The Treasury bond bloodbath is no longer about Fed policy, inflation mojo or the business cycle. It is impossible for the Powell Fed to meet its dual mandate 2% inflation target with even a 6.5% Fed funds rate as 3Q GDP was a shocking 4.9%. We are doomed to relive the stagflation nightmare of the 1970’s when the Fed consistently mismanaged its inflation fight while war, revolution and two exogenous oil crises led to the end game of 20% dollar interest rates, the worst global recession since FDR, the bankruptcy of Latin America and the Reagan/Volcker Super Dollar that led to a plunge in crude oil to $6 a barrel under Sheikh Yamani.
Inflation will re-accelerate as the angel of death haunts the battlefields of the Middle East while the US fiscal meltdown gets worse and China/Europe are in deep macro doo doo. King Dollar has begun its ascent of raw fear. The Third World debt crisis of the 1980’s is reflected in the EM dominoes destined to die in the next year. The CRE meltdown is just the tip of the iceberg for entire asset classes, shadow banks, properties/commodities whose price will take a death dive. My $20 oil call is only an extrapolation from what happens when Saudi Arabia does not play the role of swing producer as Yamani proved in 1986, Nazer in 1999, Naimi in 2014 and MBS/AABS in 2020.
The Hamas-IDF balance of terror broke down on October 7th and has escalated into the deadliest Mideast war since 6th October 1973. The US/China relations have deteriorated to a pre-Nixon/Mao entente in 1972 and promises a new tech cold war. This tripolar world is a disaster for interest rates as it means the US defense budget will be higher, world trade will slump, cross border capital flows will diminish and globalisation has finally met its Freudian discontents.
Fiscal meltdown means US bond yields will rise to 8-9%. I saw Greek government bond yields spike from 4-40% when Athens lost its fiscal credere. Egypt, downgraded to B-, trades at distress/default levels while black market rate for EGP is 45. I wonder how Sisi will finance his $400 billion new capital (Fustat? Thebes? Heliopolis?) now that Uncle Sam will need a trillion Gulf petro dollars to foot the bill for a war, exactly as happened in Kuwait in 1991. The Bible says, there is a time for greed and a time for fear, a time for life and a time for death. The Volatility Index quantifies this message. Wars cause hyperinflation, if the experience of the French Revolution/Napoleon, Bosnia, Weimar Republic and Zimbabwe attests.
With a $1.7 trillion fiscal deficit, a tax and spend White House and Congressional clowns, the fiscal math is a cruel joke – and the world will pay a terrible price when nemesis replaces leveraged hubris. I could be dead wrong but I know I am right. Risk is a four letter word, but then so is ruin and mumbo jumbo insurance is a fraud solution.
Also published on Medium.
