The Law of Bubbles
Doug Nolan
An apt Friday evening headline from “The Times” (UK):
“After a Very Brief Selling Frenzy, Bonds Are Back in Fashion.”
What a difference a few trading sessions can make.
UK 30-year gilt yields jumped to 5.75% in Monday trading – the high back to June 9, 1998 – before reversing 24 bps lower to close the week to 5.51%.
After jumping to 4.52% - the high since June 11, 2009 – French 30-year yields closed the week at 4.37%.
Italy’s 30-year yields traded Wednesday to 4.68% - within two bps of a 30-month high - then closed at 4.51%.
Japanese 30-year yields rose to a multi-decade high of 3.30% Wednesday (ended week 3.24%).
Australia long yields trade up to 5.19% Wednesday, the highest since November 1, 2023 (ended week 5.08%).
Wild global bond volatility didn’t garner much attention here at home.
Early in the week, it appeared global long-bond yields were breaking decisively to the upside.
Even 30-year Treasury yields hit 5.0% early Wednesday morning, within only 11 bps of the October 2023 spike to the highest yield since July 2007.
Long-bond yields ended the week down 17 bps to 4.76%.
After trading to 4.30% early Wednesday, 10-year Treasury yields closed the week 15 bps lower at 4.07%.
Treasury and global yields reversed on Wednesday’s weaker-than-expected job openings (JOLTS) data.
Buying only intensified on Friday’s weak (22k) August Non-Farm Payrolls report, surely fueled by a short squeeze and reversal of hedges.
The rates market is now pricing 69 bps of cuts by yearend, eight bps more on Friday’s session and 13 for the week.
September 3 – Bloomberg (Maria Eloisa Capurro):
“Federal Reserve Governor Christopher Waller said the US central bank should begin lowering interest rates this month and make multiple cuts in the coming months, adding that officials could debate the precise pace of reductions.
‘We need to start cutting rates at the next meeting, and then we don’t have to go in a locked sequence of steps,’ Waller said…
‘We can kind of see where things are going, because people are still worried about tariff inflation.
I’m not, but everybody else is…
We kind of know we want to get toward neutral…
We know roughly how much you might want to cut — say 100, 150 bps.
But how fast we get there is going to depend on the data that comes in.’”
The Fed is about to commence another round of rate cuts, with financial conditions even looser than when they initiated round one.
Gold’s $139 weekly gain (4.0%) to a record $3,587 pushed y-t-d gains to 36.7%.
Silver’s 3.2% rise boosted 2025 gains to 41.9%.
Platinum’s 0.6% increase raised y-t-d gains to 52%.
The S&P500 and Nasdaq Composite traded at record highs Friday.
September 3 – Bloomberg (Josyana Joshua, Ethan M Steinberg and Ronan Martin):
“Borrowers from across the globe are rushing into the bond market, with more than $128 billion of sales so far this week, and investors are lapping up the new debt.
In the US, 13 issuers offered high-grade bonds on Wednesday…
That’s a day after 27 issuers sold $43.3 billion of debt altogether, the third largest amount in volume ever.
In the high-yield market, seven new deals are being sold Wednesday, making 10 so far for the week.
In Europe, a day after record debt sales of more than €49.6 billion ($57.9bn) across sectors…”
August 30 – Wall Street Journal (Matt Wirz and Vicky Ge Huang):
“So much for the dog days of summer.
Companies with low credit ratings are feverishly issuing new bonds and loans to capitalize on the appetite for risk that is driving stocks to record highs…
Issuance of junk-rated bonds and loans hit a monthly record of $240 billion in July, according to… JPMorgan...
This month is also expected to be the busiest August ever, with total issuance set to exceed $100 billion.
That brings the amount companies have raised from junk bonds and loans so far this year to $930 billion, just shy of the $1 trillion issued during the same period in 2024, despite the credit freeze this spring.”
Job growth has weakened.
Our highly imbalanced “Bubble economy” is demonstrating pockets of weakness - along with strength.
But are we to believe the broader economy is faltering?
The Atlanta Fed GDPNow Forecast has the economy expanding at a 3.0% pace.
If recessionary forces are gaining momentum, it would be news to the exuberant junk bond market.
Junk bond yields closed the week at 6.66%, the low since April 22, 2022.
Investment grade yields ended the week at 4.78%, the low since October 3, 2024.
The iShares High Yield Corporate Bond ETF (HYG) has returned 6.85% y-t-d, with the iShares Investment Grade ETF (LQD) returning 7.24%.
The Bloomberg Leveraged Loan Index has returned 4.04% y-t-d.
In short, corporate Credit is certainly not signaling an impending recession.
September 5 - Washington Post (Marianne LeVine and Lauren Kaori Gurley):
“Federal law enforcement agents this week raided a Hyundai factory in Bryan County, Georgia, arresting hundreds of immigrant workers in the largest worksite raid in President Donald Trump’s second term.
A total of 475 people were arrested in the operation, which took place Thursday, authorities said at a news conference on Friday.
Steven Schrank, special agent in charge of Homeland Security Investigations in Atlanta, called it the ‘largest single-site enforcement operation’ in the agency’s history.”
Like about everything these days, analyzing labor market dynamics is anything but straightforward.
To what extent ICE operations and deportations impact job growth is unclear.
A couple weeks back, “Homeland Security Secretary Kristi Noem said… the number of unauthorized immigrants living in the U.S. has declined by 1.6 million since President Trump began his immigration crackdown (CBS).”
It’s possible that a sharp slowdown in job creation will not translate into typical easing of wages and compensation.
Both August ADP and Non-Farm Payrolls data indicated resilient wage pressures.
When financial conditions are this loose, I’ll err on the side of anticipating above-consensus economic growth.
However, I’m mindful that this dynamic won’t last forever.
And we’re now in uncharted waters regarding the scope and duration of “Terminal Phase Excess.”
This super Bubble is on borrowed time.
Ominously, today’s extraordinarily loose conditions are clearly having a greater effect stoking Credit excess, speculation, and asset Bubbles than on promoting sound investment.
Treasury Secretary Scott Bessent, Wall Street Journal (“The Fed’s ‘Gain of Function’ Monetary Policy), September 5, 2025:
“Overuse of nonstandard policies, mission creep and institutional bloat threaten the central bank’s independence.
The Fed must change course.
Its standard tool kit has become too complex to manage, with uncertain theoretical underpinnings.
Simple and measurable tools, aimed at a narrow mandate, are the clearest way to deliver better outcomes and safeguard central-bank independence over time.”
“Successive interventions during and after the financial crisis of 2008 created what amounted to a de facto backstop for asset owners.
This harmful cycle concentrated national wealth among those who already owned assets.
Within the corporate sector, large firms thrived by locking in cheap debt, while smaller firms reliant on floating-rate loans were squeezed as rates rose.
Homeowners saw their property values soar, largely insulated by fixed-rate mortgages.
Meanwhile, younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation. By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen.
Its pursuit of a wealth effect to stimulate growth backfired.”
“The Fed's growing footprint has profound implications for independence.
By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy.
The central bank's balance-sheet policies directly influence which sectors receive capital, intervening in what should be the domain of markets and elected officials.
Entanglement with Treasury debt management creates the perception that monetary policy is being used to accommodate fiscal needs.
Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices. Instead of accountability, presidents and Congress have expected intervention when their policies falter.
This ‘only game in town’ dynamic has created perverse incentives for irresponsibility.”
“At the heart of independence lies credibility and political legitimacy.
Both have been jeopardized by the Fed’s expansion beyond its mandate.
Heavy intervention has produced severe distributional outcomes, undermined credibility and threatened independence.
Looking ahead, the Fed must scale back the distortions it causes in the economy. Unconventional policies such as quantitative easing should be used only in true emergencies, in coordination with the rest of the federal government.
The U.S. faces short- and medium-term economic challenges, along with the long-term consequences of a central bank that has placed its own independence in jeopardy.”
It’s difficult to take issue with much of what Bessent writes.
But he somehow neglects the absolutely critical.
To be sure, it’s easy - and justified - to fault the Fed.
The Fed has made such a monumental mess of things.
But we should not disregard their critical co-conspirators, including the federal government, Wall Street, and the leveraged speculating community.
And how ironic that an ultra-wealthy hedge fund operator (for decades) is today’s leading critic and mastermind behind what could become the most significant Federal Reserve revamp since its inception.
The Treasury Secretary writes, “Overuse of nonstandard policies, mission creep and institutional bloat threaten the central bank’s independence.”
Okay, but the pressing threat to independence operates out of the White House.
“The Fed must change course.
Its standard tool kit has become too complex to manage, with uncertain theoretical underpinnings…”
“There must also be an honest, independent, nonpartisan review of the entire institution…”
I’m all for honest and independent.
And as much as I appreciate the sound analysis of much written, Secretary Bessent’s op-ed is disingenuous.
Having worked under George Soros for years, and then as an independent hedge fund manager, Bessent has mastered “reflexivity” and Bubble analysis like few others.
We share a similar focus on the crucial importance of financial conditions.
He has for years provided adept Bubble analysis, in particular blaming asset Bubbles on loose Federal Reserve policies.
From his January 2024 Key Square Capital Management letter:
“We believe that this inappropriately easy policy inflated the dot-com equity bubble…”
“Our base case is that a re-elected Donald Trump will want to create an economic lollapalooza and engineer what he will likely call ‘the greatest four years in American history’…
In this scenario, the greatest risk factor, in our opinion, would be a sudden rise in long-end rates.”
From a year ago: August 20, 2024 - Bloomberg (Katherine Burton):
“Scott Bessent, who runs macro hedge fund Key Square Capital Management, said he expects a jump in volatility and a decline in US markets because the economy is more fragile than most investors realize.
‘Right now we view the US economy as being in a precarious, emerging market-style equilibrium,’ Bessent told clients…
The government’s large deficit and debt issuance using shorter-term instruments have fueled asset bubbles in stocks and real estate, he wrote, adding that ‘every emerging market exhibiting these characteristics, especially during an election cycle, has experienced a downside economic shock.’
While the jump in equities and real estate prices have benefited wealthier individuals, stagnating wages and higher prices for food, shelter and other necessities have walloped lower-income groups, he wrote.
That’s led to both more borrowing and rising delinquencies on consumer loans, a state he predicts will extend to people earning higher incomes when the asset bubbles deflate.”
International Economy, Winter 2024:
“The Federal Reserve’s persistent, loose monetary policy since the Great Financial Crisis has allowed corporate zombies to continue in existence and has caused a broader misallocation of capital.
Financial engineering gives an illusory wealth effect.
Only productive investment can drive a nation’s standard of living over the long run.”
Additional pertinent comments from an April interview with Tucker Carlson:
“Go back and look at the financial crisis in ’07–’08.
The economy looked great right up until it didn’t.
Look at the end of the dot-com bubble, then the whole credit problem, the fraud at WorldCom, Enron—some other companies.
The economy looked great... until it didn’t.
And I think one of the things we won’t get credit for—but that this administration will have done—is avoiding a financial calamity.
Think about it: there’s an analysis that one of the reasons 9/11 happened was because the airlines didn’t want to pay for reinforced cockpit doors.
They kept pushing back, FAA didn’t push hard enough.
Well, now we’ve got the reinforced doors.
So, I look at it this way: We’re putting on the reinforced doors before the crash.”
Seems instead that doors are being unlocked and cracked opened.
With no “Bubble” mention or related analysis, Bessent’s Fed piece is little more than sophisticated subterfuge.
MarketWatch:
“Why Bessent’s Essay Against the Fed is a Bid for ‘Control’ Over the Central Bank.”
The Treasury Secretary can espouse needed reform.
His boss, meanwhile, demands significantly lower interest rates.
There’s no mention of Bubbles or loose financial conditions.
Sustaining the boom and winning the midterms take absolute precedence over whatever ails finance and the U.S. economy.
Bessent, an outspoken critic of the Yellen Treasury’s heavy T-bill issuance, now orchestrates the same.
He’ll argue “simple and measurable tools, aimed at a narrow mandate,” until the administration demands the Fed pull out all the stops to hold deleveraging and crisis dynamics at bay.
The Fed is today trapped by Bubble dynamics.
They have been held hostage for years.
Having taught economic history at Yale, specifically “Twentieth Century Financial Booms and Busts”, the 2007-2009 financial crisis, and hedge fund history and practice, Bessent has acute awareness.
Lamenting “mission creep,” he is intimately aware of the role speculative leverage and associated fragilities played in the “Fed’s growing footprint,” “expanded powers,” and “extending its remit.”
The Fed’s ever-expanding role has been a direct consequence of a cycle of ever-more destabilizing speculative deleveraging and bursting Bubbles.
I share Bessent’s concern that “the central bank’s balance-sheet policies directly influence which sectors receive capital…”
He and scores of hedge fund and Wall Street operators have reaped billions, at the expense of social cohesion and stability, and trust in our institutions, including the Fed.
Today’s critical issue is not a rogue Federal Reserve as much as it is untenable market structure.
But not a peep out of the administration to address speculative leverage, a culture of speculation, egregious financial excess, problematic derivative strategies, and high-risk lending.
Indeed, this is the most pro-speculation, pro-Bubble U.S. government imaginable.
The Law of Bubbles: If You Find Yourself in a Bubble, Stop Inflating.
The Trump administration is breaking laws.
Global bond market instability, booming equities, AI and crypto manias, surging precious metals prices, acute economic uncertainties – are all manifestations of monetary disorder.
The consequences of inflationism and monetary disorder have been fundamental to the rapidly shifting geopolitical landscape.
Indeed, it was as if the notion of a “new world order” became an indisputable reality this week.
September 3 – AFP:
“North Korean leader Kim Jong Un and Russia’s Vladimir Putin flanked Xi Jinping at a massive parade of military might in Beijing…, capping a week of diplomatic grandstanding by the Chinese president and his allies against the West.
In unprecedented scenes, Xi shook both their hands and chatted with the pair as they walked down a red carpet by Tiananmen Square, with Putin to Xi's right and Kim to his left.
The event, ostensibly to mark 80 years since the end of World War II, was a chance for Xi to put on an extravaganza to showcase China's military prowess and bring together friendly leaders to send a message to the rest of the world.
Kicking off the parade, President Xi warned the world was still ‘faced with a choice of peace or war’, but said China was ‘unstoppable’.
China’s enormous new intercontinental ballistic missile DF-5C, with a range of 20,000 kilometres, counted prominently among the tonnes of hardware on display.”
September 1 – Financial Times (Joe Leahy and Kathrin Hille):
“Xi Jinping has called on Russia, India and other countries in the region to join China in leveraging their economic influence to challenge the west at a time of rising geopolitical and trade tensions.
The Chinese president… told more than 20 leaders that with the world undergoing ‘turbulence and change’, they needed to uphold an ‘orderly multi-polar world’.
This included championing free trade and ‘a more just and reasonable global governance system’, Xi said in a clear challenge to the current US-led system.
‘We should expand the scope of co-operation, make the most of each country’s unique strengths, and shoulder together the shared responsibility of promoting regional peace, stability and prosperity,’ Xi told world leaders…”
The message was as clear as it was ominous.
China has solidified a formidable anti-U.S. alliance to counter U.S. global power and influence.
There will be no backing down.
Trump “bullying” will be met with an iron fist.
They sure know how to do a military parade.
Quite a spectacle, including Kim Jong Un, with his nukes and hostility for the U.S., suddenly elevated to Xi and Putin’s inner circle.
China is “unstoppable” and the world faces “a choice of peace or war.”
Whether it’s military or economic, Xi means business.
If the U.S. is intent on resisting China’s absorption of Taiwan, be prepared to face three conjoined nuclear adversaries.
If the Trump administration intensifies trade wars and sanctions, say against China, Russia, India, or Brazil, there’s a united front ready to fight back.
President Trump has been fond of saying “trade wars are good and easy to win.”
Bessent seemed to enjoy talking smack:
“They’re playing with a pair of twos.
What do we lose by the Chinese raising tariffs on us?
We export one-fifth to them of what they export to us, so that is a losing hand for them.”
An overconfident administration was misguided, if not delusional.
They seem to go out the way to antagonize allies and fracture traditional alliances, while goading our adversaries into resolute anti-American coalitions.
It’s a powerplay strategy incongruous with an increasingly fractured and hostile world.
President Trump does not today enjoy the power he anticipated on the global stage – that he so relishes.
This defiant “new world order” will not sit well.
Especially of late, he doesn’t seem in the mood to let things go.
Bullying seems to be working domestically, while posing heightened geopolitical risk.
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