As evidence keeps building that the hapless Biden administration couldn’t end fast enough, there’s also evidence that the first Trump presidency of strong growth and low inflation pre-COVID won’t return immediately.
That’s the signal we’re getting from the bond market: The possibility that the fiscal time bomb of nonstop spending that Joe Biden and his minions have planted is ready to explode just in time for Trump to take office.
Most of the financial punditry is too obsessed with stock indexes to appreciate the bond market’s warning signs.
Stock prices have their place, of course.
When investors pile into stocks as they’ve been doing since Trump’s election — until recently, that is — it’s an indication that many are betting his policies of lower taxes and less regulation will lead to higher corporate earnings and GDP growth.
For my money, the bond markets provide a more accurate window into underlying fissures that could lead to severe fiscal distress in the future.
Recall, the Dow reached record highs at the end of 2007 just as lending markets started to flash the first warning signs of the 2008 financial crisis.
And that’s just one example of bonds exposing a problem well before the rest of the financial world had a clue.
I’m not saying we’re heading for a 2008-like financial collapse.
For starters, all collapses are different.
But bonds are certainly signaling trouble ahead.
The best gauge of this is the price of the 10-year bond the Treasury issues to finance much of the federal debt. Smart traders follow it for signs of economic distress because consumer rates — such as mortgages — are priced off of its interest rate, or “yield.”
Bond prices move in the opposite direction from yields.
And since the beginning of December, prices of the 10-year have nose-dived while yields have spiked significantly, more than 10%.
When this happens, it’s a sign of trouble ahead.
Maybe Fed Chairman Jerome Powell hasn’t quite conquered inflation, which eats into bond returns.
Traders demand lower prices (higher yields) for lending their money to Uncle Sam.
Troubled bill payer
Maybe more troubling is that ballooning deficits as we have seen during the Biden years means the government increasingly can’t pay its bills.
As deficits explode, the Treasury will have to issue more debt at those lower prices and higher yields to attract enough buyers.
Even worse is that at some point those buyers — particularly foreign adversaries like the Chinese who increasingly finance our largesse — might scale back significantly on the bond buying.
The result could be catastrophic, with yields skyrocketing, causing a recession or even worse.
Those are the alarm bells the bond market is sounding, and the reason for the recent sell-off in stocks.
Trump isn’t even in office, and his critics are already blaming him for the unfolding situation.
They say his tax cuts will widen the deficit; his planned use of tariffs to craft trade deals are scaring bond traders — because tariffs are inherently inflationary since they add to the costs of goods.
Ditto for his deportation of undocumented aliens, since that will reduce the supply of people looking to work on the cheap.
But traders tell me the overriding concern is clearly Biden’s wasteful and wild spending fueled by his obsession with being more transformationally leftist than his former boss, Barack Obama.
Yes, even in defeat, the traders say, Biden continues to spend like a man on a mission, seemingly oblivious to the potential fiscal-cliff disaster it could create.
The US government runs on a fiscal-year basis, which begins Oct. 1.
In November alone, the federal government ran a deficit of $366.8 billion — nearly 20% higher than at the same time last year.
Astounding, since the economy is growing and tax receipts should be strong enough to push deficits lower.
The debt is now at $36 trillion, a scary 123% of our entire GDP and growing.
The budget deficit — which fuels the debt binge — is rising to close to $2 trillion in the coming year.
For comparison, in Trump’s first term, his last pre-COVID deficit was around $980 billion.
Larry McDonald, a former Lehman Brothers bond trader and author of the influential Bear Traps Report, lays out in chilling detail Biden’s going-away “gift” to Trump.
Yes, all that student-loan forgiveness, green-energy subsidies, handouts to migrants, expensive spending boondoggles like the misnamed Inflation Reduction Act, and arms to Ukraine are adding up.
According to McDonald, Biden has ramped up his spending as he’s about to depart from office.
Between Oct. 1 and Trump’s January inaugural, the Bidenistas are on track to spend $2 trillion, or 30%, of the annual budget they proposed.
“Trump will have to cut spending for the rest of the year to stay within the limits of the allocated budget,” he says.
My Fox colleague, former Trump econ adviser Larry Kudlow, is an optimist.
He believes Trump’s free-market policies of low taxes and less regulation will actually spur the economy’s economic growth and increase tax receipts.
Trump will use tariffs strategically to gain an edge in global trade.
The “DOGE brothers,” Elon Musk and Vivek Ramaswamy, will take an ax to the federal bloat and further appease the so-called “bond vigilantes” — traders whose selling pressure often brings government spenders to their senses.
Let’s hope Kudlow’s right.
So far, the bond vigilantes aren’t buying it.
In fact, they seem to be just getting started.
[Notigroup Newsroom in collaboration with other media outlets, with information from the following sources]
