It Started: America’s Bond Market Is Secretly Collapsing
Graham Stephan
Treasury Buybacks Begin September 9th 0:00
Starting September 9th, the United States begins buying back its own debt at twice the previous rate, essentially borrowing more money to pay off older loans because fewer buyers want them. Treasury bonds normally let investors lend to the government at a fixed rate, usually between 3 and 5 percent a year, with old debts paid off by selling new debt to new buyers. But inflation is rising, so buyers now demand higher returns, forcing the government to pay long-term holders at higher rates while offering short-term holders lower ones. Since there are not enough new buyers to absorb the old loans, the government has chosen to buy back its own debt rather than raise rates further, which Graham compares to putting tape over a check engine light instead of fixing the real problem of rising inflation and out of control national debt.
Kevin Warsh Five Part Plan 3:30
At the annual Jackson Hole meeting, new Federal Reserve Chair Kevin Warsh laid out five key points. First, the Fed will stay silent instead of signaling moves ahead of time the way Jerome Powell used to. Second, this silence means markets will decide on their own while the Fed acts separately. Third, Warsh insists this time inflation will actually be brought down, saying underlying inflation must move toward its objective clearly and at a sufficient speed or there is more work to do. Fourth, he believes the economy can handle higher rates since joblessness sits around 4.1 percent and financial conditions are not truly restrictive. Fifth, he calls artificial intelligence a hinge point in history and a new factor of production, though it remains unclear when its effects will actually show up.
Stability Now, Volatility Ahead 8:01
So far conditions have held up reasonably well, with the S&P 500 up slightly over the past month and national home prices flat despite a Japanese yen bailout, rising oil prices, and Middle East tensions. Still, Ryan Detrick's research shows September is historically the worst month for stocks, positive only 45 percent of the time with an average decline of 0.6 percent, a pattern known as the September effect, driven by investors raising cash, harvesting tax losses, and lower trading volume from summer vacations. The good news is that once September passes, the following quarters tend to be among the most bullish of the four year cycle, especially after midterm elections.
September 16th Rate Decision 10:30
Markets are pricing in more than a 60 percent chance the Federal Reserve raises interest rates by 25 basis points on September 16th, just a week after the debt buyback begins. Much of this may already be priced in, since Treasury rates barely moved when the buyback was first announced. The number to watch closely is the 10 year Treasury yield hitting 5 percent, something that last happened in 2007 right before the Great Financial Crisis, a level widely seen as the line between things being fine and things breaking.
Graham’s Own Investment Approach 11:31
Graham expects a possible 5 to 12 percent short-term market drawdown due to uncertainty, though he would not be surprised if stocks keep climbing once the election is settled. He notes that since 1950 the S&P 500 was higher one year after the August 31st close in 18 of 19 midterm years, with no 20 percent or greater drawdowns following. His own portfolio is currently about 55 percent stocks, 20 percent tax free municipal bonds, 10 percent in a Bitcoin ETF, and the remainder in real estate and other investments, and he plans to keep that allocation steady, buying more only if the market drops rather than chasing higher prices.
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