Gavin & Alan
Doug Nolan
Just another week in Bizzaro Bubble World.
Bloomberg: “Bessent Urges Fed to Lower Rates by 150 Basis Points or More.”
NYT: “Trump, Seeking Friendlier Economic Data, Names New Statistics Chief.”
WSJ: “The Partisan Economist Trump Wants to Oversee the Nation’s Data.”
CNBC: “Trump threatens Fed chair Powell with ‘major lawsuit,’ demands interest rate cut.”
Reuters: “Trump’s attack on Goldman could prompt watering down of Wall Street’s independent analysis.”
AP: “Trump says he’s placing Washington police under federal control and activating the National Guard.”
AP: “US July budget deficit up 20% year-over-year despite record Trump tariff income.”
Bloomberg: “Volatility Gauges Sink to Year’s Lows Across Markets.”
Bloomberg: “US Corporate Bond Spreads Sink to 27-Year Low as ‘FOMO’ Sets In.”
FT: “Investors are frogs in a Trumpian pot.”
Tuesday, November 3rd, 2026.
Less than 15 months away, next year’s midterms will be one epic dogfight.
“Newsom unveils California redistricting effort to counter Trump-backed push in Texas.”
California’s governor Thursday announced his “fight fire with fire” plan for countering Republican redistricting measures in Texas, Florida, Ohio, Missouri and elsewhere.
Listening to Gavin Newsom’s press conference, my thoughts returned to Alan Greenspan, of all people.
Between July 3, 1990, and September 1992, the Greenspan Fed slashed rates 525 bps to a then extraordinary 3.00%.
The fiscal deficit had surged to $270 billion, or almost 4.5% of GDP.
Costs for the S&L crisis had ballooned to $300 billion, as the collapse of the late eighties (“decade of greed”) Bubble posed a major risk to the U.S. banking system, along with federal finances.
Greenspan orchestrated a steep yield curve, allowing banks to borrow cheap and lend dear – a surreptitious recapitalization that avoided a costly and likely destabilizing banking system federal bailout.
As much as it appears otherwise, there is no free lunch in (cheap) finance.
Greenspan’s operation launched a fledging hedge fund industry, managing tens of billions to what has ballooned to $33.5 TN of assets under management (Bloomberg’s calculation surely understates total global levered speculative positions).
Alan Greenspan, the free markets ideologue, became spellbound by his newfound capacity to instantaneously stimulate markets with a mere comment.
The traditional monetary policy transmission mechanism, which had operated (inherently slowly) through adjustments in policy rates, reserves and bank lending, had been supplanted.
The leveraged speculating community has been easily incentivized for “risk on” levered securities and derivatives trading, with virtually immediate impacts on financial conditions, securities and asset prices, and economic confidence.
Such power is intoxicating.
What started as seemingly warranted support for an impaired financial system and fragile economy morphed into policymaking held hostage by increasingly powerful Bubble Dynamics.
Stoked by rates cuts and the Mexico bailout, the S&P500 returned 24% for the year up to December 4th, 1996.
Greenspan proclaimed “irrational exuberance” on December 5th, and markets turned only more irrational.
What followed was a series of ever greater Bubble excesses and burst Bubble crises.
Reflationary policy measures regressed from aggressive asymmetrical rate cuts, to 2008’s trillion-dollar QE, to the pandemic’s $5 TN “money printing” fiasco.
And with each iteration, leveraged speculation became only more expansive and powerful.
So what, you might ask, does my briefest of Bubble histories have to do with Gavin Newsom and an epic midterm dogfight?
The Bubble’s fate will basically dictate whether the Trump administration’s (“Orbanesque”) breakneck implementation of their maximalist, authoritarian, nationalistic, protectionist agenda runs unchecked.
Bubble holds, boom times ensure Republicans hold the House and Senate.
Like never before, markets and Bubbles have become partisan issues.
Will the leveraged speculating community continue to accommodate the Trump agenda?
So long as financial conditions remain so extraordinarily loose – fueling equities, high-risk lending, AI, crypto and the like - I have little doubt that the administration’s pro-growth and pro-Bubble policy course will bear fruit.
It’s been six months, and Bubble excess continues to fuel strong gains for the wealthy and more fortunate segments of society.
Whether the working class and MAGA over the next 15 months feel they’re benefiting equitably remains to be seen.
Bubbles notoriously distribute wealth inequitably – especially late in the cycle.
The administration will have the pedal to the metal.
Stocks this week inflated further into record territory.
July Retail Sales were reported up a solid 0.5%, with a big upward June revision (to 0.9% from 0.6%) providing further confirmation of an economy strengthening into quarter end.
Small Business Optimism (100.3 v. 98.6) was stronger-than-expected.
Jobless claims (224k) remain at a historically low level, while the August Empire Manufacturing Index jumped to the highest reading since November.
At a discouraging $291 billion, July’s federal deficit was $50 billion above forecast.
Pedal to the metal - with inflation already elevated and tariffs taking effect - poses clear inflationary risk.
“Bets on Outsize Fed Cut Gain Steam as CPI Data Backs Doves.”
It was a curious reaction to a mixed consumer price report.
The rates market quickly lowered expectations for the December policy rate eight bps to 3.69% (64 bps of rate reduction) on the CPI report, but not mixed producer price inflation had the market pricing 3.78% (55bps reduction) by the week’s close.
Market sentiment was not helped by University of Michigan August (preliminary) one-year inflation expectations jumping five tenths to 4.9%.
August 12 – Bloomberg (Enda Curran):
“Treasury Secretary Scott Bessent suggested that the Federal Reserve ought to be open to a bigger, 50 basis-point cut in the benchmark interest rate next month, after having skipped a move at the last meeting.
‘The real thing now to think about is should we get a 50 bps rate cut in September,’ Bessent said in an interview on Fox Business…”
August 13 – Bloomberg (Daniel Flatley, Jonathan Ferro, and Annmarie Hordern):
“US Treasury Secretary Scott Bessent made his most explicit call yet for the Federal Reserve to execute a cycle of interest-rate cuts, suggesting the central bank’s benchmark ought to be at least 1.5 percentage points lower….
‘I think we could go into a series of rate cuts here, starting with a 50 bps rate cut in September,’ Bessent said…
‘If you look at any model’ it suggests that ‘we should probably be 150, 175 bps lower’…
‘I suspect we could have had rate cuts in June and July,’ Bessent said… Treasury secretaries have typically shied away from making specific calls on Fed rates, and Bessent has said for months he would only discuss the central bank’s past policy decisions — not their upcoming ones.”
August 14 – Bloomberg (Daniel Flatley):
“US Treasury Secretary Scott Bessent said he isn’t calling for a series of interest-rate cuts from the Federal Reserve, just pointing out that models suggest a ‘neutral’ rate would be about 1.5 percentage points lower.
‘I didn’t tell the Fed what to do,’ Bessent said… in an interview on Fox Business, referring to his comments a day before… ‘what I said was that to get to a neutral rate on interest, that that would be approximately a 150-bps cut.’”
Treasury Secretary Bessent crossed the line, this week directly participating in the administration’s monetary policy meddling.
And there may be a model that backs into a 2.8% fed funds rate, but it would be an outlier.
Bessent undermines his credibility to suggest that “any model” would point these days to a 150/175 bps lower policy rate.
According to Bloomberg calculations, the widely recognized “Taylor Rule suggests rates could be slightly higher than current levels.”
Perhaps Powell and the FOMC aren’t Bessent’s target audience.
The administration is aggressively pursuing a pro-growth/pro-Bubble agenda, while implementing a radical tariff regime.
Boosting oil production by 3 million barrels/day is part of Bessent and the administration’s “three arrow” plan, with lower energy prices to help contain inflation.
Director of the White House Council of Economic Advisers – and Fed Governor nominee – Stephen Miran was out again this week propagandizing the party line:
“There just still continues to be no evidence whatsoever of any tariff-induced inflation.”
An upside inflation surprise could really muck things up.
Despite lower energy prices, tariffs coupled with an uptick in growth raise the odds of higher inflation.
There were inklings in the CPI data, and more than inklings in elevating producer prices.
The administration’s argument will soon shift from “no evidence” to tariff-related price increases are one-off and not inflationary.
The bond vigilantes lurk.
And when the Treasury Secretary talks of 150-175 bps lower policy rates, I assume he’s speaking to the leveraged speculating community: Don’t get nervous over a temporary inflationary blip with significantly lower funding costs on the horizon.
“Basis trade” and “carry trade” players – hang tough; we’ve got this. Help is on the way.
Pondering the administration’s elaborate scheme, my thoughts return to an outstanding April Financial Times article, “How the Treasury Market Got Hooked on Hedge Fund Leverage” (Robin Wigglesworth, Kate Duguid, Costas Mourselas and Ian Smith):
“The gross US government bond holdings of all hedge funds that report to the SEC stood at nearly $3.4tn at the end of 2024, and has roughly doubled just since the beginning of 2023.”
“The Maestro” unleashed incredible power back in the nineties.
Over three decades of historic Bubble excess later, leveraged speculation has ballooned to the point of becoming the key source of finance for the U.S. Treasury and governments around the world.
Securities leverage has become fundamental to funding uncontrolled deficit spending; the primary source of liquidity overabundance fueling epic speculative asset Bubbles around the world; and the marginal source of finance underpinning perilously maladjusted Bubble Economies globally.
Importantly, it was only a matter of time before politicians began to wrest control of this insanely powerful financial apparatus away from central bankers.
August 12 – Bloomberg (Josh Wingrove and Joe Mathieu):
“President Donald Trump said he is weighing a lawsuit against Federal Reserve Chair Jerome Powell over the renovation of the central bank’s headquarters… Trump… resumed his criticism of the Fed chair over the central bank’s decision to hold interest rates steady and again hammered Powell over the renovation work.
‘The damage he has done by always being Too Late is incalculable.
Fortunately, the economy is sooo good that we’ve blown through Powell and the complacent Board… I am, though, considering allowing a major lawsuit against Powell to proceed because of the horrible, and grossly incompetent, job he has done in managing the construction of the Fed Buildings.’”
In one way or another, the Trump administration will move to seize control of monetary policy.
They surely view that controlling the levers for incentivizing levered speculation is an imperative for sustaining speculative Bubbles, economic expansion, and political control.
Their radical agenda and approach have already unnerved traditional investors internationally.
The dollar index is down about 10% y-t-d, while data and myriad anecdotes point to central bank and institutional Treasury liquidations.
It’s reasonable to assume that waning international demand has been offset by only greater levered holdings of Treasuries and agency securities.
Market structure indicates extraordinary market vulnerability.
Can the administration sustain leveraged speculating community risk embracement?
Will serious de-risking/deleveraging be held at bay?
The Treasury market has of late deflected what would have normally been troubling developments (i.e. tariffs, inflation, deficits, attacks on Fed independence, state interventionism, BLS firing…).
Confidence has held that looser monetary policy is imminent.
The “Trump put” is the markets’ reliable first line of defense, with the “Fed put” – lower rates and open-ended QE liquidity – available when things turn dicey.
Much has changed since Alan Greenspan was the exclusive conductor of the leveraged speculating community.
Especially after 16 years of global government finance Bubble excess, speculative leverage permeates international markets and the entire global financial system.
Even if the administration commandeers the Fed and U.S. monetary policy, there are international factors that significantly impact the leveraged speculating community and markets more generally.
Hats off to Treasury bonds this week.
Ten-year yields rose a mere four bps (to 4.32%), despite CPI, PPI, Retail Sales, a huge July federal deficit, EJ Antoni, and such.
Meanwhile, bonds globally showed signs of buckling under the pressure.
August 15 – Bloomberg (Alice Atkins):
“European bonds extended declines at the long-end…
German 30-year yields climbed eight basis points to 3.35%, while their French peers rose 10 basis points to 4.32%, both the highest levels since 2011.
Gilts tracked the moves with 30-year yields up as much as 8bps to 5.57%, the highest level since May.
German 10-year yields rose 7bps to 2.78%, the highest levels since March.”
August 12 – Bloomberg (Momoka Yokoyama and Masaki Kondo):
“Japan’s five-year government bond auction saw the lowest demand since 2020 amid the prospect of tighter monetary policy and renewed concerns over poor market liquidity.
The sale nudged bond prices lower across maturities…
The bid-to-cover ratio was 2.96, compared with 3.54 at the prior sale and the 12-month average of 3.74.”
August 13 – Bloomberg (Julia Zhong and Shulun Huang):
“A selloff in China’s bond market is accelerating, sending futures on ultra-long debt to a four-month low as a bull run in local stocks builds momentum.
Futures on 30-year sovereign notes fell as much as 0.7% Thursday, extending this week’s drop to 1.5% at the low as a gauge of onshore equities reached its highest point since October.”
Japanese 10-year JGB yields jumped eight bps this week to 1.57%, boosting 2025’s yield gain to 47 bps.
Forty-year JGB yields rose another three bps to 3.32% - increasing the y-t-d yield rise to 70 bps.
UK 10-year gilt yields rose nine bps to 4.70% - the high since May, and within 19 bps of January’s spike to the highest yield since before the 2008 crisis.
August 13 – Bloomberg (Caleb Mutua):
“A key measure of US corporate-bond valuations surged to the highest level in nearly three decades as investors raced to lock in still-elevated yields amid speculation that the Federal Reserve will resume cutting interest rates next month.
The extra yield that investors receive for owning investment-grade corporate bonds instead of Treasuries shrunk to just 73 bps Friday, the lowest since 1998, according to Bloomberg index data.”
I do take note of global bonds trading as if yields could make a surprising lurch higher, while U.S. investment-grade spreads trade to “the lowest since 1998” – during carefree summertime days leading up to cataclysmic Long-Term Capital Markets/Russia meltdown.
On a related subject, there are unfolding AI developments worthy of mention.
The historic AI mania and arms race are sucking up enormous amounts of finance.
They become only more acutely vulnerable to de-risking/deleveraging.
There are other significant festering risks, including energy limitations and “AI delusion.”
AI concerns could provide a catalyst for general market de-risking.
August 14 – Financial Times (Richard Waters):
“Much of the investment world’s excitement about artificial intelligence lies in its potential to make life more efficient and productive.
If the technology yields better search engines, easier ways to shop or AI agents that can organise and book your next holiday, huge digital markets could be up for grabs.
But what if millions of people are yearning for something more personal and profound from AI — and, in many cases, what if they are already starting to find it?
As conversing with a chatbot becomes a common daily activity, tech companies have been waking up to unexpected new behaviours on the part of their users, and to the deeper levels of attachment this is causing.
Rather than just a useful digital tool, many people are starting to treat AI as therapist, life coach, creative muse or just someone to talk to.
Soon, according to OpenAI chief executive Sam Altman, ‘billions of people’ will be trusting ChatGPT to advise them on ‘their important life decisions’.”
August 8 – New York Times (Kashmir Hill and Dylan Freedman):
“For three weeks in May, the fate of the world rested on the shoulders of a corporate recruiter on the outskirts of Toronto.
Allan Brooks, 47, had discovered a novel mathematical formula, one that could take down the internet and power inventions like a force-field vest and a levitation beam.
Or so he believed.
Mr. Brooks, who had no history of mental illness, embraced this fantastical scenario during conversations with ChatGPT that spanned 300 hours over 21 days.
He is one of a growing number of people who are having persuasive, delusional conversations with generative A.I. chatbots that have led to institutionalization, divorce and death.
Mr. Brooks is aware of how incredible his journey sounds.
He had doubts while it was happening and asked the chatbot more than 50 times for a reality check.
Each time, ChatGPT reassured him that it was real.”
August 14 – Bloomberg (Naureen S. Malik):
“Data centers looking to connect to the largest US grid must bring their power supply, the system’s independent watchdog said.
The warning escalates the watchdog’s position from just a month ago when it said the grid operated by PJM Interconnection LLC, stretching across 13 states from Virginia to Illinois, has no spare supply for new data centers…
However, in its quarterly report…, watchdog Monitoring Analytics LLC said it ‘recommends that large data centers be required to bring their own generation.’”
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