On the menu today: The theme of today’s newsletter is the likelihood of whether all of us will live long and prosper, or whether we’re going to experience some rough times in the face of an accelerating “Sell America” trade. Read on.
Bond Market Woes
Considering the importance of the market for U.S. bonds, you would think it would get more attention, more regularly.
A government bond is effectively a loan to a government. You give the government money, and they agree to pay you interest every six months over a period of 20 to 30 years. Owners can hold a bond until it matures or sell it before then. But either way, the U.S. government absolutely, positively must pay out the money for the interest. The U.S. government has never missed an interest payment, other than a handful of times in the 1970s because of a technical glitch; interest rates rose, and the lesson everyone took from that was to never let there be a glitch again.
This is why a U.S. bond is considered one of the safest places to put your money. And because of that, for a long time, the U.S. could pay comparably low interest rates. When the U.S. federal government is seen as reliable, stable, and financially sound, people will loan it money and accept a low rate of interest, because they know that come hell or high water, they’re getting that money paid back.
Since the start of October, the American public invested $567 million in savings bonds to finance the federal government.
That may sound like a lot, but in that time period, the U.S. government has spent $1.83 trillion. (That’s 2 percent higher than the same period last year.)
Some idiot out there will try to convince you that this is because the U.S. spends so much on the military. So far, about 15 percent of that $1.83 trillion spent this year was spent on defense. Comparably, 22 percent has been spent on Social Security, 14 percent has been spent on Medicare, and 14 percent was spent on health care. Also, 15 percent of that is interest on the debt, because once again, the U.S. government absolutely, positively must pay out that money.
Back in May 2016, then-candidate Donald Trump suggested that he could negotiate to play less than the full amount owed in the U.S. debt. He also suggested, “If interest rates go up and we can buy bonds back at a discount — if we are liquid enough as a country, we should do that.” The problem is that a country that is trillions in debt is never “liquid enough” to buy back those issued bonds; Trump’s plan would require the government to borrow money at high interest rates to buy back its old debt.
This is no doubt some of that five-dimensional chess that eludes mere mortals.
Trump’s 2016 announcement was not warmly received by the financial world, and Trump quickly backtracked from the idea of paying back less than 100 percent of what the U.S. government owed bondholders. He then moved on to the argument that the U.S. government could never default on its debt, “because you print the money.” This, of course, is a formula for higher inflation and devaluation of the dollar.
Over the past year, in places like CNBC and other corners of the financial press, you may have seen the term, “the Sell America trade.” The gist is that if you’re an investor, you don’t want to be quite as wrapped up in U.S. markets as you have been in recent years — whether that means you’re invested in U.S. companies, or you own a lot of U.S. government bonds, or your cash reserves are in U.S. dollars. The United States starts looking like a less stable, less predictable, less profitable place to invest, and other countries’ markets and companies start looking like a better, safer bet.
Investors don’t like tariffs and trade wars. Nor do they like shooting wars, or high tensions between the U.S. and its traditional allies. Nor do they like attacks on the independence of the U.S. Federal Reserve. Nor do they like high U.S. deficits and debt, with little sense of how the U.S. government is going to balance its money coming in and the money scheduled to go out. Nor do they like unpredictability.
Hey, guess what the Trump administration has been serving up lately? All the above. For a while, it seemed like the markets were going to whistle past the graveyard, dismiss this as just Trump being Trump, and hope for good numbers from corporate earnings updates.
Yesterday, the whistling stopped. From CNBC:
Precious metals gold and silver marched to fresh highs. Gold, which has long been viewed as a safe-haven investment during periods of geopolitical turmoil, was on track for its biggest one-day gain since 2020.
U.S. stocks tumbled as investors mitigated exposure to American assets. The Dow Jones Industrial Average slid more than 800 points, while the S&P 500 and Nasdaq Composite each dropped more than 2 percent. The Cboe Volatility Index, known Wall Street’s “fear gauge,” spiked to a highs last seen in November.
The latest flare-up in so-called sell America positioning follows Trump’s threats to impose 10 percent tariffs on eight European countries as part of his push to take over Greenland. Representatives from the 27-nation European Union gathered for an emergency meeting in response to Trump’s tariff call, which he said would start Feb. 1 and then rise to 25 percent on June 1.
You may have heard of the term, “bond market vigilantes,” which sounds like a DC comic that got canceled in 1993. The gist is that certain investors eye U.S. policy decisions warily and in particular don’t like policies that are likely to worsen inflation. When they see bad decisions, they stop buying U.S. Treasury bonds and demand higher interest payments, or they sell the Treasury bonds they already own.
James Carville, Bill Clinton’s chief strategist, once said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
An important point about bond purchasers, whether they think of themselves as vigilantes or not, is that they don’t have an approval rating. They don’t need to get reelected. They aren’t likely to change their minds because of a presidential tirade on Truth Social. They just have a set of fiscal and economic policies that they think are wise and good, and if the U.S. government deviates too far from that, they stop loaning the government money by purchasing bonds. And no one can make them purchase U.S. Treasury bonds if they don’t want to buy them.
And those decisions have far-reaching consequences:
Just days after mortgage rates hit a three-year low, sparking a near-instant surge in applications, fresh trade tensions are threatening to undo that progress.
Rates on a 30-year mortgage jumped 14 basis points to an average of 6.21 percent on Tuesday morning, according to Mortgage News Daily, following new escalations in the standoff between President Trump and European leaders over the future of Greenland.
Multiple factors, including bond yields, market volatility, and demand for mortgage-backed securities, go into determining mortgage rates. In recent weeks, lower yields and a mortgage bond-buying directive from Trump helped push mortgage rates to close to 6 percent, the lowest level since late 2022.
Tuesday’s volatility effectively reversed those recent gains, bringing mortgage rates back in line with where they were for most of the fall.
Hey, it’s not like Republican fortunes in the midterm elections depend heavily upon whether the American people believe that electing Trump in 2024 helped alleviate the strain on the cost of living, right?
Yesterday’s newsletter discussed Trump’s text tantrum to the prime minister of Norway and other European leaders. For a while, it seemed like the movers and shakers in the American and global economies had acclimated to having a president who regularly jumps onto Truth Social and vents his spleen on all manner of topics, OFTEN WRITING IN ALL CAPS and Capitalizing Random Words for No Discernible Reason. Most investors had concluded it was just Trump being Trump, the political equivalent of the dog next door barking in the middle of the night — loud, but minimally consequential, and eventually you get used to it and tune it out.
But these last few moves from Trump are having a long-delayed, harmful effect on investor confidence. American investors thought they had seen the worst of the trade wars, but now Trump is threatening another round of new, higher tariffs. (Hey, Supreme Court, how’s that decision coming?)
The investor class likes the Federal Reserve making its decisions based upon its assessment of the long-term best interests of the American economy, and not reflecting a presidential preference.
The current U.S. interest rate set by the Fed is 3.75 percent. Trump has insisted, for a long while, that interest rates should be lower; last month he told the Wall Street Journal that by December 2026, interest rates should be “one percent and maybe lower than that.”
The problem is that if interest rates get too low, inflation starts to rise, and vice versa:
Higher interest rates naturally lead to decreased demand for borrowing money, which, in turn, slows the pace of inflation by reducing overall demand and mitigating upward pressure on prices.
The initial response from consumers to rising interest rates is often a decreased willingness to finance major purchases such as homes, vehicles, and household appliances. At 3 percent mortgage rates, a family might be able to afford monthly payments for a $300,000 home, but 6 percent could make the same property unaffordable. When borrowing costs increase, businesses, too, tend to delay their growth plans and reduce capital expenditures, which can result in job losses and lower wage growth.
In other words, shortly after we just saw Joe Biden’s presidency wrecked in part by extremely high inflation, President Trump is hell-bent on enacting a policy change that will raise inflation.
Yesterday, President Trump insisted, “No inflation. So, everyone said, ‘Oh, tariffs will cause inflation.’ We have no inflation. . . .” This is not the case.
If the American president, already seemingly not all that stable himself, seems hell-bent on enacting economic policies that worsen instability in the economy and markets . . . is it really all that surprising that “sell America” is the hot term on Wall Street these days?
ADDENDUM: Jeff Blehar watched Star Trek: Starfleet Academy so that you wouldn’t have to subject yourself to it.
Stephen Miller — yes, that Stephen Miller, the White House deputy chief of staff for policy — recently weighed in on the state of the Star Trek franchise: “Tragic. But it’s not too late for Paramount Plus to save the franchise. Step 1: Reconcile with William Shatner and give him total creative control.”
Look, I love William Shatner. I love doing my William Shatner impression. There is something contagiously joyous about the way Shatner, long past his tongue-in-cheek “get a life!” speech, thrives on the interactions with the dedicated Star Trek fanbase.
But Shatner, God bless him, is 94 years old, even if he looks a lot younger. I don’t know if any nonagenarian is really the guy to have total control of a major Hollywood franchise.