Is the Bond Market Sniffing Inflation?

Too few bond buyers at current rates suggest printing presses will run hot!

If the Fed’s rate cuts were intended to help stimulate the housing markets by lowering the mortgage rates so far it isn’t working. The 10-yr. Treasury upon which mortgages are priced has risen from a low of 3.62% in September to 4.016% as of Wednesday, 16, 2024. Now, let’s say the Fed cuts rates again and mortgage rates don’t drop or, God forbid, go higher? Then we’re in a situation where the Fed has lost control of the bond market. This situation may be fun for now but it’s actually terrifying when you really think about it.

In fact, I believe that’s exactly what may already be underway for reasons Alasdair Macleod noted in his Oct. 11 Substack missive.

Here is an excerpt from Alasdair’s October 11 article:

“Furthermore, bond yields are rising again, despite hopes for lower interest rates as the chart for the 10-year US Treasury note above demonstrates.

“The 55-day MA is now turning up, indicating that the 10-month decline in yields may be over. A little further to the region of the 200-day MA and then some consolidation before 5% is challenged, following a progression higher towards 8%+ is in prospect.”

What is really different this time is that the Fed has started to lower rates even before the markets have started a dramatic decline and before it reached its 2% inflation goal. Indeed, core inflation has now risen three months in a row at a 3.8% annual rate, even as the Fed is goosing the economy in an effort to avoid the next financial crisis. Given massive derivatives tied to equity values, I believe the Fed is being quick to pump money despite not reaching its inflation goal, simply because it is fearful of another Lehman Brothers moment as in 2008. 

So I suspect the bond markets are starting to sniff out rising inflation. But with the long end of the yield curve beginning to steepen, that has always been a sure sign that a recession is getting underway. And what happens during a recession? The budget deficit explodes even higher! Already the U.S. is in a debt trap. A recession will dig us even deeper into it. But unlike 2008, neither China nor any other net export country is there to buy massively more Treasuries that come to market. That can only mean one thing: Currency debasement!

Jeffrey P. Snider tweeted the following thoughts regarding why he thinks we are now definitely heading into a recession: “More signs of an impending recession in the US economy, focusing on consumer behavior and credit card usage. Repeated decreases in revolving consumer credit are a strong indicator of economic perception and job market concerns among Americans. It’s not about spending, it’s about how regular people see employment conditions. This obviously and sharply contrasts with the latest over-optimistic payroll reports. Unlike the usual one-offs from the Establishment Survey like for September (or March), the correlation between credit card statistics, consumer confidence, and labor market conditions repeatedly pan out. They have been tightly correlated during past recession cycles since consumer behavior changes with recessionary pressures on job market fundamentals.

“Here in October 2024, there is a variety of sources you won’t hear about corroborating not payrolls but what consumers are doing by putting away their credit cards – starting with the rest of the Establishment Survey which was nothing like the glowing headline.

“Hours are being cut, yet payrolls are soaring? Not a chance. That also conflicts with JOLTS which has consistently shown to be a very serious hiring slowdown likewise developing into an all-out freeze. This is also why American workers aren’t quitting their jobs, either.

“Those are further backed up by Challenger, Gray and Christmas which just reported exceptionally low hiring plans for the Christmas season and for the year so far, further aligning with recessionary trends. Consumers adjust their financial behaviors based on labor market cues like fewer job openings, slower payroll growth, and potential layoffs.

“Headline payroll reports create excitement, but the focus should be on comprehensive economic indicators that paint a more accurate picture of the economic health. We have to go deeper into economic analysis beyond surface-level reports especially when it comes to jobs and more now than ever given how unreliable the CES Establishment Survey constantly proves to be.”

Another reason we are likely to expect massive fiscal stimulus to continue, which will need to be financed with printing press money, can be seen from E.J. Antoni’s tweet chart shown below.

The blue line is the nominal wage growth. The orange line is the real wage growth during the Biden Presidency. That explains why Harris is not polling well among the wage workers and why there will be continued political pressure to keep spending even as inflation continues to rise.

All of this is of course positive for gold priced in dollars. On October 11 Alasdair wrote that Asian buying is returning to the gold and silver markets in the run up to the BRICS summit in eleven days’ time.

Regarding gold Alasdair said, “This market has a strong underlying feel to it, demonstrated by the technical chart below, which suggests that the price has sufficient underlying momentum to run away to the upside, now that this brief consolidation appears to be over:

“While technical analysis is far from infallible, reading this chart suggests that $2750 is a minimum target for traders, before a longer consolidation allows the moving averages to catch up.

“We can see that technical considerations for both gold and silver are likely to drive both markets into overbought conditions. The timing coincides with the runup to the BRICS summit at Kazan on 22—24 October, only 11 days away. The reason this is important is because of speculation that a new trade settlement currency based on gold will be on the agenda. In other words, this is a potential development which is to some extent discounted already.

“Experienced traders know to buy the rumor and sell the fact. Even if a new gold-backed currency project is announced, after initial excitement profit taking will probably set in. Even worse, if there is no announcement the setback could be significant. Therefore, the patterns revealed in the technical charts of a further run into higher prices before a broader consolidation is confirming a likely trading outcome.

“However, is this a headwind for gold? It is bound to be spun as such, but more correctly it indicates the debt trap is being sprung-shut on the US Treasury, a condition leading ultimately to loss of credibility and therefore a collapse in value for the Fed’s fiat dollar.” Need I remind you, a much, much higher dollar-denominated gold price.

There are a host of evolving gold deposits owned by companies covered in J Taylor’s Gold, Energy & Tech Stocks that you may want to know about before the markets catch on to the rising profitability of this sector.

Best wishes,

Jay Taylor