD investors “reinvested every distribution”. To the contrary, most invest for the income. It’s as if the writer expected you to buy a rental property and let tenants use it for nothing on the hope you will make it up by selling at a profit years later.
That’s basically the proposition offered by high price low dividend growth companies. Let us use your capital for nothing, trust us, we’ll grow it for you. A gullible public bought this kind of pitch in 1999 and lost money over the next ten years.
“The real bill is opportunity cost. From the completed month-end window of August 31, 2016 through August 31, 2026, SCHD returned 244.45% on a dividend-reinvested basis. VOO returned 316.54% over the identical window.”
A rear view window, to be honest. The possibility that the last ten years aren’t representative of normal markets and shouldn’t be expected to be repeated for the benefit of an investor buying now seems not to have been considered.
Another writer takes a different view:
This 0.06%-fee dividend ETF is beating the S&P 500 by 16% YTD without owning a single Magnificent Seven stock
Bessent’s Bazooka went over like a lead balloon. Treasury was to “buy back” $6B of longer term bonds today between 2:00-2:20 PM EDT.
Overall, Treasury (GOVT) prices fell from yesterday’s close of $22.29 to close today at $22.17, a drop of 0.56%. That’s a big drop for a fund weighted by market cap and skewed toward short term maturities. The longer term (10-30 year) fund VGLT was down 1.18%. The ten year yield rose 12 bp to 4.95%.
The absurdity of Bessent’s machinations is thus: It boils down to buying Treasuries so it can sell them cheaper.
A loss of 0.56% on a $40T market comes to about $224B.
Time for a new TSec.
Maybe Liz Truss is available.
Putting the bond bear in perspective:
First let’s look at a one year history. Looks pretty bad, don’t it?
Now let’s zoom out to five years. This media styled bond apocalypse looks like a teddy bear compared to the 2021-2023 grizzly.
Another facet of media treatment is worthy of note. Back then it was Putin’s fault. Now it’s Trump’s. Years of monetary and fiscal excess are reserved for the fine print.
For those of us who prefer bull markets …
Interesting news from Yahoo … apparently the only decision on the Fed’s agenda this week is whether to cut rates …
Why a hotter CPI could deepen Fed divide on rate cuts
“… to break down the latest inflation data, what it means for the Federal Reserve’s rate-cut decision …”
While Wall Street media remain stuck in auto-cut mode, markets think the Fed will hike and I agree.
Media have an intuitive grasp of the obvious, a skin deep sense of the proximate causes of increasing consumer prices. Two commonly cited culprits are the war causing energy price increases and the AI buildout causing materials price increases.
Look deeper and it’s always the same though; monetary profligacy. Or it’s just a mere coincidence that these phenomena arose after years of ultralow rate policy and money printing. Step into the Wayback Machine and recall that it wasn’t that long ago we marveled at trillions of dollars worth of debt priced so high yields were negative. A few voices warned there would be consequences. but they are now forgotten.
Is it possible that easy money could have fostered a sense that resources were so abundant that the cost of war seemed trivial or that all that was needed for an AI utopia was clever information processing? That too easy money might have just as negative effects as too tight money seems not to have been considered. Cheap capital is tempting to squander.
In the monetary world, you can have anything you want by printing up the money to pay for it. In the real world, resources are finite … choosing things like war or an information processing revolution means having less of others like affordable food and shelter. A worker building weapons or data centers is a worker not building homes.
Media are also making a big deal out of the ten year treasury yield breaking above 5%. Yawn. Wake me up when it breaks 6%.
It will get there. But not soon. The most likely course for yields near term is lower. Too many bears, too far too fast. What’s more, if as I expect the Fed hikes rates tomorrow it will reassure markets it’s serious about reining in inflation. That would take pressure off of long term rates. Now only if The House at Treasury realizes his negative balance leaves him unempowered – he’s not sitting on top of a mountain of assets, he’s at the bottom of a canyon of liabilities – and stops trying to play tricks with the market. The way to take pressure off yields would be to use his bully pulpit to exhort his boss and congress to start tapping the deficit spending brakes.
So over the next several weeks I expect treasury prices to trade higher and yields lower. But some time before 2030 expect the ten year yield to exceed 6%. The secular bear market in bonds is still a cub.
The House
I watched Warsh’s recent remarks from Jackson Hole. He opened with personal stories about walking in that local resort area with financial people in the woods for recreation. It was odd – kinda forced and awkward. But it provided him an excuse to use the word “hike” a few times. It was so odd and, well, not a good story, that I can’t help but wonder if he was intentionally using that word to seed the AI engines and algorithms to prepare the public for a coming increase in interest rates.
Somewhere near your 6pct levels I may start buying CD’s and turning my back on all but the best equities. After the widely expected upcoming market corrections, the next ten year bull cycle in stocks falls outside my planning horizon because I’m old.
Likely very intentional, as we referenced here, along with the full quote:
https://financology.net/2026/07/29/fomc-2026-0729/#comment-10604
Hiking at this point could be styled as more of a defensive than offensive maneuver. To questions like what if the Fed hikes, we could counter what if it doesn’t? The bond market has already been hiking, and if the Fed is seen to be soft on inflation – especially after all the tough talk – it could send the already skittish bond market into a tailspin.
“The Fed is widely expected to raise its benchmark rate this week, but that won’t open the Strait of Hormuz or get rid of tariffs.”
“The Federal Reserve can’t open the Strait of Hormuz and it can’t get rid of tariffs. Can it fight inflation stemming from those sources?”
The whole premise rests on a tacit assertion: That inflation is caused by the closure of Hormuz and tariffs.
The article makes no attempt whatsoever to support this premise.
What’s more, it’s false. The closure of Hormuz has caused a supply disruption. That in turn has caused real prices to rise. It has nothing to do with inflation, which is a decline in the value of money. Tariffs don’t cause inflation either, as we showed in Tariffs Are Not Inflationary.
It’s remarkable that tariffs are tarred with the inflation brush, even as sales taxes, environmental regulations, employer medical insurance mandates, and minimum wage laws, all of which have the same effect on final prices, are not.
Assuming that the price of oil is only a function of supply and demand for oil is a common error. The price of oil involves not one, but two, commodities … the oil and the currency it’s being priced in. For striking evidence, just compare how the price of oil has risen in dollars with how it’s risen in lira or pesos. The Fed cannot control the value of oil but it can control the value of the security it issues … the Federal Reserve Note aka the dollar.
It’s also noteworthy that consumer price increases – which the article equates without justification to inflation – are in 2026 lower than they were in 2022, when Hormuz was wide open and long before this administration’s tariffs.
In light of the facts, it’s at least incumbent on the media to justify its assertions, unless the intent is not to educate but to propagandize.
This is inexcusable for a source which poses as a neutral reference on economics. Shame on you Investopedia.
Does this mean the Fed shouldn’t hike? Not at all. We have price inflation now because the Fed printed trillions of dollars and held interest rates near zero for years, culminating in a monetary extravaganza in 2020-2021. It didn’t finish cleaning up back in 2022-2023 – it even cut rates while consumer price inflation never came back down to its target – leaving it more work to do. Even the AI bubble the article acknowledges, but treats as an external cause, was inflated by easy money. Not only commodity prices but stock prices have been inflating like there’s no tomorrow, so it’s hardly just Hormuz and tariffs. Even if there are other sources of price pressures it doesn’t let the Fed off the hook for its part.
“But these economists worry that a rate hike could cause a sharp cut in economic activity, which could prompt businesses to let go of workers and ultimately lead to a recession.”
That wouldn’t make it a “Fed mistake”. If you let inflation run hot for years and need a recession to change the trend, then where was the mistake? There sure have been mistakes all right, but they were in letting the inflation cat out of the bag in the first place. It is obtusely simplistic to refuse to trace effect to cause back more than one step.
The recession Wall Street is truly worried about is a recession on Wall Street. Main Street is struggling with affordability. Who do you suppose “these economists” are working for?
I contend that if stock prices came down 20% or so and stayed down for a while, consumer price inflation would dissolve like sugar in water. Possibly in its bones the financial industry suspects the same, but the likely hit to its gravy train takes precedence in its rhetoric. This is why we have inflation. Powerful interests benefit.
“For the Fed to raise rates and then have to reverse course and cut rates in a few months would be seen as Warsh having “a very unsteady hand on the tiller.””
If so, only because years of dozy nonresponsiveness have conditioned the financial establishment to expect monetary policy to come only in long periods of well telegraphed unidirectional moves. A Fed that responds to the data will change its mind when the facts change.
The bond market resets interest rates tick by tick. It raises and lowers them on a continuous basis. Says the Wall Street Journal, “Bond yields could come down as fast as they’ve climbed“. If the real world can respond to the data, why not the Fed?
Financology Model Portfolios followers with find a familiar ticker here: VT. It forms the foundation of the stock portion of every model portfolio. It is by far the fund that best represents the asset class we call “stocks”. It’s especially useful in a portfolio whenever one wants to allocate to or increase or decrease one’s allocation to “stocks” without doing anything else like betting on certain sectors or geographies.
In our more sophisticated model portfolios, we add some other funds to emphasize dividend, quality and value factors and moderate exposure to supercap tech, but VT is always the core starting point.
A drop of oil lubes stock market rally
Why the Currency Hedge Actually Matters
“Americans who buy international dividend funds get two returns embedded in one line item: the stocks and the currency.”
This is an illusion and a myth. They receive only the returns of the stocks.
To understand why, first consider what happens when they buy an American fund. The nominal returns received are USRRTN/USD. That is, the returns of the stocks relative to the returns on dollars. The real returns are just USRRTN.
If they buy a Japanese Nikkei fund, they receive nominal returns of RJP/USD. The real returns are just RJP.
Where does the illusion come from that currency is involved? From the practice of reporting RJP/JPY. That is, the Nikkei is quoted in yen … different units. That’s like comparing someone’s weight in pounds to someone else’s in kilograms. To make a proper comparison, you have to put them in the same units. To convert to RJP/USD, you need to factor in the relative currency returns, USD/JPY:
RJP/USD=(RJP/JPY)(JPY/USD)
Now we have returns in the same units. There is no reason whatsoever you couldn’t have just started with RJP/USD. The illusion that there is a currency component to the unhedged return is created by having used different units to report Japanese stock returns in to start with. That assumes, with no rational basis, that the real return on Japanese stocks is the one quoted in yen, and that the return on Japanese stocks quoted in dollars is somehow less valid … even though you assume it’s perfectly valid to quote US stock returns in dollars.
The real return in both cases involves no currency … for US stocks it’s USRRTN, and for Japanese stocks it’s RJP. You just have to choose units if you want to put numbers on them.
The bond market this morning is getting hammered by surprisingly strong PMI reports and commodity prices, throwing cold water on our bond rally call. It either lasted only a week, hasn’t started yet, or is just plain wrong. My best guess right now is that it’s a mix of all three, with GOVT having breached last week’s lows and the ten year yield poking back above 5%. The seasonal lows for GOVT likely still lie ahead.
In any case the spillover to stocks and metals is worse than bonds themselves, sharply down in dollar terms. The only bonds doing well this morning are the very short term as represented in the 0-1 year funds SHV and TRSY.
The ten year yield is now hitting 5.095%. GOVT down to $22.04.
5.125%
$22.00
I might have to hold my nose and buy a little more GOVT. Down 0.83% since yesterday’s close, a massive move for a mild maturity widows and orphans Treasury fund. It’s a blood-in-the-streets moment in Bondland.
Gold is getting hammered too … down 1.76% to $4284. so maybe a bit of IAU as well.
Stocks have sold off sharply too, but not enough to buy yet.
A word on the significance of this move. US Treasuries are the basis of the pricing of every financial asset that represents future US dollars. With the assurance that they will pay the promised dollars of interest and principal (though no promises about the worth of those dollars), their yields are the purest expression of the time value of money, and therefore the discount rate that is applied to future cash flows. And since the bond bear is worldwide, it extends far beyond US assets.
Cash flow valued assets include stocks. The increase we’ve seen in discount rates corresponds to a larger decline in stock prices, because they are longer duration assets than treasuries as a whole. This underlies my remark that stock prices have not yet declined enough.
This article adds some color:
I did ultimately add a little GOVT this morning. I’m not pounding the table on bonds, but they’re unquestionably more attractive at these levels than those of three months ago. So I’ve taken my position from more underweight to less underweight.
Stocks (I’m looking at you, hyperinflated hypercaps) alas are not yet ready for prime time. The financial rug has been pulled out from under them but they don’t quite realize it yet … like Wile E Coyote having run off the edge of the cliff but not having yet looked down.
The 10-year Treasury pays 5.2%. The S&P 500 only needs 4% earnings growth to keep up.
You can always count on the folks at Motley Fool to find reasons to hand over your hard earned cash to Wall Street and Silicon Valley. Here they compare money Treasuries actually pay you to money stocks don’t.
Earnings are when the company sends you a note telling you how much money you made.
Dividends are when it sends you the money.
30-year Treasury bond yield scales to highest level since 2002
Well the long bond has now been bombed all the way back to 2002. The one year is over 4.5%. The five year has breached 5%. The ten year benchmark, long touted to sport a red line at 5%, is now over 5.25%. There are no bright lines, but 5.25% has been the most significant level I’ve been watching. Next one, 6% …?
It’s noteworthy that the latest increases over the past two weeks have come as oil prices have been flat to down, so it’s not oil alone that’s driving the treasury plunge. Nor is it the Fed, because it’s no longer telling us what it’s going to do, leaving that question up for speculation. If anything, the rise in treasury yields will be leading the Fed.
It’s all about supply. Treasury has been borrowing like a drunken sailor, and it’s recently been joined by Big Tech, adding its own bond supply to the mix. Feckless mortgage seekers are drowning in big league competition, and the Fed’s only contribution is to refrain from accommodating explosive borrowing demand with an inflationary surge of money.
Rock meets hard place.
The bond bear continues today. GOVT – the broadest single measure of treasury prices at our disposal – is down to $21.85. Treasuries have been in a secular bear market since 2020, opening with a massive plunge from July 2020 to October 2023. That cyclical bear market makes even the recent selloff look like a mere ripple … see my 0911 comment above. And GOVT still hasn’t quite reached the lows of October 2023.
So any temptation to blame the bearish action solely on 2026 developments is misplaced. But we know they are contributors. The latest cycle down began at the end of February, when the Iran war started. We have to interpret even that with caution though, because by far the steepest drop began from a peak on August 25. That this was just after the announcement of a new round of sanctions and just before the opening of the Jackson Hole conference may or may not be meaningful. And whether or how much of the cyclical bear since the end of February can be chalked up to rising oil and commodity prices and whether or how much of it can be attributed to the impact of the war on deficits is a matter of speculation. My sense is both are meaningful contributors.
Though these observations apply directly to the US market, the bond bear is a worldwide affair. American, European, and Japanese governments have all been through an era of excessive monetary and fiscal profligacy and all are swimming in red ink.
Bonds down (yields up) again today. They rallied earlier on a perceived soft jobs report, media chatter chalking it up to a reduced likelihood the Fed will raise rates. But in a classic case of the trend whose premise is false, they gave up those gains and turned lower.
Wall Street spins stories to support its easy money addiction. The Warsh Fed has made it abundantly clear that it’s focused like a laser on inflation. The road to sustainable attainment of its employment goal is paved with price stability.
It’s also made clear it’s listening to the markets. Wall Street media’s obsession with what the Fed will or won’t do serves its desire of having a central planner do its bidding. That paradigm is past its sell by date. The bond market is in charge.
These yields are quite something now.
In the UK the 30 year gilt is yielding 6%. The highest since 1998. The Ftse is hanging on but looking vulnerable. How high can US yields go and how long can the global stock markets ignore it for.
It’s a watershed, confirming what we already knew, that the post crisis era of ultralow rates is over. We’re now back to historically normal rates.
There are more shoes to drop though. Your suggestion that stocks have yet to reflect it is spot on. And then there’s the matter of all the debt that those years of ultralow rates encouraged … the hangover will be epic.
US reportedly to offer USD 4bln loan to Vistra (VST) to support nuclear production
Something rotten in the state of AI …
Let’s try a little exercise in dot-connecting. I’ve been writing about the government’s game of reverse robin hood … this is just one more arrow in the quiver. A subtle shifting of the cost of powering data centers to the taxpayer … a behind-the-curtain subsidy to the world’s richest corporations.
They’re more than capable of financing their own power plants, thank you, not offloading their costs to J Q Public.
The family struggling to pay its electric bills is helping to pay Alphabet’s, Amazon’s, Meta’s, Microsoft’s …
Let me add some context. I’m a free market guy. A free economy is best system we have for efficiently allocating the available resources to the most human satisfaction. But it depends on economic actors seeing the full costs as well as the benefits of their decisions. When it is possible to externalize costs, the premise fails.
Worse yet, the prevailing myth is that free markets unfairly concentrate wealth and that government needs to step in to counteract this tendency. Capitalism produces inequity and therefore socialism is needed. This is an ad for more government; it will play robin hood and correct the failings of the free market.
But that’s only what government does in front of the microphones, in the spotlight. Backstage, behind the curtain, it’s doing the opposite, playing reverse robin hood, working for its corporate masters. We don’t have free market capitalism, we have socialism for the rich.
That’s how this happens.