Bessent's Gambit
Doug Nolan
Let’s start with weak July non-farm payrolls.
For now, I’ll continue to downplay weak payroll data (loss of 23k vs. expectations of 80k gain).
The Unemployment Rate actually dipped a tick to 4.1% - and hasn’t been lower since January 2025.
Unexpectedly, the Labor Participation Rate declined 0.2 to 61.4% - down one full percentage point so far this year to match the low back to February 2021 - and, from Bloomberg, “excluding the pandemic was the lowest since the 1970s.”
An additional million plus workers have left the labor force since the start of the year.
There are various reasons people opt out of traditional work, some directly linked to Bubble excess.
How many millions have become work-from-home market gurus, earning their living day-trading stocks and options?
How many millions have retired early, content to live off huge market gains?
And how many millions have used market gains along with loose Credit to pursue entrepreneurship?
These are extraordinary times, and the monthly change in non-farm payrolls no longer provides a reliable gauge of economic activity or labor market conditions.
August 3 – Bloomberg (Jeffrey Sparshott):
“US manufacturing activity expanded in July at the fastest pace in more than four years as demand remained strong, production surged and firms added workers.
The Institute for Supply Management’s July manufacturing gauge rose to 55.6, the highest since May 2022.
Readings above 50 indicate growth, and the sector has now been above that mark for seven consecutive months.
The gauge for production rose to 58.5, its highest level since late 2021, while the employment measure indicated manufacturers increased headcount for the first time since September 2023.
New orders growth… also picked up… ISM’s prices index fell to 71.1 in July, the lowest in five months but still significantly higher than at the beginning of the year.
ISM’s gauge of exports for July was the highest since March 2022 and a measure of imports climbed to its best mark since June 2021.”
It’s worth repeating.
Manufacturing activity expanded at the fast pace since May 2022.
The ISM Manufacturing Index has surged 7.7 points so far in 2026, the steepest advance since emerging from the pandemic.
Strength was notably broad-based.
In particular, factories are ramping up production.
Manufacturing data corroborate the “overheating” thesis.
That said, I generally downplay the relatively small manufacturing sector while overweighting data from services.
A weakening services sector would ameliorate overheating risks.
We’re just not seeing that play out, as financial conditions remain extraordinarily loose.
The ISM Services Index increased slightly to a solid 54.1.
New Orders jumped two to 57.2, with Prices Paid rising back above 70.
The S&P Global U.S. Service PMI added a full point to a stronger-than-expected 54.6, the highest reading since last October.
The Employment component popped more than a point to 50.8, the high since November.
Prices charged (58.5) jumped to a more than one-year high.
I’ll toss into the analysis July’s 7.359 million job openings (“JOLTS”).
Weekly Unemployment Claims remain at a historically low 200k level.
There was also July’s stronger-than-expected Durable Goods data (“non-defense, ex-air” up 2% for the month).
August 6 – Wall Street Journal:
“U.S.-based employers announced about 33,500 job cuts in July, the lowest monthly total in two years, according to Challenger, Gray & Christmas, a global outplacement firm.
So far this year, layoffs are 41% lower than they were at this point in 2025.
The tech sector has been hit hardest, with more than 30% of all the jobs lost to date in 2026.
‘The pace of layoffs fell dramatically this summer,’ said Andy Challenger, who tracks workplace data and trends.
‘Hiring has also increased over last year by 25%, so while AI is shifting the labor market, it is not dismantling it.’”
I do not see compelling data that would warrant downgrading overheating risks.
Instead, financial conditions remain exceptionally loose, and inflationary pressures are ever more deeply ingrained.
It was, however, a conveniently timed weak jobs report.
Stocks added to strong weekly gains, with the VIX (equities volatility) Index closing the week at 14.9, the low back to the week of January 9th.
The S&P500 Friday posted a record close.
Notably, 10-year Treasury bond yields dipped a measly three bps (30-yr 2.5bps) on the surprising job losses – closing the week at 4.65% (down 9bps for the week).
The rates market ended the week pricing 28 bps of rate cuts this year, down from last Friday’s 37 bps.
What impact might Friday’s Non-Farm Payrolls have on a divided Warsh Fed?
I doubt the hawks will be swayed, while the doves will be emboldened.
The new chair’s job was not made any easier.
August 3 – Axios (Neil Irwin):
“The U.S. and Japanese governments have acted together to try to prop up the value of the yen on global currency markets.
The way they did it contains a clue about U.S. goals — and has some worrying implications for global markets…
The two governments appear to have used complementary tools.
The New York Fed, acting for the Treasury, reportedly sold euros to buy yen.
Meanwhile, the Fed’s Foreign and International Monetary Authorities (FIMA) Repo Facility gave Japanese authorities a way to borrow dollars against Treasury securities rather than selling those securities outright.
In effect, the U.S. Treasury was acting to strengthen the yen-euro exchange rate.
It apparently achieved its goal of strengthening the yen on global currency markets, without the Japanese government selling U.S. government debt on a large scale…
A Treasury official tells Axios that the action was a response to the speed and disorderliness of the yen sell-off, and meant to prevent that instability from spreading.
‘Markets are treating this as a currency issue, but it’s far bigger than that,’ Nigel Green, CEO of the financial consulting firm deVere Group, wrote…
‘When two of the world’s largest economies step into the market together for the first time in over a decade, they’re telling investors something about stress building beneath the surface of the global financial system, not just about an exchange rate.’”
August 2 – Bloomberg (Cormac Mullen and Matthew Burgess):
“Treasury Secretary Scott Bessent’s championing of a Federal Reserve facility Japan can use to boost the yen comes with the benefit of protecting the US bond market from excess sales.
The Foreign and International Monetary Authorities Repo Facility enables overseas central banks to use their Treasury holdings as collateral to access dollars, rather than sell the bonds on the open market to raise cash.
It was created during the pandemic in 2020 to allow counterparties to raise liquidity without overly disrupting the Treasuries market.”
August 5 – Wall Street Journal (James Mackintosh):
“The joint U.S.-Japan support of the yen is unusual.
The way it is being financed is unprecedented, and adds liquidity when the punch bowl of the U.S. economy and markets is already overflowing.
So far the scale of intervention is small.
But Treasury Secretary Scott Bessent wants the Fed to drop the $60 billion cap on the emergency facility Japan plans to use—or abuse—and pledged to do ‘whatever it takes’ to help.
Put simply: America is offering to print dollars to buy yen.
It’s not quite quantitative easing, because the way it works is the Federal Reserve lends Japan money in return for temporary ownership of Treasurys in repurchase agreements, rather than outright buying the Treasurys.
But like QE it expands the Fed balance sheet and pumps billions of dollars into the economy.
When the Fed is widely thought to be moving toward raising rates, this is exactly the opposite of what it should be doing.
Expanding the balance sheet is also the opposite of what Chairman Kevin Warsh has repeatedly said he wants to do.”
August 3 – Financial Times (Ian Smith, David Keohane, Kate Duguid and Claire Jones):
“When Washington and Tokyo staged their first joint intervention to boost the Japanese yen in almost three decades, the man steering the US effort was no stranger to making high-stakes currency trades.
Friday’s move was spearheaded by Scott Bessent, a former trader who made his name betting against the pound in 1992 and the yen in 2013 while at George Soros’s investment firm.
At the helm of President Donald Trump’s Treasury, he has taken an increasingly activist approach to financial markets.
Washington’s historic intervention to prop up another nation’s currency stunned investors in part because the yen had been weakening more steadily than the chaotic moves that typically prompt co-ordinated action.
They were also struck by the decision to sell euros to buy the Japanese currency rather than using dollars.
The trade reflected the growing willingness of Bessent’s Treasury to delve deeper into forex markets after it swooped in to support the Argentine peso last year.
‘It’s not for soft power, it’s not for the greater good, so what is the US doing?’ said one big US bond investor.”
“So what IS the US doing?”
My read has the Trump administration recognizing acute underlying market fragility.
Bessent is willing to take extraordinary measures to prevent potentially unmanageable market instability – egregiously speculative stock market near record highs notwithstanding.
And this is what markets have expected – what’s built into elevated prices and historically depressed risk premiums.
The “Trump put” in action – sophisticated, crafty, aggressive and proactive.
Bessent this week went so far as to invoke Mario Draghi’s “whatever it takes” (from 2012 European bond crisis).
So, we can pretty much dismiss Kevin Warsh’s rhetoric on scaling back the Fed’s balance sheet and market interventions more generally (less than three months into his term!).
I’ll assume the Fed Chair shares Bessent’s worry that intensifying currency instability might force Japan to liquidate Treasuries to fund yen support operations, selling that would push Treasury yields even higher while further pressuring vulnerable marketplace liquidity.
Higher Treasury yields and waning liquidity would reverberate through fragile global bond markets, risking a disorderly unwind of “carry-” and “basis-trade” leverage around the world.
That’s the nightmare scenario the administration is hellbent on avoiding, especially while at war and with midterms looming less than three months away.
Coincidentally, it was two years to the week that U.S. and global markets were buffeted by a major yen “carry trade” “flash crash.”
To refresh memories: From Reuters:
“Wall Street’s most-watched gauge of investor anxiety logged its largest ever intraday jump on Monday and closed at its highest since October 2020, as traders scrambled to hedge against market volatility during a global selloff…”
And from the August 10, 2024, CBB:
“At Monday’s intraday lows, the S&P500 was down 4.3%, the Nasdaq100 5.5%, the KBW Bank Index 5.0%, Germany’s DAX Index 3.6%, France’s CAC40 3.1%, UK FTSE100 3.2%, and Japan’s Nikkei 225 Index 13.2%.
Bitcoin was 13.8% lower at Monday’s low…
During peak Monday panic, the market was pricing a 3.85% December policy rate, down an incredible 79 bps in four sessions.
At rate lows, market pricing implied 148 bps of rate reduction by year-end.
Two-year Treasury yields sank as low as 3.65% in Monday trading, down 40 bps to a 15-month low.
At lows, two-year yields were down 71 bps in four sessions.”
It’s the type of chaotic market dislocation not soon forgotten by Scott Bessent and Kevin Warsh.
The August 2024 incipient de-risking/deleveraging episode, however, was quickly reversed by market-induced dovish BOJ comments (Shinichi Uchida: “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile.”).
Global Bubble rescued and further energized.
And in two years of additional policymaker accommodation, global speculative leverage only ballooned to more precarious extremes, ensuring today’s much greater fragility.
Bessent’s Gambit triggered yet another market reversal and short squeeze.
The Nasdaq100 rallied 5.1% this week, as the Semiconductor Index surged 9.2%.
The Goldman Sachs Most Short Index spiked 9.6% higher.
Short squeezes and the unwind of market hedges are powerful liquidity creators.
Accordingly, the week saw gold jump 7.3% ($295) and silver surge 10.4%.
The NYSE Gold Arca Gold BUGS Index rallied a blistering 21.9%.
Most financial conditions indicators retreated to near multiyear lows (loose conditions).
I was thinking this week about a George Soros quote:
“When I see a bubble forming, I rush in to buy, adding fuel to the fire.”
Of course, speculators will aggressively play market Bubbles.
Lots of fuel will be thrown on the fire.
But what happens when everyone becomes a speculator – when policymakers accommodate Bubble excess for so long that it becomes such a rational decision for all to partake in the mania?
When basically anyone with the wherewithal – including government policymakers and Fed officials – has a significant chunk of their wealth in the markets and a vested interest in sustaining asset inflation?
Who will safeguard system stability?
Kevin Warsh’s affinity for Alan Greenspan is fascinating.
“Like Alan, I intend to fill the role of chairman with energy and purpose, just the way Chairman Greenspan did.”
Okay, but there will be no second coming of “The Maestro.”
Greenspan was credited for rescuing the markets following the 1987 stock market crash; resuscitating the economy from the early-nineties deep recession; resurrecting the banking system from the depths of crisis; successfully orchestrating multiple bailouts; and adroitly supporting the economy’s technology revolution.
“The Maestro” had a secret partner: unfolding booms in non-bank Credit creation and “Wall Street finance.”
And some three decades later, the Federal Reserve still has no analytical framework or policy mechanism for managing unfettered Credit creation and asset Bubbles.
The imperative of early Bubble recognition goes unrecognized.
This week, I also thought of a quote I stumbled across years ago when studying the “Roaring Twenties.”
It was a simple comment by a Federal Reserve official in 1929 while discussing dangerous Wall Street speculative excess and the dilemma it presented for policymaking.
He asked: “How are we to stop people from doing what they want to do?”
Markets have succumbed to a precariously dysfunctional phase.
There’s no turning back.
For too long it has paid to ignore risk, buy every pullback, and lever up for big returns.
Broken markets have proven incapable of orderly adjustment/correction.
At this point, risk management is for suckers.
Hedging only hurts performance.
And from a macro perspective, derivative hedges and short positions create highly flammable fuel for squeezes, panic buying, and FOMO speculation.
Will this week’s reversal and squeeze evolve into the typical FOMO market run higher?
While the stock market is hankering for speculative blow-off, bond market fragility is a mounting issue.
Financial conditions are too loose and inflation too deeply entrenched.
The likelihood of ongoing issues in the Gulf ensures ongoing energy and supply chain issues.
Tariff and trade war issues will also continue to stoke inflationary tailwinds.
And to anyone paying attention, intensifying climate change coupled with a powerful El Niño has inflation ramifications.
Throw into the mix reckless fiscal deficits and an evolving Federal Reserve credibility crisis, and I’d bet on a bond market these days less than friendly to stock market shenanigans.
Bessent’s Gambit was conspicuously pro-Bubble.
Structural damage — deep and wide-reaching — runs unabated.
August 5 – Bloomberg (Simone Foxman):
“Surging retail trading isn’t just transforming markets; it’s also highly correlated with demoralization in young men, according to a new study.
One-quarter of men aged 18-29 said they trade stocks daily, and almost two-thirds of them (64%) report feeling like failures, according to a study of 2,000 men published Wednesday by the Institute for Family Studies…
Of the 23% of young men who said they gambled daily, including on sports and events, 66% reported similar angst…”
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