The inflation bogeyman

Get ready for more bond-market scares

Anxieties about inflation, on which a constellation of asset prices depends, will persist

The week in financial markets got off to a breezy start, belying the turmoil of the previous week. 

By the time the New York market closed on March 1st, the s&p 500 index of leading shares had risen by a carefree 2.5% on the day. 

Europe’s stockmarkets had already followed Asia’s lead in closing sharply up. 

The mood in Asia was helped by Australia’s central bank, which acted to calm bond-market nerves by announcing it would intervene to buy long-dated government paper. 

Yields on ten-year Aussie bonds, which had risen quickly since New Year’s Day, fell by some 0.25 percentage points.

Stockmarkets gave up Monday’s gains on Tuesday and Wednesday. 

But conditions in America’s government-bond market were somewhat calmer, in stark contrast to the week before, when anxiety about inflation took hold. 

The steady fall in bond prices since the start of the year had suddenly quickened to a pace that threatened a destabilising rout. 

During February 25th the benchmark ten-year Treasury yield spiked above 1.6% (bond yields move inversely to prices). 

That is still low by historical standards, but a lot higher than it started the day, or indeed the year. 

This prompted a big one-day fall in the s&p 500 and a bigger fall in the tech-heavy nasdaq. 

Almost as suddenly, the worst fears about inflation have receded again—but perhaps not for long.

Much of what has happened is to be expected. 

Bond prices ought to fall as the economy recovers. 

The ten-year Treasury is the benchmark bond and is thus a barometer of risk appetite in markets and of economic confidence more broadly. 

And it is global benchmark. 

The sharp rise in Treasury yields from the start of the year until February 25th was matched by yields on bonds in other places (see chart 1).

Bond prices move in the opposite direction to confidence; bond yields go in the same direction as confidence. 

When the outlook for the economy is bleak, as it was in March last year, yields fall sharply as investors rush to the safety of bonds. 

As the outlook brightens, bond prices start to fall and yields start to rise again. 

Bond prices are thus countercyclical most of the time. 

This feature makes them very attractive diversifiers for equities, the prices of which are more procyclical, moving up and down in tandem with the economic cycle.

Mild inflation is not to be feared. Indeed it is in part changes in the market’s expectations of inflation that drive bond yields down in recessions and up in recoveries. 

But hopes for a reflation of the economy can quickly spill over into fear of higher inflation. 

The case for this seems stronger than it has for many years. The American economy is recovering quickly. 

Fiscal transfers have left households with lots of extra savings. 

Lockdowns have given rise to pent-up demand. 

Already there is plenty of fuel for a spending spree when the economy reopens in earnest. And more is on the way. 

President Biden’s $1.9trn stimulus package is likely to become law this month. A jump in the annual inflation rate seems assured in the coming months, if only because prices were depressed a year ago. 

Perhaps, then, the strength of consumer spending, as people start to move around more freely, might further push it up.

These latent anxieties form the backdrop to the recent turmoil. 

Three factors in particular seemed to be at work. 

First, the market for future short-term rates started to price in interest-rate increases by the Federal Reserve by early 2023, sooner than the Fed had indicated thus far. 

You can call this the inflation-fear element: if the economy seemingly has this much momentum behind it, can the Fed really hold off from raising rates for very long? 

And if it tightens sooner, might the peak in interest rates be higher? 

That would be a big concern for America’s stockmarkets, where high prices relative to future earnings are largely justified by the expectation that interest rates will remain very low for a long time.

Second, just as the market was having a rethink about Fed policy, the Treasury held auctions for two-year, five-year and seven-year bond issues on February 25th. 

These are maturities that are sensitive to shifts in expectations about Fed policy in 2023-24. 

Indeed the one-day rise in the five-year-bond yield was notable (see chart 2). 

The auctions went poorly. 

The seven-year bond had the lowest bid-to-cover ratio (a gauge of excess demand) for an issue of its kind for more than a decade. 

This further spooked the market about the underlying demand for bonds.

Third, the volatility in the bond market seems to have caused liquidity to dry up. So for a given volume of selling, prices fell further than they otherwise might have. 

Each of these three factors reinforced the other—hence the drama.

Given the anxieties about inflation, you may wonder why the bond market recovered its poise. 

There are probably limits to how far an inflation scare can run this early in the economic recovery. 

The message from the Fed’s rate-setters has generally been that they are not even thinking about thinking about raising rates or cutting back on bond purchases. 

In a speech on March 2nd Lael Brainard, a Fed governor, stuck to that script. 

“Today the economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress,” she said. 

The intervention by the Reserve Bank of Australia is a reminder that central banks have the firepower to cap bond yields, if they are determined to do so. 

And some private-sector investors will see value in Treasuries at these yields. 

Foreign buyers from Europe and Japan, for instance, where yields are lower, may find them attractive.

All this has restored a measure of calm to the bond market. Ten-year Treasury yields are inching upwards again, having fallen back to 1.4%. The equity market is choppy, but that might be expected after such a long run-up in prices. 

You could put the events of last week down to “technical issues”, the catch-all explanation for many a financial-market scare. 

But that would be a little too sanguine. 

Episodes in which trading liquidity suddenly dries up seem to be becoming more frequent in the Treasury market. 

These sorts of scares will recur. Inflation is the bogeyman of financial markets. 

A whole constellation of expensive assets depends on its quiescence. 

No one can yet be confident that it will stay subdued. 

Further bouts of bond-market jitters are likely before the year is out. 

US vs China: Biden bets on alliances to push back against Beijing

The new administration believes it can develop a more effective China strategy if it can work closely with old friends

Demetri Sevastopulo in Washington 

In his first weeks as president Joe Biden has been focused on the Covid-19 vaccine rollout and trying to pass a $1.9tn stimulus package. 

But he has been eager to deliver another central message — when it comes to China, he will not be a pushover. 

Speaking to the online Munich security conference last month, Biden said the US and its allies faced “long-term strategic competition” with China and had to “push back” against Beijing’s “economic abuses and coercion that undercut the foundations of the international economic system”.

“We are in the midst of a fundamental debate about the future and direction of our world,” he said, a choice between those who argue that “autocracy is the best way forward and those who understand that democracy is essential.”

Since Biden’s inauguration, Antony Blinken, his secretary of state, has described the detention of 1m Uighurs in Xinjiang’s labour camps as “genocide”, while national security adviser Jake Sullivan has slammed China’s “assault” on freedoms in Hong Kong, saying the US would “impose costs” on China over any abuses. 

While the Biden administration has tried to signal a clean break with its predecessor on most issues, the stance on China has often sounded similar. 

Biden has even signalled that he has no immediate plan to remove the tariffs Donald Trump imposed on imports from China during his trade war.

“People thought there was going to be a huge difference between the Trump and Biden administrations,” says Nadège Rolland, a China expert at The National Bureau of Asian Research. 

“But from the first few weeks, it seems there’s going to be a lot of continuity, not in style and tone but in the awareness of the challenges posed by China.”

Joe Biden: ‘We are in the midst of a fundamental debate about the future and direction of our world’ © AP

There is one big difference, however. Biden believes he can craft a much more effective strategy for dealing with Beijing by forging common ground with US allies and partners. 

In interviews with a series of senior officials who are leading the administration’s dealings with China, they describe a strategy that can be summarised as — tough, but with alliance backing.

Biden officials believe Trump was correct to take a harsher stance towards China. 

But they did not support his methods, saying the former president, who criticised the amount the US spent defending allies in Europe and Asia, had created power vacuums and weakened alliances.

One senior official said Biden wants to create what Dean Acheson, postwar US secretary of state, called “situations of strength” where like-minded nations co-operated to tackle threats.

But the question he is grappling with is how much partners, especially in Europe, are willing to take part in these plans. 

While opinion towards Beijing has hardened in many countries, European allies in particular are reluctant to get drawn into a cold war-style confrontation with China. 

“There’s a broad desire for dialogue and discussion, but no illusion that many EU countries are careful and want to take a step-by-step manner,” the official says.

Deep sharing

When Barack Obama took office amid the global financial crisis in 2009, the priority with China in his first year was to avoid unnecessary confrontation. 

The Biden administration, which operates with many of the same officials, is not ruling out co-operation with China — it says the US will engage on urgent issues such as Iran, North Korea and climate change. 

But the new president, they say, is more focused on rebuilding alliances.

“They’ve clearly signalled that they’re not in a rush to pursue dialogue for the sake of dialogue,” says Evan Medeiros, former top Asia adviser to Barack Obama.

French President Emmanuel Macron (C) with Chinese counterpart Xi Jinping and Germany’s Angela Merkel after their meeting at the Elysée Presidential Palace in 2019 © Chesnot/Getty Images

One senior official, however, stressed that the US was “not preventing dialogue in any way” with Beijing, but wanted to first explore areas of common ground with its allies.

“We are putting a premium on a deep sharing of views with partners and allies to help arm us with strategic perspectives,” he said.

Biden on Wednesday issued his “interim national security strategic guidance”, which said China was “the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system”.

In Asia, Biden wants to strengthen the “Quad”, a group that includes Japan, Australia and India, to counter China. 

The Financial Times reported this week that the White House is spearheading an initiative with Japan, Australia and India that would use vaccine diplomacy in Asia to counter China’s influence.

In Europe, his team has been engaging with European officials in an effort to find areas where they can co-operate on China.

But US officials say they recognise that while the US and Europe share many values, there is different risk appetite across the Atlantic. 

After Biden spoke in Munich, Chancellor Angela Merkel and President Emmanuel Macron both gave remarks with more emphasis on the need to co-operate with China.

European and US officials say they are about to hold a series of discussions in the coming weeks over everything from strategic approaches to specific issues such as how to work together to stop China from securing sensitive technologies.

A second senior US official says the talks will focus on finding areas of convergence and building “interlocking and overlapping” coalitions, as opposed to a big united front against China, in order to generate “the greatest wingspan”.

Medeiros adds that while Merkel and Macron have been “very clear that alignment against China isn’t on the cards”, the US can build coalitions for specific issues.

“There’s a real geopolitical play to leverage Europe to shape China. But that is different from some kind of Kissingerian approach to get Europe to align with the US against China,” he says. 

“We shouldn’t expect to see Biden, Merkel and Macron standing up and saying, ‘We will work together Yalta-style to balance Chinese power’.”

US officials are confident they can find common cause with Europe on issues such as the Uighurs and Hong Kong and on economic issues involving access to China’s market. 

But they say it will be harder to agree on technology issues, such as the 5G debate that strained transatlantic relations during the Trump administration.

One challenge for Washington is the different political calculations that have to be made when balancing competing economic and security considerations.

Nathan Sheets, a former top Treasury official, says Biden’s tougher stance reflects bipartisan congressional pressure which is amplified by the fact that looking weak on China would hurt the Democrats in the 2022 midterm elections.

“The zeitgeist right now demands a policy that is tough on China,” says Sheets, who is now chief economist at PGIM Fixed Income. “Everyone in Washington, on both sides of the aisle, is in broad agreement that China is a strategic competitor.”

Across the Atlantic, however, the picture is more mixed, partly because some politicians put a higher premium on ensuring good trade relations with Beijing.

“When I discussed the threat of China’s strategy and the necessity of a competitive response with foreign ministry and security officials in Europe, they were in complete agreement,” says Alex Wong, a former Trump official now at the Hudson Institute. 

“The question was always whether they could convince their politicians.”

Riot police stand in line as anti-national security law protesters march on the anniversary in July 2020 of Hong Kong’s handover to China from Britain © Tyrone Siu/Reuters

But Wong adds that European lawmakers seem more willing to adopt a more hawkish stance after seeing the lack of transparency from China surrounding the pandemic.

Pre-emptive deal

In another example of the challenge, the Biden team was frustrated that Europe signed an investment treaty with China just before the new president took office, even after Sullivan had signalled they would prefer Europe to confer before proceeding.

“US-EU co-operation is going to be harder than anybody likes to admit. It is easy to say, but harder to do as evidenced by the EU-China investment agreement,” says Anja Manuel, director of the Aspen Security Forum. “It wasn’t really the ideal way to go out of the gate.”

The first US official told the Financial Times that they had assumed China had put such an “enticing” deal on the table that the EU felt compelled to move quickly. But he says US officials who have since reviewed the text were very “underwhelmed” about concessions China made.

“We are concerned that these kinds of deals or arrangements don’t push China to move away and abandon certain elements of their economic practices,” he says.

While trade concerns may influence some European politicians to hold back on attacking China, one problem for the US is that the perception in Europe about the security and economic threats from China is nowhere near as strong as it is in Washington.

“Europeans have finally come to realise that China is not going to liberalise politically under President Xi Jinping but they’re still clinging to the hope that they can shape Chinese behaviour on economic issues,” says Rolland, a former French defence ministry official.

Susan Thornton, a former senior state department Asia official now at Yale Law School, adds that while Europeans share concerns about Chinese state capitalism and economic rule-breaking, they view the rise of China in a less threatening way than Americans.

“European officials who work on Asia policy say they’re used to seeing powers rise and fall and are comfortable with China’s rise, and don’t see things as a Manichean struggle,” she says. “There’s a structural power shift that is driving a lot of the US narrative about China, and the US tends toward overconcern about decline.”

Huawei’s production campus in Dongguan, near Shenzhen. Another measure of Biden’s approach will be how aggressively he tries to prevent China from obtaining sensitive US technology © Kevin Frayer/Getty Images

Signs of caution

While the US focuses on finding agreement with allies, its actions in the Pacific indicate that Biden will maintain a tough stance on China. 

The US navy has conducted freedom of navigation operations in the Taiwan Strait and held dual aircraft carrier exercises in the South China Sea — only the third time that has occurred since 2012.

But the Biden administration has yet to take any big decisions that would indicate whether its harsh rhetoric will be matched by equally tough action.

Mike Gallagher, a Wisconsin Republican lawmaker and leading China critic, says he has seen encouraging signs, but is taking a “wait and see” attitude. “The good news is that many of Biden’s advisers have demonstrated a growing awareness of the threat from the Chinese Communist party.”

In addition to Blinken and Sullivan, Biden has installed Kurt Campbell to be his Indo-Pacific co-ordinator and Laura Rosenberger as his top NSC China official. Meanwhile at the Pentagon, Ely Ratner, another more hawkish official, has been asked to head a new task force focused on China policy.

But one early litmus test may be how Biden responds to the situation in Xinjiang. In his first call with Xi last month, Biden said there would be “repercussions” for the persecution of Uighurs in China’s northwestern province. 

But he later said he understood that there were “different norms that each country and their leaders are expected to follow”.

The USS Barry in the South China Sea. The US navy has conducted freedom of navigation operations in the Taiwan Strait and held dual aircraft carrier exercises in the South China Sea — only the third time that has occurred since 2012 © Reuters

While defenders say he was just explaining why China might view the situation differently, critics questioned whether he would actually take meaningful action.

“It is increasingly clear that Biden himself is not as hawkish as his advisers,” says Gallagher, who worries that he will ignore his more hawkish advisers.

Another measure of Biden’s approach will be how aggressively he tries to prevent China from obtaining sensitive US technology — an area where Trump was assertive with export bans on companies from Huawei to DJI, the drone maker, and SMIC, China’s biggest semiconductor maker.

While Trump faced a tough time convincing European nations to exclude Huawei from their networks, Biden’s nominee for commerce secretary, Gina Raimondo, was criticised for refusing during her nomination hearing to commit to keeping Huawei on an export blacklist, before later clarifying her position after a big uproar.

Sarah Bauerle Danzman, an expert on the security implications of investment decisions at Indiana University, says the Biden team shares the same view about technology risks as the Trump team, but the key question is how they would evaluate the level of risk and the ability to mitigate threats in crafting policies.

Members of the Muslim Uighur minority protest outside the Chinese consulate last December in Istanbul © Bulent Kilic/Getty Images

“They’re going to have to think about the trade-offs in terms of when maximum pressure works and when it does not. 

A lot of this is about slowing the People’s Republic of China. Nobody thinks we can keep this technology from the PRC forever.”

Another indication will be how Biden handles an order that Trump signed to bar Americans from investing in Chinese companies with alleged ties to the People’s Liberation Army. 

The Treasury recently pushed back the implementation deadline by several months, as part of a broader review of many of the sanction-related actions taken by Trump.

“That will be a litmus test. If Treasury secretary Janet Yellen goes soft on that, they will lose a lot of goodwill in Congress,” says one former top Trump administration official.

John Smith, former head of the US Treasury’s Office of Foreign Assets Control, says Biden is unlikely to ease up on this matter. “There is bipartisan support in Congress that will press him on China,” says Smith, a partner at Morrison & Foerster. “And his own team will want him to take a tougher approach on China, but with allies.”

While Biden sizes up China with a harsher eye, Beijing has also taken a more jaundiced view of Washington, suggesting that relations will remain choppy.

“China is under no illusions about how the US is looking at the relationship,” says Jude Blanchette of the Center for Strategic and International Studies. “Beijing has also undergone a shift. There is now a more open discussion of longer-term rivalry with the US which was always there, but was buried.”


By Egon von Greyerz

Well, right on cue, it looks like the endless creation of fake money by the Fed has now poisoned both the stock market and the bond market. 

The Dow was down 1,000 (3%) points in two days and the Nasdaq down 7% in two weeks.

Gold and silver are also falling in sympathy. This was expected short term, but the outlook for the precious metals look excellent as I will discuss later.

Is this what the 16th century Swiss doctor Paracelsus ordered? It certainly looks like it. He told us that too high a dosage of anything is toxic. 

And with a world flooded with toxic money with little value, the levels of poison have reached extremes.

The toxic financial system needs to be cleansed but as we have warned many times, this will have dire consequences for the world.


Buy high and sell low is the mantra of many investors. And as the stock market surges – buy more! And when it falls, buy still more.

But this time, the method of always being long, which has been fool proof for decades and underwritten by the Fed, will fail hopelessly. Whether investors buy on strength or buy the dips, they will get slaughtered.

As often the case at the end of a cycle, we have in recent weeks seen frantic buying of anything that moves just like with tech stocks in 1999-2000.

Just look at the incredible 16 week inflow to stocks of $414 billion. This is 2X the 2018 peak of $200b and an all-time record.

Investors are clearly jumping on the bandwagon just before the music stops.

There are many indicators that point to a market top currently and a secular bear market for many year as I have pointed out in recent newsletters.

The graph below is a clear red flag for stocks. It shows that all the higher highs since October 2017 have not been confirmed by momentum indicators (bearish divergence). 

So in spite of the Dow having gone up almost 6,000 points since Oct 2017, the RSI (Relative Strength Index) has shown lower tops for each new high in the Dow. That is very bearish.

There are a number of other technical indicators pointing to a top at this time.


Coming back to toxic speculation, this caused the crash of the sub-prime market in 2006-9 when the global financial system was minutes from implosion. 

This led to the Great Financial Crisis. 

But an economics professor from Princeton University, who was chairman of the Fed at the time, “saved the world.” 

It was Helicopter Ben of course.

But Bernanke didn’t save the world. 

All he did was to take the orders of his masters, the heads of the major investment banks like JP Morgan, Goldman Sachs and Morgan Stanley. 

These banks had everything at stake. They were on the verge of bankruptcy and only a massive rescue mission by the Fed and other central banks could save them.

The rest is history. $10s of trillions of loans and guarantees later the US banks and the world were handed a stay of execution. And even that year in 2008, the bankers received the same mega bonuses as the previous year! Hmmm….

The 2006-9 crisis was never resolved and today, over 14 years since it started, the world is being hit by a crisis which is more than twice as big in debt terms with global debt up from $125 trillion in 2006 to $280t today.

The problem is that as debt has doubled, risk has gone up exponentially. And this time, the old cure of just printing worthless money will have ZERO effect on solving the problem.

But it will lead to the final collapse of the dollar and other currencies, massive problems in the financial system and hyperinflation.


Between 2000 and 2011, gold went from $290 to $1920. In 2011, Congressman Ron Paul questioned Bernanke about the role of gold: (click on the picture)

So Bernanke made it clear that gold is not money. When Paul pressed him, he came up with that “it is an asset”.

“So why do central banks hold gold” asks Paul. “Tradition” replies Bernanke.

Yes Ben, it is a wonderful tradition that gold has been money for 5,000 years but you don’t even understand it. (EvG’s words)

Bernanke also argues that gold is held as “protection against tail risk, a really bad outcome”.

Bernanke obviously couldn’t tell congress or the world that gold is held as protection against central banks’ mismanagement of monetary policy. Nor did he point out that since 2000, the dollar had lost more than 80% of its value against real money which is gold.

Well Bernanke clearly didn’t teach Austrian Economics (Sound Money) at Princeton. No, he is a true prophet of Keynesianism and MMT (Modern Monetary Theory). He was a clear wizard of money printing and still has the absolute record. During his reign, from 2006 to 2014, he doubled the US debt from $8.5 trillion to $17t.

A remarkable achievement and he didn’t even have to lift a finger!

Yellen took over Bernanke’s mantle at the Fed but wasn’t there long enough to set a record. But now we have the dream team BY (Biden Yellen) running the US economy.

BY will most certainly print more money and create bigger deficits than any president and treasury secretary in history. They will break all records. They have already spent $2 trillion before they started. And that is clearly the mere beginning.

The BY team are no spring chickens and the question is if they will last four years. But if they do, they will have increased US debt by many tens of trillions. They will also have crashed the stock market as well as the bond market.


So it will be BY, BY to all these bubble assets that their predecessors have managed to inflate to extremes.

As we enter an era of massive money printing, increasing deficits and debts, there will also be inflationary pressures that will see interest rates increase substantially.

The Fed will use all the trick they know to hold rates down. Still, so far the 10 year treasury is up from 0.38% in March 2020 to 1.5% today.

Until now, this is primarily a US problem. As the graph below shows, German and Japanese 10 year rates are rising but still very low with German’s still negative at -0.25% and Japan’s just positive at 0.16%.


With pressures on stocks and bonds, the precious metals are falling in sympathy as often is the case at the beginning of falling markets.

I have been stating for 20 years, that fundamentally gold and silver are in a very strong uptrend, supported totally by central bank’s destruction of paper money. Within major uptrends, there are always corrections and some are vicious.

At the beginning of 2000, gold was $290 and silver $5.40. So even as the metals correct currently, gold is still up 6X since 2000 and silver 5X!

If we first look at the 21 year chart of gold, the uptrend is crystal clear and the current correction is part of the pattern.

No investment moves in a straight line. 

And especially not precious metals. 

Gold and silver prices are determined in a casino of fake paper claims that bear no resemblance to supply and demand of the underlying physical metals.

Gold is currently undergoing a technical correction which we have pointed out for a while. 

I have also said that we could see $1,700-50. 

Often prices undershoot in a correction and we might see gold below $1,700 temporarily.

The precious metals often sell off at the beginning of a stock market fall and this is what we are seeing now.


Also, as we have often pointed out and most recently in a MAMChat with Matt Piepenburg and myself, gold and silver generally move up when real interest rates are negative. 

So it is beneficial for gold when the rate of inflation is higher than the rate of interest. 

Say interest is 5% and inflation 7%. 

That gives a negative real return of -2%. 

Thus this supports a higher gold price.

The Real Interest Rate line below shows the difference between the 5 year US treasury and inflation. During the sub-prime crisis in 2008 real rates moved up strongly and gold fell from $1,030 to $680. Clearly a vicious correction, but as real rates fell rapidly, gold rose strongly.

Gold then peaked 2011-12 and real rates bottomed in 2012. As real rates rose, gold fell from $1,900 to $1,050 in 2015. Then as real rates fell strongly in late 2018, gold surged from $1,100 to over $2,000.


As interest rates in the US have moved up lately, the negative yield has become slightly smaller and the metals have reacted negatively.

The course of events I see is the following:

- US rates will top and turn down temporarily as the Fed initiates accelerated money printing.

- Inflation in commodities and food will soon show up in consumer prices even though the government will try to suppress it. 

Real inflation is already considerably higher than the official rate. 

Based on the official calculation method pre 1980, consumer inflation is now almost 9% according to Shadow Statistics.

- After a temporary correction down in rates, they will continue to rise in spite of the Fed’s efforts to hold them down. This will create shock waves in the bond market and all financial markets.

- As the Fed loses control of rates, the rising cost of financing the total debt of US $80 trillion will lead to economic disaster for the US and a crashing economy. I would not be surprised to see 15%+ interest rates like in the 1970s to early 80s.

- Massive but futile money printing will lead to plummeting currencies and hyperinflation.

- Real rates will remain negative like in the 1970s. I remember interest rates in the UK being 15%+ for many years but inflation was always higher. Same in the US.

This scenario will be extremely bullish for gold. 

In 1971 gold was $35 and climbed to $200 in 1975. 

Then it corrected to $100 in 1976 whereafter it rose more than 8 fold in just over 4 years to $850 in Jan 1981.

I would be surprised if gold “only” goes up 8X from here in the next 4 years.

But physical gold should not be held as a speculative investment. 

Gold is real money and the most perfect wealth preservation asset you can hold. 5,000 years of history proves that.


Michael Pento 

The global sovereign bond market is fracturing, and its ramifications for asset prices cannot be overstated. 

Borrowing costs around this debt-disabled world are now surging. 

The long-awaited reality check for those that believed they could borrow and print with impunity has arrived. 

From the U.S., to Europe and across Asia, February witnessed the biggest surge in borrowing costs in years.

Thursday, February 25, 2021, was the worst 7-year Note Treasury auction in history. 

According to Reuters, the auction for $62 billion of 7-year notes by the U.S. Treasury witnessed demand that was the weakest ever, with a bid-to-cover ratio of 2.04, the lowest on record. 

Yields on the Benchmark Treasury yield surged by 26 bps at the high—to reach a year high of 1.61% intra-day–before settling at 1.53% at the close of trading.

What does the head of the Fed have to say about the move? 

Jerome Powell believes the volatility in bond yields is a healthy sign for the economy. 

Yet, out of the other side of his mouth is warning that nearly 30% of corporate bonds are now in “trouble.” 

The Federal Reserve and other bank regulators are warning that businesses impaired by Covid-19 are sitting on $1 trillion of debt and a high percentage of it is at risk of default—exactly 29.2% of lending was troubled in 2020, up from 13.5% in 2019, according to a report recently released by the Fed.

The average interest rate on U.S. Public Debt back in 2001 was 7%. 

Today, thanks to massive and unprecedented central bank intervention, it has plummeted to about 2%. 

Precisely because of the Fed’s manipulation of bond prices, the interest expense on that $27 trillion National debt was just $522 billion in 2020. 

If interest rates were to return to the normal level of 7%, the interest expense would soar to $1.9 trillion per year!

So, what pushed rates to record lows in the first place, and what conditions are necessary to keep them from surging much higher from here? 

There are three reasons for record-low bond yields. 

Number one: The Fed has been engaging in Q.E. at the record pace of $120 billion per month. 

It is in the process of purchasing $80 billion of Treasuries and $40 billion 0f M.B.S., which amounts to massive manipulation of bond prices. 

The second: The U.S. has experienced anemic G.D.P. growth. 

According to the B.E.A., real G.D.P. decreased 3.5 percent (from the 2019 annual level to the 2020 annual level), compared with an increase of 2.2 percent in 2019. 

Lower levels of growth push the flow of money towards fixed-income investments. And thirdly, inflation must be quiescent, for it is the bane of the bond market. 

The B.L.S. indicates that year-over-year C.P.I. increased by just 1.3% at the end of last year, which is well below where the Fed would like inflation to be. 

If either one of these conditions changes, rates will spike along with interest payments on the debt.

The problem, as far as the future direction of interest rates is concerned, is that all three conditions are now heading the other way. 

The rates of C.P.I. and G.D.P. growth are about to surge on an annual basis in the next few months due to last year’s virus-related base effects. 

Adding to this upward pressure on rates, the Biden administration could soon sign into law the $1.9 trillion COVID Relief Package. 

If approved by the Senate, the bill will include $400 in enhanced unemployment checks as well as $1,400 stimulus checks for most families. 

And, an expansion of the child tax credit to give families up to $3,600 per child. 

This huge amount of new debt issuance will once again be all monetized by the Fed.

Adding further fuel to the surging growth and inflation dynamic is the continued roll-out of the vaccines, along with the warmer spring weather, which should serve to steepen the downward trend in Wuhan-related hospitalizations and deaths that is already in place. 

This will lead to a reopening of the economy and cause a surge in Leisure and Hospitality sector hiring.

These factors should also cause Wall Street’s bond vigilantes to become dreadfully afraid of the inevitable tapering of the Jerome Powell’s asset purchase program. 

After all, the Fed is comprised mostly of Phillips Curve devotees; and the surging Non-farm Payroll reports coming in the late spring and early summer should awaken them from their slumber. 

The end of central bank rate manipulation should cause the average interest rate on debt service payments to spike higher. 

If the Fed were to be forced to abruptly end Q.E. and raise rates, that spike could–at least temporarily–rise towards that average rate of 7% seen in 2001.

Just how damaging could that be for this overleveraged economy? 

Our national debt now stands at $28 trillion, and last year’s annual deficit was a daunting $3.1 trillion.  

But now, President Biden’s $1.9 trillion COVID Relief package is just the start of 2021 spending plans. 

D.C. will then quickly turn to another multi-trillion-dollar infrastructure deal before the ink on this latest round of stimulus checks is dry. 

Alas, the C.B.O. already predicts the deficit for fiscal 2021 to be $2.3 trillion. 

Sadly, this is before, and such new government “stimulus” plans become law. 

It is inconceivable that the market for our government debt could function normally if our annual deficit climbs towards 35-40% of G.D.P. 

This will be especially true if the Fed is forced to fight inflation instead of continuing to supply its massive and price-insensitive bid for Treasuries.

Of course, we are only talking about government debt here. 

Spiking rates on the record amount of corporate debt, along with the real estate and equity market bubbles, will be absolutely devastating.

This brings us to one Annie Lowrey, staff writer for The Atlantic and author of the book “Give People Money.” 

I mention her because she is a torch carrier for the Modern Monetary Theory movement and is an apologist for Universal Basic Income. 

Regrettably, this is now something our government is fully embracing. 

Her claim is that the government can send people checks with impunity because inflation has not been a problem for a generation, and so most have no memory of it. 


Just because most have no memory of inflation doesn’t mean it can’t exist. 

Hence, she concludes we should not be worrying about a problem that we simply do not have. 

Well, to that, I say the Titanic didn’t have a problem with ice burgs for a while either.

Ms. Lowrey must not know about surging home prices that are once again pricing out first-time home buyers. 

She is also blind to skyrocketing stock values that are at all-time high valuations and bond prices which have reached the thermosphere. 

Indeed, asset price inflation has become intractable. And now, consumer price inflation is about to follow. 

This is precisely because MMT and U.B.I. are becoming entrenched in the economy and putting money directly in the hands of those same consumers; but without a commensurate rise in the productive capacity of the economy.

What this all means for the markets and the economy is clear: we will be experiencing chaotic swings between inflation and deflation with increasing intensity over time.

My friend John Rubino put the current state of affairs succinctly:

“So here we are “Capital D” Depression if governments rein in their spending and borrowing, and a spike in interest rates followed by a Depression if governments continue on their present course.”

The bond market is already starting to crack, and the numbers hit on the Richter scale are rising. 

For those looking to offset equity risk by holding bonds…well, you are in for a shock. 

That 60/40 portfolio strategy may have worked fairly well for the past forty years. 

But fixed income will not act as a ballast for your investments when both equities and bonds are in a bubble and headed for a crash. 

In contrast, it is a recipe for disaster. 

Active management to navigate these inflation booms and deflationary busts is now mandatory.

Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check”  and Author of the book “The Coming Bond Market Collapse.”