Evidence is mounting that the ill-fated Biden administration could not end quickly enough, while the pre-COVID-19 era of the first Trump presidency, which brought about strong growth and low inflation, will not return soon. There's evidence.
That's the signal we're getting from the bond market. It's possible that the fiscal time bomb of nonstop spending planted by Joe Biden and his minions is ready to explode in time for Trump's inauguration.
Most financial commentators are so fixated on stock indexes that they fail to understand the red flags in the bond market.
Of course, stock prices have some value.
Investors flocking to stocks since Trump's election, as they have until recently, means many believe Trump's tax cuts and deregulation policies will lead to higher corporate profits and GDP growth. This shows that they are betting on it.
In my view, the bond market provides a more accurate means of identifying fundamental cracks that could lead to severe financial crises in the future.
Please remember. The Dow reached an all-time high at the end of 2007, when the first red flags of the 2008 financial crisis began flashing in the lending market.
And this is just one example of bonds revealing a problem long before the rest of the financial world had a clue.
I'm not saying we're headed for a 2008-style financial collapse.
First of all, every collapse is different.
But the bonds do signal trouble ahead.
The best measure of this is the price of the 10-year bonds issued by the Treasury to finance most of the federal debt. Smart traders look for signs of financial distress because consumer interest rates, such as mortgages, are priced from their interest rate, or “yield.”
Bond prices move in the opposite direction to yields.
Since the beginning of December, 10-year bond prices have plummeted and yields have risen sharply to more than 10%.
If this happens, it is a sign of trouble ahead.
Federal Reserve Chairman Jerome Powell may not be able to fully overcome the inflation that is weighing on bond returns.
Traders demand a lower price (higher yield) to lend money to Uncle Sam.
Bill payer in trouble
Perhaps more troubling is that rising deficits, as seen during the Biden administration, mean the government will be increasingly unable to pay its bills.
When budget deficits explode, the Treasury has to issue more bonds at lower prices and higher yields to attract enough buyers.
What's worse is that these buyers, especially our foreign adversaries like the Chinese, who are increasingly financing our nation's vast coffers, may at some point significantly scale back their bond purchases. .
The result could be catastrophic, with yields soaring and causing a recession or worse.
These are the alarm bells the bond market is ringing, and the reason for the recent sell-off in stocks.
Trump has not yet taken office, but his critics are already blaming him for this turn of events.
They say his tax cuts will widen the budget deficit. His plans to use tariffs to seal trade deals has scared bond traders. Because tariffs increase the cost of goods, they are inherently inflationary.
The same goes for deporting illegal aliens, because it reduces the supply of people willing to work for low wages.
But the biggest concern, traders said, is clearly Mr. Biden's extravagance and promiscuous spending, fueled by an obsession with moving more transformatively to the left than his former boss, Barack Obama.
Yes, even if defeated, Biden will continue to spend like a man on a mission, seemingly oblivious to the potential fiscal cliff disaster it could cause, traders say. I say.
The U.S. government operates on a fiscal year that begins October 1st.
In November alone, the federal government deficit was $366.8 billion, nearly 20% higher than the same period last year.
This is surprising since the economy is growing and tax revenues should be strong enough to drive down the deficit.
Debt currently stands at $36 trillion, a frightening 123% of total GDP, and rising.
The budget deficit, the driving force behind the debt overhang, will rise to nearly $2 trillion next year.
For comparison, during President Trump's first term, the last deficit before COVID-19 was about $980 billion.
Larry McDonald, a former Lehman Brothers bond trader and author of the influential Bear Trap Report, describes Biden's parting “gift” to Trump in chilling detail.
Yes, big spending sprees like student loan forgiveness, green energy subsidies, immigration benefits, the ill-named anti-inflation law, and weapons against Ukraine are piling up.
McDonald said Biden is increasing spending as he prepares to leave office.
Between October 1 and President Trump's inauguration in January, Bidensta plans to spend $2 trillion, or 30% of its proposed annual budget.
“President Trump will need to cut spending for the rest of the year to stay within his allocated budget,” he says.
My FOX colleague, former Trump economic adviser Larry Kudlow, is an optimist.
He believes President Trump's free market policies of lower taxes and deregulation will actually promote economic growth and increase tax revenues.
President Trump will use tariffs strategically to gain an advantage in global trade.
The “DOGE Brothers” Elon Musk and Vivek Ramaswamy will take a tough knife on federal government bloat, further placating so-called “bond vigilantes” — traders whose selling pressure often drives government spending to its knees. Dew.
Let's hope Kudrow is right.
So far, bond vigilantes aren't buying it.
In fact, it looks like they're just getting started.
