Well, that was fast.
It only took five days after Moody’s downgrade of the US government’s sovereign credit rating for investors to throw a fit. The result was yesterday’s meltdown trifecta in which ALL three major markets– US stocks, US bonds, and the US dollar– lost significant value.
I wrote about this extensively last month because we saw the same phenomenon after the “Liberation Day” announcement.
Typically, if there’s bad news in a major developed country, investors will simply shift their money into a different asset class within that same country.
For example, if investors in the US suddenly become concerned that a recession is on the horizon, they’ll pull their money out of the stock market… and then invest that capital into the bond market.
The money remains in the US; it simply moves into a new asset class. So, as a result, stocks decline in value, but bonds increase in value.
But what we saw last month after Liberation Day… and then AGAIN yesterday, is stocks AND bonds both declining simultaneously.
(Remember that bond prices move inversely to yields; so, when bond prices fall, as they did yesterday, it really means that bond yields, i.e. interest rates, are moving higher. More on this below.)
Plus, on top of the stock and bond market routs, the US dollar also took a big hit.
As I explained last month after Liberation Day, this can only mean ONE thing: investors aren’t shifting their money from one US asset class to another. They’re moving their money OUT of the US and into foreign assets.
This is a clear sign that at least some investors are losing confidence in the United States.
And who could blame them? Congress is fiddling while the budget burns. The “One Big Beautiful” tax bill will result in yet another $2 trillion budget deficit.
Trust me, I love tax cuts. Tax cuts are great for the economy. But you can’t just cut taxes without massive spending cuts.
Well, this legislation doesn’t cut spending. In fact, they INCREASED spending… meaning that America’s $36+ trillion debt problem is only going to become worse.
Investors aren’t terribly impressed with that outcome… because they’re the ones who will be asked to finance all that debt and buy trillions of dollars’ worth of US government bonds.
Proof of investors’ dissatisfaction came yesterday when the Treasury Department auctioned off roughly $16 billion worth of 20-year bonds.
This is how the government typically sells its bonds– through an auction process in which various banks and funds place bids. And ordinarily no one ever pays attention to Treasury auctions; they’re about as exciting as airline safety briefings.
But yesterday was different. Investors put their collective foot down and essentially refused to buy the government’s bonds unless the yield increased dramatically.
In the end, the 20-year yield hit 5.125%… which is almost the highest level it’s been since 2007.
The auction became a major signal that investors are very concerned about the US government’s horrific finances. Sure, they’ll still buy bonds. But they will demand much higher interest rates… which is debilitating for the US government.
Remember, the government already spends more money paying interest on the national debt than they do on the US military. And total interest payments this year are expected to reach about $1.2 trillion– more than 20 cents of every tax dollar collected.
Social Security, Medicare, and other mandatory entitlement programs will consume the other 80% of tax revenue… meaning that EVERY discretionary spending program, from the Defense Department to Homeland Security to Border Security, will have to be financed with more debt… at a HIGHER interest rate.
Higher interest rates cause the government’s annual interest bill to be even higher, meaning that the problem will eventually spiral out of control.
Folks, I’m not being pessimistic. It’s just basic arithmetic: there are very few good outcomes when your interest bill and mandatory entitlement spending grow faster than tax revenue.
Lower interest rates would be helpful. And that’s one of the reasons why the White House has been so vocal in demanding the Fed “lower” interest rates.
Problem is– the Fed doesn’t really have the power to cut rates anymore.
In the past, all the Fed Chairman had to do to cut rates was utter a few words; the bond market would click its heels, salute, and dutifully comply. Rates would fall just based on a speech.
That doesn’t happen anymore. If you recall when the Fed supposedly cut rates last year, bond yields actually increased. Essentially, investors are no longer paying attention to the Fed. They don’t care.
The market is now in control of bond yields… NOT the Fed. And certainly not the White House or Treasury Department. And the market does not like what it sees:
– $36 trillion national debt
– $2 trillion annual deficits
– $1.2 trillion annual interest bill
– Congress doing nothing about any of it
Bottom line, investors are fleeing– and not just the bond market. Given the drop in the US dollar yesterday (alongside stocks and bonds), it’s clear that many investors are fleeing the United States entirely and moving their capital elsewhere.
Gold will be a major beneficiary of this trend (along with well-managed gold businesses) simply because foreign governments and central banks need a reliable, liquid asset with minimal counterparty risk to park all the capital they withdraw from the United States.
Gold is one of the few assets that meets these qualifications. And, while nothing goes up or down in an uninterrupted straight line, we continue to believe that there is tremendous upside left in gold… along with silver, platinum, and several other real assets.
Ultimately, though, this is bad news for the US. No one in government seems to want to fix its terminal spending/deficit problem.
And given what happened yesterday, it’s obvious that the market is no longer willing to ignore it.
