Bonds continued to get hammered. On Tuesday morning, the yield on the 10-year Treasury rose above 2.9%, and the yield on the 30-year is knocking on the door of 3%. Since bond yields rise as bond prices fall, this indicates a serious decline in the bond market. In his podcast, Peter Schiff said that at some point, the market is going to actually crash.
A crash is coming. Because, if the bond market doesn’t crash, the stock market will. And if the bond market does crash, well then, the stock market is going to crash too. So, either way, at some point you’re going to get some kind of crash.”
The last time bond yields were this high was in late 2018. The target Fed funds rate at that time was 2.25% to 2.5%.
So, that was the highest the Fed was able to raise rates, and they had to start cutting them because that 3% yield was doing a lot of damage to the economy, as were the two-and-a-quarter to two-and-a-half Fed funds. Well, the Fed funds rate is still at .25 to .5 now. The Fed has only hiked rates once by 25 basis points. And we’re already almost at 3%. … So, yields are already where they were when the Fed funds rate was 2% higher than it is right now.”
If the Fed actually succeeds in raising short-term rates back to 2.5%, by then, you should see bond yields above 5%.
Does anybody believe that the economy can handle 5%? We couldn’t even handle 3% in 2018 when we had a lot less debt than we have now.”
Peter said the thing that should really scare investors in both the bond and stock markets is just how fast yields rose to 3% even though the Federal Reserve has barely started to move.
We’ve already reached the level where the economy broke down in 2018 because of how much interest rates had already risen.”
Remember, in 2018, when the economy reached this level, the Fed stopped tightening. It began cutting interest rates, and it relaunched quantitative easing. This fact gets lost in the extraordinary monetary policy we got in response to the COVID lockdowns. But the Fed was already loosening before the pandemic.
There is another thing the Fed was doing in 2018 that it’s only just now talking about — balance sheet reduction. In fact, the balance sheet is still growing.
The question is: if the Fed is talking about fighting inflation and they’re serious, why do they continue to create inflation? If the Fed is really going to aggressively shrink its balance sheet, why does it continue to expand its balance sheet? And if the US bond market is this weak when the Federal Reserve is still buying bonds, imagine how much weaker it’s going to get when the Federal Reserve not only stops buying but actually starts selling, which is exactly what they are indicating they are about to do. This is why I’m saying that a crash could be imminent in the stock market when stock investors actually come to terms with the reality of what’s going on in the bond market and what it portends for the economy and corporate earnings.”
In this podcast, Peter also talks about the weakness in the technology and cryptocurrency sectors, strength in gold and silver mining stocks, the high levels of inflation and how far the Fed has fallen behind the curve, and the Musk takeover bid for Twitter.
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