Are the bond vigilantes about to ride again?
That’s the question we picked up to start the week – much like we ended last – Because it goes to the heart of the moment.
For the uninitiated, “bond vigilantes” are investors who refuse to buy government debt at low yields when they sense fiscal recklessness. Instead, they demand higher returns — or sell outright — forcing interest rates up no matter what the Fed does with its overnight rate.
Over the past year, as the Fed has lowered interest rates by 1% over three meetings, long-dated U.S. bond yields have actually risen – a sign that the bond vigilantes are already saddled up.
No one would benefit more from lower interest rates than the U.S. government. That much is clear. But can President Trump simply jawbone Powell into cutting? Or will the market itself — those vigilantes — decide where the line gets drawn?
Interest expense on the federal debt has hit $1.2 trillion in the last 12 months, a vertical climb since 2021.
Bank of America figures the Fed would need to slash another 1.5 percentage points to get rates under 3.1% and keep that number from ballooning further.
In other words, Washington needs lower rates more than anyone.
But as we learned in past cycles, markets can turn on a dime. And when they do, they don’t ask permission.
A graphic depiction of an economy in search of the mean. Total US household assets have increased dramatically since the pandemic-era lockdowns reminded us that markets go down in value, too. (Source: Federal Reserve)
As Dan Denning at Bonner Private Research warns, American household “wealth” — stocks, bonds, real estate, savings — has inflated by $60 trillion in just five years. A full $100 trillion since the 2009 crisis lows.
If you’re a glass-half-full guy, that’s the magic of staying invested through cycles.
If you’re glass-half-empty guy, you see the risk and ask: how much of the current $60 trillion could vanish just as fast in the next down cycle?
“Make the Foreigners Pay”
Trump’s tariffs are an old idea dressed up new: central planning can allocate trade better than free buyers and sellers. The White House line is simple — foreigners will foot the bill.
But reality looks different. Tapestry — the parent of Coach and Kate Spade — warned tariffs will cost $160 million this year. Investors weren’t impressed.
Still, Wall Street’s summer heatwave continues. All three indexes posted gains last week, driven by earnings season, during which 40% of S&P 500 companies raised forecasts (compared to 17% in Q1). Optimism reigns.
And yet Santiago Capital puts it best: “The market is soaring to dizzying heights, defying gravity like a rocket fueled by endless optimism. But beneath the surface, cracks are forming.”
Tech as a Jenga Tower
Nowhere is that more evident than in tech.
The S&P 500’s gains are increasingly concentrated in the Magnificent Seven — really just a handful, with Nvidia doing most of the lifting.
The top 10 stocks dominate performance. Diversification? Hardly. Think Jenga tower — pull out a few key blocks, and the whole thing wobbles.
Positioning is extreme. Systematic equity strategies sit at 89% exposure. Commodity trading advisors (CTAs), the trend-followers who turbocharge moves, are 95% long.
The Dow lags. The NASDAQ barely scrapes new highs — propped up by ETF money pouring into the same big names.
Here’s the kicker: momentum is fading. Stocks riding hype are trouncing those with strong balance sheets. That works — until it doesn’t. As always, it’s the stairs up, the elevator down.
So what happens if the momentum chasers all decide to head for the exits at once?
Powell’s Swan Song
Meanwhile, Jerome Powell heads to Jackson Hole this week for what may be his final bow. Markets are still pricing a September rate cut, but last week’s hot producer price index muddied the picture.
The irony is thick.
In 2019, Powell gave his famous “policy shift” speech — pledging the Fed would adapt as the world changed. Now the White House wants exactly that: a shift, not because the data demands it, but because the debt math does.
Few Fed chairs are pushed out early. Even fewer are under fire from a sitting president. None have ever been pushed out because they aren’t willing to bend a knee to politics.
What Powell says Friday — about inflation, tariffs, and rates — may be remembered as his last act. The end of one thing is always the beginning of something else. With Trump at the helm of Fed policy (figuratively, of course) we’re at the beginning of… what?
Earnings and Economic Crosscurrents
Retailers line up this week to report their earnings. It’s probably too early still to see any impact from tariffs but here’s the lineup: Home Depot Tuesday, Lowe’s, Target, and TJX Wednesday, Walmart Thursday.
Elsewhere, Duolingo’s CEO Luis von Ahn is still defending his “AI-first” memo. Critics cried layoffs. He insists it’s about multiplying productivity. The stock jumped 30% on earnings — so Wall Street, at least, is sold.
Neither will geopolitics be quiet. Trump meets Zelensky today in DC, joined by European leaders.
On Friday in Alaska, Trump backed off demands for an immediate ceasefire with Putin, shifting instead toward a broader “peace deal” that could leave Ukraine ceding land. The next act is playing out now in Washington.
Debt, Credit, and Demographics
The U.S. debt officially crossed $37 trillion. Crossing a big round number, even in the trillions, used to mean something.
Now, not so much. High-yield credit spreads — the extra return junk borrowers pay over Treasuries — are at 30-year lows.
That screams, “No risk here!” Lenders are funding even the riskiest bets at bargain prices.
But history shows this calm never lasts. When spreads widen, liquidity dries up, and stocks follow fast. Imagine a party where no one thinks about the fire exit — until smoke appears.
Layer on an aging demographic base and the looming 2033 insolvency of Social Security, and you’ve got a setup of record debt, record obligations, and markets that refuse to price risk.
Sentiment at Crisis Lows
Wall Street may be euphoric, but Main Street is spooked:
A full 62% of consumers expect unemployment to worsen in the year ahead.
The University of Michigan’s sentiment index fell to 58.6 in August — levels not seen since the 2008 financial crisis. (Source: University of Michigan)
As the University of Michigan’s sentiment survey chief Joanne Hsu put it: “Consumers are bracing for an increase in inflation to come. Moreover, they are also concerned that labor markets will weaken.”
Households are adjusting. For the first time in four years, debit-card spending is outpacing credit-card spending. It’s not that folks finally remembered their PINs. It’s a sign of growing restraint.
Wall Street may keep stacking blocks higher, convinced it’s all solid. But Main Street knows a house of cards when it sees one.
~ Addison
P.S.: Our next Grey Swan Live! will be at 11 a.m. ET Thursday, August 21. Stay tuned for further details!
Your thoughts? Please send them here: addison@greyswanfraternity.com
