THE DEEPER DIVE: The US Treasury Secretary is Lying to You about Inflation because Trumpflation Is about to Rip Your Freakin' Face off!
There is no other explanation, other than the slight possibility that Scott Bessent is dumber than dirt about the very things that are supposed to be his area of expertise.
No sooner did Treasury Secretary Scott Bessent declare that inflation would only be rising for another two months before it starts to go “significantly” back down again (disinflation), than the bond market called him out as a liar (or just plain dumb). The bond vigilantes immediately took the reins, and started pricing in the higher inflation that Bessent’s words perversely guarantee because anyone that blind to the risks of inflation is bound, in his position, to help create a lot more of it!
“Treasury Buyers Get 5% Long Bond For First Time Since 2007”
A $25 billion auction of new 30-year bonds on Wednesday was awarded at 5.046%…. The result … showcased middling demand as U.S. government yields reach their highest levels in nearly a year.
Sales of three- and 10-year Treasurys earlier in the week also drew less demand than expected.
Auction bidders are demanding higher fixed rates as compensation for the risk that inflation—stoked by rising energy prices since the U.S. attacked Iran in late February, choking off Middle-East oil supply—will accelerate further. The oil shock has driven broad inflation gauges including the U.S. consumer and producer price indexes higher, and lifted market-based inflation expectations….
The last 30-year Treasury to carry a 5% interest rate was sold in 2007, on the brink of the global financial crisis and U.S. economic recession. Since then, no 30-year Treasury has carried an interest rate higher than 4.75%.
The 10YR bond also easily danced its way up 11 basis points (a big move in such short time in bond world) to clear well above 4.5%, which I’ve said in the past is the level at which stocks start to experience trouble from bonds.
As could be expected, stocks finally woke up to the inflation reality that bonds were pricing in. Most likely, investors saw 5% on the 30YR and decided it was time to trade up to safe and easy interest by shifting money out of the stock market. How long stock investors will remain smart by getting out of stocks is another question, but it demonstrated exactly the kind of move I wrote about earlier this week when I warned of trouble signs emerging for the precarious stock market from the bond market:
Charlie McElligott, Nomura Capital’s quant guru, gives a much clearer view regarding the market’s insane positioning. He just pointed out how precarious the stock market’s rise really is, saying the materialization of any downside risk at this point could trigger an avalanche of 15-20% in just one day! (“Deranged Stocks Dodge Reality as Inflation Rises”)
I wrote the article because …
According to CNBC, the stock market is not ignoring the Iran War or the sustained soaring of oil prices. Stocks are rising due to magnificent economic reasons!
“Uh huh, sure!” said I.
The article, itself, will someday become a classic study of insanely deranged justifications for the market’s irrational exuberance.
Now we see how fragile the stock market is. If bond rates hold this high and especially if they rise some more, we’ll see that materialization of “downside risk” that McElligott said could trigger an avalanche as large 15-20% in a single day. All they have to see is, “OH some investors are taking inflation seriously now, raising the benchmarks that other interest rates are pegged to. Guess I better take that seriously, too.” Then the crash begins.
CNBC also said in a manner as lame between the ears as Bessent was on Thursday,
There are very real fundamental reasons for the comeback, including an economy much less reliant on oil to power it, strong company margins with energy costs as just a small input and tech companies whose businesses are insulated from the impact powering S&P 500 earnings forward.
To counter such utter nonsense, I pointed out what should have been obvious to them:
Would that be tech companies like AI that demand enormous amounts of energy far beyond any spikes in demand humans have ever seen right at a time when energy costs are going through the roof for the reasonably distant foreseeable future? Are those the companies that are insulated from these forces? The article, itself, points out how AI is the driving tech force….
That is insanity. AI and tech are far from immune to Natural Gas shortages and energy price hikes because they demand tremendous amounts of energy beyond anything we’ve ever seen by any industry and because the helium used to produce AI’s computer chips comes from NatGas. So, the article, itself, is lunatic thinking. These guys are smoking weed soaked in expensive crude oil, and their own smog cloud is making them delirious….
Lunacy. A plunge SHOULD follow an energy shock ripping through the entire global economy if “very real fundamental reasons” were actually being applied to companies that demand extraordinary amounts of energy and helium, especially when we can all see that this energy shock is the biggest in history already with no clear end in sight.
Sheer lunacy.
They all fell off the same turnip truck that the rotten Bessent rolled off of.
McElligott, contrary to the deranged financial writers at CNBC, noted that the stock market was not running on any fundamental strengths; it was narrowly stacked and extremely fragile for that very reason and was running on nothing but its own hot air … or, as he called it self-referential thinking. It was, in other words too impressed with itself. It was continuing to rise because it saw that it was rising!
That, I noted, means …
it is susceptible to any external economic pressure that brings a significant change into the narrow view angle within the market’s blinders.
That would include, particularly, a rise in inflation causing bonds to price upward and compete with stocks for safer yields:
If any outside contradiction finally breaks through, stubborn investors who have only been looking within the loop to see what they want to see, may be horrified when they can’t find a narrative demented enough to explain it all away. Then the cascade will be calamitous. The factors McElligott listed that could accomplish that breakthrough are already so abundant and powerful that it’s incredible they haven’t already broken through:
Those include:
Inflation, which we know is rising again due to tariffs passing through and is also rising due to longterm high oil prices.
[and]
Interest rate increases, which became more likely after today’s inflation report…. Today’s lousy Treasury 10Yr bond auction with low participation even at higher yields also signaled that the bond vigilantes will be pricing through the inflation that Fed rates are falling behind on. This is going to make it hard for the incoming Trump chair to make good on the delirious hopes of further rate cuts when interest rises every time the Fed lowers its targets, making the Fed look stupid if it takes that path.
And—ta, da!— the bond action that day did signify more bond moves to come right away as the bond vigilantes did grab the reins away from stocks.
The third thing McElligott said could send the fragile market over a cliff was …
Geopolitical events.
To which I asked,
Hmm, where are we going to find any geopolitical events powerful enough to upset the apple cart?
We got that, too, as the war started pushing oil prices back up right away when Trump’s trip to China failed to produce any dreamed-of headway on the wartime closure of Hormuz:
U.S. markets were selling off sharply as global oil prices topped $109 a barrel, inflation fears rippled through Wall Street and President Donald Trump’s China trip ended without a breakthrough to reopen the Strait of Hormuz. (MarketWatch)
That put a dent in the delirious dreaming about easy answers.
Market expectations have shifted sharply. Traders now see a much higher probability that US interest rates could end the year higher than previously expected, as inflation risks from oil prices and geopolitical uncertainty remain difficult to ignore. (Brisk Markets)
and from the New York Times:
Hopes for an end to the war in Iran faded after President Trump failed to secure a commitment from China to help persuade Iran to reopen the Strait of Hormuz. (NYT)
As for Kevin Warsh having more freedom to lower interest because inflation would be settling back down in two months, as besotted Bessent also claimed:
Even with recent inflation news universally bad, Treasury Secretary Scott Bessent expects price pressures to ease soon, just in time for the new Federal Reserve chair to take over. (“Clearing the Low Bar”)
I don’t think so!
The bond market isn’t waiting around for Kevin Warsh, the newly confirmed head of the Federal Reserve, to get settled into his role at the helm of the U.S. central bank.
Yields across the roughly $30 trillion Treasury market already were repricing higher, raising interest rates, tightening financial conditions and increasing borrowing costs for the economy. (MarketWatch)
So, dream on Bessent! The bond vigilantes have already taken control of interest rates away from the Fed. If they stay with this move, the Fed will have to run to catch up with its rate increases, just to make it look like it is still in control. (That is why we call bond investors, when they finally get riled enough by inflation, “bond vigilantes.” Market forces at that point go where the market says it should price for inflation, taking interest where the market demands.)
Trump’s visit to China ended like this:
As delusional as Trump and Bessent are, Trump should have been wearing a strait jacket in that meme.
This is why I let everyone know …
I’m going to save my analysis of today’s rising inflation report for my weekend Deeper Dive, but I will note that the government’s inflation report shows that items having little to do with direct oil impact on prices are rising more quickly now, too, though gasoline and petroleum-related prices were the main drivers. Those non-petroleum prices are likely the effects of the last year’s tariff regime coming through, even though the Supreme Court quashed most of those tariffs (while Trump reimposed some at lower levels under a different set of laws). It’s still a little too early to see the cost of oil pricing through to other items, as I’ll explain in my Deeper Dive.
The increase in today’s CPI inflation report for April is nothing compared to what is coming as Trump’s war is already dragging on far beyond any timeline he originally gave for how quickly the war would be over, disrespectful entirely toward his claim, which is now more than a month old, that he had already won victory.
Bezirk Bessent
So, here we go! You saw each little lever in the movement click into the right position this week to release the result I said you could expect to see quickly materialize. Now, for paying subscribers, I’m going to lay out the reasons Bessent was ludicrously wrong about inflation (just like CNBC was about stocks) and show where this is all going. Get ready for a serious ride.
To be clear, I’m not saying today’s move in stocks and bonds on Friday starts the new trend. It may well have done so, but things could try to relax again or Trump or Bessent might get away with a little more blabbergassing, but the precise moves of these action levers proved 1) how unstable the stock market is, contrary to CNBC, and 2) how ready the bond market is to take inflation seriously and how serious bond investors found the inflation to be, in spite of Bessent’s bizarre claim, and 3) how quickly every piece fell into place to injur stocks as the vigilantes took control and raised interest rates.
It may, given the precise timing, even have been Bessent’s claim, less than a day before the big move in bonds, that made investors suddenly nervous when they saw that the top finance guy in the US is so out of touch with inflation that we are bound to see the kind or inflation eruption we saw after Covid when the Fed kept saying inflation was transitory, so the Fed and Treasury did nothing that they needed to do to stop inflation. (Also, something I warned was likely way back then.)
I’m going to lay this situation wide open like a prophetic chicken and read its entrails so that you can see why I am so certain about all of this—certain enough that, if Bessent proves right, and inflation starts significantly retreating two months from now, I’ll hang up my economic writing. I’m betting my site that he is wrong! I’ve made that big bet twice before and not lost it. So, let’s make it a trilogy.
The only way inflation will start to significantly retreat two months from now, as Bessent claimed, is if it takes a spectacular rocket ride to the moon in the next two months, gaining so much height that it can slowly settle back down at a rate that will still leave it higher months down the road than it was before this war. That is the one caveat I’ll give because, in that case, it won’t matter that inflation is settling back down, it will be still savagely high for months to come, even if slowly trailing downward again under Fed tightening, not an environment where the Fed can start to lower rates, as Bessent claimed in order to try (unsuccessfully, thanks to the bond market’s response) to pump the stock market.
That kind of spectacular rise in inflation could actually happen during the next two months, and I’ll show how that possibility is building rapidly. (It is not the path I think is likely, but the pressures are building that could make that happen, which would make such a rocket ride over the next two months the terrifying detail Bessent left out of his prediction that inflation will begin to fall two months from now but only because he doesn’t foresee any rocket ride in inflation. The possibility of such a rapid rise can be seen in the unexpected burst of inflation we just got that completely blindside economists.
Bessent’s claim that the Warsh Fed will have a path for lowering interest rates at that point shows he doesn’t see that pathway at all. If it happened, it could make him accidentally right about inflation starting to settle back down soon, but only because things got so horrendously out of control before the two months were up.)
That would be the path of sudden economic collapse, which would destroy the Treasury’s US debt equations because the Fed would be forced to slam on the inflation brakes with savage rate hikes because that is what the bond vigilantes would already be doing with or without the Fed. That would bring economic devastation because of how it would hit the US debt and US citizens.
So, yeah, IF (BIG IF) that happened, then Bessent could be right about inflation starting back down in two months (but for very different reasons than he envisions) …. slowly and with much anguish and an intense battle by the Fed. It’s not the likely path; but, by either path, high inflation is here for the long haul, and I’ll now show paying subscribers why inflation will still be rising in two months and how high it is likely to go, and I will explain how easily that rocket ride could happen.