U.S. Just Started Fighting Its Own Bond Market

The U.S. bond market is the bedrock of the global financial system, but now the United States finds itself fighting its own system. Now, for years, we've been talking about this exact trap, right? We've been talking about the proverbial rock and the hard place, where a government has too much debt to tolerate these high rates, but forcing rates back down, it comes with a cost somewhere else. Now, we've always known that the math eventually forces a choice. What we don't know is when. Well, last week, I think we got the first real signal. We saw the 30-year Treasury yield push all the way up to 5.31%. That may not mean a lot to you, but we saw the Treasury rush in immediately, and they doubled the size of its long-end bond buybacks. Then head of the Treasury, Scott Besant, went on TV, and he said the part basically straight up. He said, part of this is signaling. Now, what is that signaling? Well, the buybacks, they haven't even started yet, but all the smart money, all the insiders, they're already front-running the market moves. Now, they're doing this because they're reacting to what Washington just told them, basically what they're willing to do next. Now, there's two ways to read this news. The first is that is this the first move in a much bigger policy shift? And if so, then, of course, waiting around for more confirmation could mean missing a large part of the move. But is this a temporary market adjustment? Because then chasing that move can now be exactly the wrong thing to do. So in this video, we're going to break it down. I'm going to show you, was this Washington's signal or blip? What are the markets showing us about what comes next? What I think Besant is really trying to accomplish with $40 trillion of debt. And three signals that I'm watching to tell me whether this is the beginning of something much bigger or if it's just a blip. So let's go. All right, we're going to jump right in because we got a lot of charts. I'm back to the whiteboard here. It's been a while since I've been on the whiteboard. Hope you love this. I got a bunch of charts. I'm going to show you a lot of data because they blinked. To me, this is a big sign, but I'm going to show you which way you should fall on this. Okay, so they blinked. What I mean, Washington blinked. We find the place of pain, of maximum pain, where the Fed, the Treasury can no longer sit on the sidelines. They can't take any more pain, and they move in. That's the blinking line. And basically, the U.S. is now finding itself fighting its own bond market. So the U.S. government bonds are the bedrock of the global financial system, as we talked about, and they're fighting the bond market. I'm going to set all this up for you so you can understand what's at stake right here. And just so you can kind of see what's going on, we're talking about the long bond, which is the 30-year bond. Now, a couple things I want you to see here. So this is 2020 right here, where we had to drop rates all the way down. And you can see this trend that we've been on. As you can see, it's a pretty strong trend. We're talking about this move right here, but we're at the highest rate that we've been on for a long period of time. But of course, as we always say in the market, I say all the time, zoom out and let's take a look at a bigger picture. This is the trend going back into the 80s. And I drew these green lines here so you can see the channel. And so we've been in this descending channel this whole time. And for any of you charters out there, technical analysts, you can see that, well, it's either going to break down or break up. And of course, it broke up here. And now the trend, this, it's a four-decade trend. The four-decade trend is reversing and we're going back up. This is what the US government is fighting. They're fighting this trend of bonds continuing to go higher and higher and higher. Now, a couple things happened. And again, we need to take these things seriously because it's the signal. All right, what are we talking about? The US Department of the Treasury put out a press release, talking here, announces increased sizes of nominal long-end, long-end, so the 30-year, long-end liquidity support, buybacks beginning September 9th. So first of all, starting September 9th. I don't know when you're watching this video, but that hasn't started yet. September 9th is in the future. So nothing's actually happened. They just announced it. Come back to that. This was August 19th. Okay, increasing buy at least double. Not just increasing a little bit. They're already planning to not resume it, not increase it, increase it by at least double, double the size of liquidity support, buyback operations, and for longer-dated Treasuries. Okay, at least $4 billion per operation, per intervention, not $4 billion total, just per operation. And this is effectively, again, September 9th. Okay, so that was the announcement. But here, we see Scott Pescent. What a time that we're alive in. It's pretty amazing where you have, like, the President of the United States, head of the US Treasury, like, talking directly to the people, not just on the news, but directly on Twitter. Let's hear what he has to say in this clip right here. We have a big toolkit, so we'll see. And part of it is signaling here, and to show that we believe that the yields don't reflect the underlying fundamentals. All right, so you heard it out of his mouth. We're sending a signal. Well, what signal are they sending? What are they trying to tell us? Well, I'm hearing it. Are you? Okay, so the signal is basically that they are ready to jump in. They've reached max pain. That 5.31 level, that was their pain point. Okay, so now we know, now the market knows where the stop is. That's what they did. This is our signal. We're coming in. Not just coming in, we're coming in hot. We're doubling it. Okay, now how high could this go? Well, we can see here, Pescent could tap nearly $1 trillion in the TGA, Treasury General Account, to fund bond buybacks. Sources say, how? To help fund purchases of government bonds, Pescent has built up the TGA, Treasury General Account, to about $1 trillion. The Treasury surprised markets last week by doubling the size. So the Treasury surprised the markets. The market weren't ready for this. The market didn't expect them to come in and do this, but they did. They came in super hot. And as I said, Pescent himself said it. This is the signal. The TGA, Treasury General Account, is the ammo of how they're going to protect this. Okay, so again, let's take a look at this cheap TGA, just so you can see the Treasury General Account. Think of this like the checking account for the Treasury, right? This is how much money they have. And we did have a high back here after 2020, of course, after, you know, whatever, $10, $20 trillion of stimulus was printed. It's been spent down through the Biden years, and now it's refilled and ready to go back to, yeah, buying government debt. All right, let's take a look at this. We can see that the markets were listening to this signal. Question is, were you? He said it, right? Scott Pescent said, this is the signal. Hasn't happened yet, but they were paying attention. Now, the key piece here is that the money hasn't even moved. This doesn't even go into effect until September 9th. Doesn't matter, the markets are already front-running this, right? So they see what's happening. They go, oh, he said it's a signal. He showed us where the line is. Now we see what's going on. We see the $1 trillion here. Okay, game on. We're not going to wait for them to move. That's what retail does. Not you and I, right? We front-run it. Okay, so we can see a couple charts here. Let me show you these. When I say the markets are front-running, what am I talking about it? So here we have Bitcoin. My favorite asset, of course, has been dead. It's dead. It's been dead. You know, I don't know, it's the 190th time it's been dead. All the analysts are talking it's going to go to $20,000, $30,000. Some say $10,000. Here it is, dead. And then boom, it went up $20,000 from in the $60,000 range. Today, it's over $80,000. Bitcoin, hard, scarce assets. Just keep that in mind. Here we have gold, gold futures. They've been sitting pretty flat. Boom, gold jumped up. The US dollar index, because if they're going to print more money to buy the debt back, then the dollar is going to lose its value. So you can see how much that dropped. And then the 30-year Treasury Index stayed somewhat flat. They didn't really move it a whole lot. Okay, but the assets moved. Okay, now, not all assets. I'm going to come back to that in a second. But take a look at this. What we can see here is this is ETFs, all right? So the ETFs, QQQ, SPY. So these are stock indexes, obviously, gold, etc. And what we can see right here is that gold and Bitcoin, both being hard, scarce assets, being part of what we call now the debasement trade, have now both entered the top 10. So we see gold here in number 3, and we see Bitcoin here in number 7. So those two hard, scarce assets, the debasement trade assets, have both moved into the top 10. You can see the market saying that. And then we can look at the flows. This one's pretty interesting. So the gold and Bitcoin ETFs have a combined $7 billion in flows in just the past week. $7 billion have moved into those debasement trades. It's a record for a five-day period as the debasement trade steals spotlight from AI. We've been talking quite a bit about, eventually, you know, AI sucked all the oxygen out of the room. Gold and Bitcoin have sort of languished. All the money went to AI, the IPOs, semiconductors, all of that. But now we've talked about this capital rotation would come back into the debasement trade, and here it is. AI is going down in a lot of ways. AI is not going down. I don't mean that. But we're starting to see the capital rotate specifically out of semiconductors going back into these debasement trade assets. Okay, and we can see that specifically if we look at this. So this is during the same time period where I show you gold and Bitcoin. Bitcoin went from $60,000 to $80,000. Here we have the SPY and the NASDAQ both trending down. Now, there was no life in the SPY and the SP500. The NASDAQ got a little bit of a bump right here from that. Okay, so now we can see the markets are reacting to this, but let's dig a little bit deeper under the hood to find out is this a blip or is this the beginning, as Basant said, the signal that the game has started, the game has shifted. Okay, so there's a $40 trillion problem or $40 trillion problems if you want to call it that. All right, now, why is the US government fighting rates and why is 5.31 the red line that can't be crossed? Why fighting rates? Well, again, Scott Basant on TV tells us this was pretty interesting, this piece right here. I kind of got a kick out of it. Scott Basant said, there's nothing magic about the $40 trillion number. Nothing magic about it. It's just $40 trillion, like whatever, right? Nothing magic about it. He said, quote, we can grow our way out of that. Okay, how do we do that? And what's the implications for us, for our business, for our jobs and for our investments? What does that mean for us? Okay, you can watch the news. You can read the news headlines on your own. I'm here to try to tell you what it means and what we're going to do about it. Okay, so I put this up on X. If you're not following me on X, you certainly should. If you want the daily play-by-plays, I'll link to my X account down below in the description. So for Basant to be right and for us to grow our way out of this, for the last five years, we have to look at, well, to grow out of debt, how fast are we growing and how fast is the debt growing? So for the last five years, debt is growing about 7% a year. Nominal GDP is growing about 5% to 5.5%. So we're about 2% to 2.5% under. So that means the debt is growing faster than GDP. How do we grow our way out of that? It seems like we're just digging ourselves deeper holes. Remember the 2021 spike? The real growth was 2% to 3%. Oh, so we have to remove that out. That's the outlier. To stop the ratio from rising with about a 2.5% primary deficit, nominal growth needs now 6%. Now, if you haven't studied what growth rates are, 6% is insanely hot. That's what China achieved, you know, as it had its great growth spurt for about a decade. So to actually shrink it, we need growth to get actually to about 7% to 8%. How do we get to 7% to 8%? Cool ideas. So we need to increase it to 1.5 to 3 points faster than the trend. How? Well, they got to let the economy run hot. So that means a no recession. That means all the economy has to run hot, booming, etc. And the debasement trade has to happen. Okay, there's an actual playbook for this. There's a precedent for this and I'm going to show you that. But let me show you the problem that we're up against before we do that. Because as you can see, the problem is that higher effective interest costs raise the growth needed to stabilize the debt. So back to the $40 trillion problem. Why is the Treasury, why is the government so worried about bond prices? Because higher effective interest costs, rates go up, mean that we need more growth. So it gets harder and harder and harder. So if we have 4.5% cost of debt, we need 6.8% growth. Wow, how do we get that? But if we have 5% cost of debt, it goes from 6.8% to 7.3%. So all of a sudden it gets harder and harder and harder. So those have to come down. Now, why does that have to come down? We'll take a look at this. We can see this is the interest, the amount of interest that's being paid on the debt going back to 1950. I mean, it's basically flatlined here until about 1980. Then it obviously started taking off. But right here around 2020, look at that. It's like a pair of ball. It's like a hockey stick, as we might call that. The interest on the debt is now over $1.2 trillion per year. And to put that into perspective, just to kind of understand how we can get out of this, if we take a look at this, when we look at the government expenditures, you can see it's the third highest government expenditure. So Social Security is above it, and Medicare is above it. We have health. National Defense is all the way down here, not all the way down here. But how do we cut Medicare? How do we cut Social Security? Like that's money that's owed. We don't cut that. National Defense, we're probably not cutting that either. And so you can start to see the problem that we're in. The one that could be adjusted is the net interest, the $1.2 trillion. We can get that down. There's a couple ways we can get that down. Obviously, number one, lower interest rates. But let me show you the playbook from 1945 that's getting dusted off and about ready to go back into place. Now, like I said, it's interesting to see these stocks going down while the basement trade is going back up, the capital rotation from AI. And the point here is that just because rates come down and the economy runs hot and the Fed intervenes in the market doesn't mean all assets go up at the same time. Doesn't mean they all go up at all and doesn't mean it's going to be a smooth ride. If you'd like to see the playbook of how we're making sure that we maximize what's happening, I'm going to do a full live workshop. I'm going to do it all live. We'll do it next week. I'll put a QR code on the screen, a link down below. But if you understand how to build a portfolio that's set up for what's coming and without having to chase hot stock tips and things like that, but build a portfolio that will grow faster than what the economy is going to come in. Coming out for the live workshop is going to be amazing. Again, it's all free. There's a link down below, but let's keep going with this. Okay, so let's just go through the math. Like what does it actually take to grow out of 40 trillion dollars? Well, the first thing you have to understand is we don't. We don't. We don't get out of the 40 trillion dollars of debt. We don't pay off the debt that doesn't get paid down. A lot of people are like, when are we going to pay off the debt? We're not. What we are going to do is a couple different things. And so, what we want to understand is debt to GDP. It's a ratio. Okay. So right now, the debt to GDP is about a hundred and twenty percent. It's way too high. We need that to be 80 percent, 70 percent, 60 percent, 40 percent, something like that. Now, there's two ways to get this hundred and twenty percent ratio down. Well, one, we can bring the debt down so we can go from 40 to 30 to 20, whatever, or we can bring the GDP up. Of course, there's some combination there, but knowing that the debt is never going to be paid, then we have to get the GDP up. How do we do that? Well, there's a couple ways that we can do that. Number one, treasury moves can become shorter. What do I mean by that? So, the treasuries, the bonds, have a curve. So we have everything from short-dated bills up to bond, treasury bills to treasury bonds, up to 30 years. And that's a curve. Now, the way it's supposed to work is that the longer you loan your money out, the more money that you want to make. And what the government has been doing has been shifting most of the debt down into the shorter-term debt. And they can do more of that. So, for example, this chart right here from my friend, Nick Badia, over at the Bitcoin layer. Follow them. They're amazing. Right here, the blue is the bills. This is the short-term, the short-dated bills. We have about $6.69 trillion there. And the long-dated treasury public debt is $31 trillion right here. Now, what this red line shows is that means about 21% of the debt is short-term. So what they can do is continue to do more and more and more to the shorter-term. Now, one of the ways that affects things is by using stable coins. I've talked a lot about stable coins and how they're really going to be instrumental in helping the US government get this debt problem under control. One of the things that's been holding up the stable coin bill, known as the Clarity Act, is the banks do not want stable coins to pay interest. So, if they can take a lot of this government debt, put it into the short-term, the short-term, the stable coins have to buy the treasury, the debt, but the treasury debt doesn't pay yield. So now, all these stable coins that can come in and buy that short end and buy no yield, and they can bring the interest expense down. That's one way. One of probably many ways we're going to see this play out. Also, as I already showed you this chart, they have this treasury general account, has about a trillion dollars in it, and they can start buying the debt down that way. In addition to that, they use banks to buy these treasuries. So, this is U.S. banks holding trillions in treasury, and we can see how much this is going up. And of course, that can just continue going up. The banks will continue to buy that. And then, when it all else fails, of course, we have the good old Federal Reserve, and they can buy the debt. Of course, when that happens, we call that quantitative easing. Today, we have all types of quantitative easing. That's not technically quantitative easing, but that can come back. And you can look again. This is from Bitcoin Layer. You can look at the room that we have here. So, the red is the Fed-owned treasuries as a percent of treasury debt, and the blue here is just the Federal Reserve Bank and U.S. Treasury securities that they hold. But you can see how much they've been able to wind this down over the last couple years. And so, they have all this room right here to add back in. Okay, so there's lots of ways they can start to bring that down. And all of that would change the ratio of the debt-to-GDP, because what it does is it pushes inflation hot, is the key piece. Inflation runs hot. The economy runs hot. Growth runs hot. Yes, wages go up. Everything goes up. Your assets go up. And so, GDP goes up. Remember, not debt coming down, GDP coming up. However, through inflation. So, the problem is, while it looks like on paper everything's going up, the problem is everything's going up. So, you're not necessarily getting richer. The quality of your life is not going up. You're not buying any more things. And this is one of the reasons why I love history so much, because history is cause and effect. If you touch the stove and you get burned and you touch the stove again when it's hot, you're probably going to get burned again. And history is about cause and effect. And so, let's go back to 1945, the last time the United States found itself in this situation. And there's a couple of very interesting parallels. Number one, this was coming after, right after World War I and World War II, right, obviously. So, there was that going on. It was during the industrialization of the United States, so building out all the factories and things like that. And so, the United States sort of finds itself in that. We've been fighting, now we're fighting every war, war on poverty and war on terrorism and the COVID pandemic war and all those other wars. But more specifically, we're in this reindustrialization period with the build-out of energy infrastructure, with the build-out of AI infrastructure, data centers, etc. And so, we have this massive need for this reindustrialization at the same time as we have high debt levels. So, let's take a look at this chart. This is a chart from Lynn Alden. She's amazing. I've used this before. You might have seen it. But this goes back here to the World War I, World War II period from 1932 to 1944. And what we can see here, these gray lines, is the deficit as a percent of GDP. And we can see the deficit of GDP spiked really high coming out of the wars. And this monetary base, this blue is the monetary base as a percent of GDP. So, basically how much money they've been printing. And what you can see is they increased the money supply, printed way more money. In this period. And in order to do that, this orange line down here is the short-term interest rates. They pushed the interest rates down to basically zero. And they printed a crazy amount of money. They could do that because interest rates went down to zero. So, when they push the rates down, they can print more money without blowing themselves out on interest cost. All right, now you can see things sort of normalized here through the 60s, the 70s, the 80s, the 90s, the 2000s. And we saw short-term interest rates sort of settle back in. The monetary base as a percent of GDP came down because GDP went up and that sort of normalized. But here we are again. And we find ourselves in a very similar situation where we need to lower rates and we need to increase the money supply at the same time to get that debt to GDP back down. It happened before and it worked and it's going to happen again. They're doing it right now. We can see this here during this time period. It's important to understand that during that, the debt to GDP fell. So from 120% right here, it fell all the way down to 60%. Not because the debt was paid but because the growth of the economy happened. Nominal GDP went up. So the GDP went up, the debt to GDP went down, but the debt didn't disappear. The debt actually went up. It was the ratio that changed. That's the whole game and it's important to understand and if you want to understand how to make money in this new phase. Okay, now, if you really want to nerd out on this, it's something I've talked about quite often on the IMF website, International Monetary Fund website. They have this, it's called the Liquidation of Government Debt. It was published in 2015 and this lays it out. It's called Financial Repression. Bond yields low, inflation run hot and they liquidate the bondholders, which is why you don't want to be in bonds. Do not hold the bonds. If you have a 60-40 portfolio, it's probably not going to work out really well for you because things are changing. This is why I talk about the reverse crash. The reverse crash is different than what most people expect. Most people expecting asset prices to crash, home prices to come down, stock prices come down, my retirement account comes down and then I get a chance to buy again. So I'm just going to sit in cash and I'll wait. The problem is that what we're going into is a reverse crash and it's a reverse crash because instead of asset prices going, coming down, home prices coming down, food prices, gasoline prices, travel prices coming down. They just keep going up. While that looks good on paper, the problem is that your wages don't keep up and the result, the crash ends up being the same, which is I can no longer afford the quality of life I used to. I can't take as many vacations. I can't go out to eat as much. I can't drive my car as much. Not because things came down because they went up faster than I could afford and that's the reverse market crash and that's what happens during these periods of financial repression like we saw after 1945 and what percent just said is the signal to the market We're re-entering that again right now. Again, the proverbial rock in the hard place has been there. We've been talking about it for years, but he sent the signal to the market. The signal was sent. The threshold has been defined. He drew the line in the sand. He said, well, if 30 year goes over that we're stepping in hot and heavy and what the markets love, traders love is to know where that line is and now it's been said that the basement trade continues. It confirms that I showed you which assets are going up and which assets are not going up and most assets are not going to keep up in this environment. So most of what you've done in investing is not set up for this. Go back to 1945 and look at what worked back then. Okay, and so again, if you want to understand this a little bit deeper, I'm having a full live workshop here. I'll put a link to it down below if you want to come join me. We're going to talk about how to build your portfolio for this market and cycle that we're going into. It's not about trading. It's not about finding hot option strategies or cryptocurrency pump and dumps or whatever. It's not about the asset at all. It's about the structure in which we put our assets and how we use our income, our taxes, and our wealth strategy together to achieve the goals that we want to no matter what the market cycle is doing. If you want to come join me again, it's free. We're going to hang out. I'll go through all your questions live. It's amazing. It's fun time. I'll put a link down below, but this is the signal. Basent said it himself. Those were the very words he used and either way, you got to be prepared. Hopefully that makes sense. All right, that's what I got. To your success. I'm out.