It appears there will be no soft landing in store for the US economy. The US headline PPI (Producer Price Index) rose 1.4% last month, well above the consensus forecast of 0.5%. This implies an annual inflation rate of a massive 6%. Now, some of this is linked to the problems in the Middle East, but if you exclude food and energy from the analysis, inflation is still running at 1% last month, and 5.2% annually.
Increases were seen particularly in the cost of transportation and warehousing. No surprises there. Thanks to the on again/off again ceasefire in Iran, global oil inventories are falling.
The closure of the Strait of Hormuz continues to impact Persian Gulf producers. Saudi Arabia reported its oil production has almost halved since February.
How can you drop rates when the economy is under such pressure? Simple; you can’t. In fact, the bookies are already drawing up the odds for an interest rate increase in December this year. Imagine how Trump will view that possibility as he approaches the November midterm elections.
Nonetheless, let’s hope some lessons are learnt from indulging in wars of choice in the future.
And now we come to today’s real story. Just how are the so-called bond vigilantes taking all this news? Well, it seems it is calling b*llsh*t on all of it.
The US Treasury department issued $25bn of new 30-year bonds on Wednesday, with the high yield at auction reaching 5.046 per cent. The reason why is because long term bond holders demand a higher yield for a long-dated bond. It’s an extra return above what the bonds are auctioned for in return for taking on the risk for holding such long duration bonds.
And so, the auction settled on a yield that broke 5%. Now, here is something you should know.
Since 2019, when I first joined the PSE team, whenever I was asked why I wasn’t worried about the insane amount of debt globally, my answer was this; The debts don’t matter.
Am I being silly, or arrogant, or dismissive? I don’t believe so. But since 2019 the US real estate cycle has turned like clockwork. Meanwhile the debts globally only continued to go one way. And so, every year since, whenever I’m asked about do I believe now that the debts are too high and the end of the cycle is imminent, guess what I said?
The debts don’t matter. Until one day, when suddenly they really do.
People, that day has now arrived.
And the straw that eventually breaks the camel’s back are rising yields on long term bonds. It is always the same in every real estate cycle. And we are here once again.
From this moment on, financing this debt becomes increasingly difficult. The ten-year closed around 4.48, the highest level since last July. The bond market and the AI tech stocks are telling two different stories right now.
One of them is wrong.
The history of the cycle teaches us that at such a late stage in proceedings inflationary pressure begins to move higher. Now, each preceding cycle sees different overall drivers that are responsible for this, but the fact remains. It is an enduring part of the cycle; one you can rely upon happening and one you can time too.
Now, you can add to asset inflation and credit inflation those of energy and consumer price inflation too.
“I would expect at 5% yields to see investor demand emerge,” said Steven Zeng, an interest rate strategist at Deutsche Bank. “It’s typically where 30-year Treasuries become more attractive for pension funds and other liability-driven investors.”
So, dear reader, you find yourself at a crossroads. Either it is time to dive headfirst into the AI boom before it bursts, or you begin to see how things are now lining up and decide that now is the time to hedge yourself against the worst and take that 5% return basically risk-free.
What will it be?
Well, there is a third option that can help you with both. Become our newest Boom Bust Bulletin (BBB) member. Let the knowledge the history of the real estate cycle can provide you guide your future decisions.
If I knew that we would be facing increased inflationary pressures at this specific time years ago then why can’t you? That is the power that timing the economy can give you.
And through monthly editions and weekly videos you can begin that journey towards financial freedom today.
The end game has now begun. It really is only a matter of time now. As in 2007, those long-term bond rates eventually snapped the spell of enduring stock market returns and almost broke the global financial system.
And here we are—again.
Understand what is at stake and how to prepare now while you still have time left to do so.
The world doesn’t need another fall guy.
So, sign up now.
