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The Daily Missive

The Valiant Return(s) of The Bond Vigilantes

By November 13, 2023No Comments

It's tough to make predictions, especially about the future.”

— Yogi Berra

This week is a big one for the Fed and its knock-down, drag out against “inflation”. Here are some economic data points financial journalists will be anticipating, then obsessively noodling:

  1. October CPI Inflation data—Tuesday
  2. October PPI Inflation data—Wednesday
  3. Retail Sales data—Wednesday
  4. Philly Fed Manufacturing data—Thursday

Big retailers including Walmart, Home Depot, Target, and Macy’s will also report earnings.

And there are a total of 14 Fed speaker events.

If you listen, you can actually hear the horde of market stenographers cracking their knuckles in anticipation.

We expect all of these data points to furnish us with an update on our thesis from The Great American Shell Game: namely, the American consumer is tapped out and the Fed is not that serious about fighting real inflation.

As a consequence “economic anxiety” continues to increase… and as a symptom we are continuing to see a rise in random violence. Car jackings, for example, are up over 500% in Baltimore alone with little sign of reversal.

The other dominant strain in the news will be the continuing dysfunction and theatrical histrionics of “mainstream politics.”

The new Speaker of the House, Mike Johnson, has advanced a plan to keep the government open past Friday night at midnight, when the previous resolution engineered by the previous Speaker, Kevin McCarthy, expires.

The measure has been discounted as “extraordinarily complex” and does not include any budget cuts or funding for the wars in Israel or Ukraine.

As we approach the primary season, the inability of the House to govern—the nation or themselves—is all but considered a given.

“Something’s gotta give…” we’re thinking, but our forecast is, before January 15 “nothing will.”

Through Friday, the stock market has rallied for two weeks straight.

The Nasdaq had its best day in 7 months Friday as tech investors pushed the index 275 points higher. The S&P 500 also gained for the ninth out of 10 sessions.

The strength of the market recently has less to do with fundamentals than the “bond vigilantes” stepping in and putting a floor in a collapsing Treasury market.

You’ll recall “bond vigilantes” are a group of big swinging bond traders who step in when the market is signaling a lack of faith in the government’s ability to manage the economy or outsized geopolitical uncertainty.

From a CNBC post on November 1, 2023:

Speaking at a Robin Hood Foundation and JPMorgan event in New York, Druckenmiller said he had become “really nervous” in recent weeks that something in the economy is about to break.

As a result he revealed he has bought a “massive leveraged positions” in short-term notes, adding his position to the increasing number of investors sounding the alarm on the global economy.

In recent weeks Bill Ackman, founder of Pershing Square Capital Management, revealed he has decided to end his bet against 30-year Treasury bonds saying “there is too much risk in the world to remain short bonds at current long-term rates.”

Shortly after the ‘Bond King’ himself, Bill Gross, urged his followers on X to “invest in the curve” on bonds, which have been hit with a selloff in recent months.

Since the bond vigilantes got busy in the week leading up to October 27, the S&P 500 has gained nearly 10%.

As much of an oxymoron as it may sound, during “extreme episodes” in the bond market, the vigilantes have more influence on price and yields than do government or central bank policymakers.

As we’ve pointed out, the sell-off in Treasuries from April to October was the most aggressive in the nation’s history… going all the way back to 1787 when the bonds were first issued. If that isn’t extreme, we don’t know what is. And thus, the bond vigilantes ride again.

A little background. The phrase “bond vigilante” was coined in 1984 by the uber analyst Ed Yardeni following the Fed’s historic bout with inflation under then Fed Chair Paul Volcker. In mid-October, Bloomberg made this observation:

It was bond vigilantes who compelled President Bill Clinton to scale back his ambitious domestic agenda—which was to include a middle-class tax cut—during his first term to focus on deficit reduction instead.

Clinton was stunned to find himself at the mercy of the bond market, according to journalist Bob Woodward’s book, “The Agenda,” which quoted Clinton raging to aides: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f—-ing bond traders?”

The impact of the bond selloff on the politics of the time prompted Clinton political adviser James Carville to say in 1993: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back to the bond market. You can intimidate everybody.”

Falling bond yields and commensurate stock price rises have investors thinking the market may fulfill its customary promise and close the calendar year out with a strong rally.

Will this week also be the exception that proves the rule? We’re going to stick with Yogi Berra on this one as the answer is anyone’s guess.

In the meantime, we’ll keep one eye on the vigilantes as inflation and retail data flow, Fed mandarins speak and political theater once again emanates from Washington.

Follow your bliss,

Addison Wiggin

P.S. Following reader suggestions, we’re also going to continue our rather academic discussion with Libertarian Candidate for President in 2024, Michael Rectenwald.

Tomorrow, we’ll hear his thoughts on the Great Reset and the nefarious globalist characters he refers to as the “Subversive Elite.” Stay tuned.

Addison Wiggin

Addison Wiggin Addison Wiggin is an American writer, publisher, and filmmaker. He was the founder of Agora Financial and publisher for 18 years. An acclaimed New York Times best-selling author, his books include: Financial Reckoning DayEmpire of DebtThe Demise of the Dollar, and The Little Book of the Shrinking Dollar. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.