Gold News

The Fed's Bright Red Alert

Suddenly it's panic in the bond market...

"INVESTORS Prepare for Inflation," warned the front page of The Wall Street Journal on Wednesday, writes Bill Bonner in his Diary of a Rogue Economist.

"Rising Treasury Yields Ripple Through Markets," it added on Thursday.

"US Treasurys lead bonds sell-off," the Financial Times piled on, "as investors fear a faster retreat from crisis stimulus."

These headlines may herald the biggest financial turnabout in 35 years.

Stocks are hitting record highs. But bonds are slipping.

For three and a half decades, inflation and interest rates – which tend to travel in the same direction – have gone down.

Now, they are going up.

The yield on the 10-year Treasury note – an important benchmark for borrowing costs in the economy – fell to 1.37% on July 8, 2016.

Since then...

"Another drop in bond prices sent the yield of the 10-year Treasury note above 2.5%," says the Journal.

But what does it mean?

Shaping up in front of us is a delicious farce, a comedy of errors and ignorance, like The Three Stooges, but without the "nyuk, nyuk, nyuk."

Fed chief Janet Yellen either didn't see the bond sell-off coming...or she didn't think it was worth worrying about.

There is nothing "flashing red," she said in her last congressional appearance. "Or even orange."


We mean, from a slapstick point of view.

Ms.Yellen, then at the San Francisco Fed, didn't see the crisis of 2008 coming, either. Instead, she turned her back and got whacked on the tushy.

Then, when the crisis hit, she had no idea what she was doing in the hysteria that followed, so she deferred to her fearless leader at the time, the hilarious Ben Bernanke.

This clown later modestly described himself as having the "courage to act."


The markets were correcting the damage done by excess credit provided by Greenspan, Bernanke, and Yellen, et al. But instead of having the cajones to let the correction happen, Bernanke it even more credit.

To the cheers of practically every investor, householder, politician, and economist, he slashed interest rates and bought up bonds with newly minted digital cash (QE).

That is, he was the quack who gave the diabetics what they wanted: more sugary donuts.

And now, the world economy may be going into a coma...brought on by $233 trillion worth of debt – nearly all of it desperately dependent on Bernanke's and Yellen's absurdly low interest rates.

As for the alarming signal delivered by the bond markets this week, we'd put it in the vermillion category.


Bond investors are generally more professional and more experienced than stock investors; they are the so-called adults in the room.

So, as the stock market continues to punch holes in its ceiling, bond prices are taking the down elevator. And bond yields – along with borrowing costs throughout the economy – are going up.

In other words, the trend that has marked practically our entire adult lives – the sweet "stimulus" that has fattened almost every price, business, loan, and financial hope on the entire planet – is turning sour.

Central banks, via various QE programs, have put out some $15 trillion in extra credit so far this century. But central banks give...and they take. What makes it funny is that they almost always do so at the wrong time for the wrong reason.

Now, with more people owing more money than ever before in history, central banks in the US, the Eurozone, and China are either cutting back on their bond buying or shrinking the stockpiles of bonds they already own.

The Fed, for example, is on schedule to reduce the bonds on its balance sheet at a rate of $600 billion a year by the end of 2018.

Jens Weidmann, a German member of the European Central Bank's governing council who is expected to take over as its president next year, has called for an early end to QE in Europe.

And China is not only backing away from money printing, it is also signaling it may not be keen on buying more US debt, either.

That leaves the Bank of Japan as the only major central bank still pumping in liquidity. But that last major source of worldwide credit seems to be tightening up.

Reports the Financial Times: "[T]he Bank of Japan trimmed purchases of 10- to 25-year debt by ¥10 billion to ¥190bn [$1.7bn]...the first reduction in the sector since December of 2016."

And "if the world's most assiduous user of quantitative easing is itself easing back on the use of the proverbial punchbowl," wonders an analyst at British broker IG, will this mean that the others "start to shift to a higher gear, earlier than previously thought?"


And we will add a wonder of our own: Could the central bankers have set up a better pratfall?

They lured the whole world to their party – promising free booze and canapés. And now, they're not only putting away the liquor and turning off the lights, they're setting the curtains on fire.

Stay tuned.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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