Macro-market headlines out of the US were inauspicious at the end of what, notwithstanding a modest rebound on Friday, was a down week for equities.
“Ray Dalio says Bessent move is sign that a debt crisis is getting closer; recommends gold and bitcoin,” CNBC declared, referencing the same Dalio piece I mentioned in “Failure’s Not An Option.”
“US ‘Playing With Fire’ as Dollar Risks Yen-Style Debasement,” Bloomberg pronounced, quoting former Goldman FX chief and current Brookings fellow Robin Brooks who, on social media, warned that the dollar’s troubles are just beginning.
The greenback on Friday slipped below pre-war levels versus EM FX, Brooks pointed out, noting that relative performance for the dollar versus developing market currencies is “the best leading indicator for future dollar direction and it’s pointing down.” “The dollar was stable in the previous round of the debasement trade last fall, when precious metals prices went crazy [but] that won’t be the case this time,” he cautioned.
Suffice to say Scott Bessent made a mistake this week, and some fear it might be a last straw moment in the context of last year’s de-dollarization drama around Donald Trump’s “Liberation Day” tariffs and a similar, fleeting scare in January, when Trump — and I’m chuckling as I write this — kidnapped Nicolas Maduro and threatened to seize Greenland.
Of course, this too might pass. Bessent surely realizes the buyback gambit wasn’t well-received. And he hopefully understands that trying to save face by upping the ante (i.e., threatening to buy back even more Treasurys) could be a wormhole on the other side of which is YCC, QE and Japan. So maybe (hopefully), he’ll leave well enough alone, even as things aren’t exactly “well.” As I used to remind my favorite felon in the hopes she’d stop spiraling, “Remember M., you can always make things worse if you try.”
For now, though, and assuming the Trump administration’s concept of a plan for placating markets with empty promises of fiscal retrenchment doesn’t amount to much, the dollar and Treasurys are “in a precarious position,” as BMO’s Ian Lyngen put it Friday afternoon.
“Despite Bessent’s interventionist tactics to drive bond yields lower and efforts to downplay budget deficit concerns, a constructive tone shift has failed to materialize in the long-end of the curve,” Lyngen said. “Instead, the Treasury’s actions have triggered fresh concerns about the agency’s debt-management credibility in addition to renewed concerns about de-dollarization.”
Weighing in, SocGen’s veteran FX chief Kit Juckes channeled Manoj Pradhan and Charles Goodhart in suggesting current account surplus countries may be “less willing than they were to invest [their] reserves in the US” going forward.
“As America’s publicly-held debt level reaches 100% of GDP and budget deficits remain high, this will be a growing issue, which will either force the US to tighten fiscal policy, accept higher borrowing costs or let the dollar weaken,” Juckes added. “No prizes for guessing which solution the market now sees as most likely.”
Yet the markets were up big today (possibly on a “buy the dip” impulse after yesterday’s big losses). Some time ago I asked if Kevin Warsh could actually cut interest rates in an environment where nearly all of the world’s central banks were actively raising them. Things have gotten much more muddled since then. Now we must ask ourselves how long can markets continue to rise while interest rates are steadily climbing? The entire treasury rate complex was higher today: short-term treasuries were up about one basis point, the two-year was up about five basis points, and the entire long-end was up around four basis points. I know there are many contributing factors, but stocks didn’t seem to care today. August is normally a thin month for liquidity anyway, and we now have hyper-scaler bond issuance to contend with. Is this a dollar/debt crisis? I would be more convinced if the markets had been down hard again today. At some point higher rates should start to lure investors away from stocks.
In 1999 the 10y yield opened around 4.67% and closed near 6.4%
We closed this week around 4.7%
Was shorting stocks a good strategy in 99 ?
Shorting no, but I have never messed with options. Exiting the market in 1999 is a different story. True, there was still some gas left in the tank, but if you bought a U.S. 30-year bond in December of 1999 you are still making 6.48% annually on your investment (state tax free). That time period included two market crashes and one or two bear markets, and you could have sold those bonds at just about any time above par. My wife and I exited the markets about that same time and bought gold and CDs. We lost nothing in the 2001 crash. Certainly not the worst thing we’ve ever done.
You might be making 6.5% but your principle is worth a hell of a lot less buying power today. The opportunity cost of those bonds is severe.
6.5% is greater than the average cost of inflation over that period. Dollars made on any asset class suffered from debasement as well — except for gold maybe which is some of what I bought in 1999.
Because a weak dollar is useful for exporters, and balance of trade is such a presidential obsession, I think it is going to be very difficult for anyone to convince this president that the third of the three options Juckes outlines at the end of the article isn’t clearly the preferable choice if a policy choice needs to be made between them.
Hence no prize for guessing as Juckes says.
Exports assumes you can convince someone overseas to buy your stuff, and that the importer country has not placed retaliatory tariffs.
From a purely marketing POV, “American [inset product name] ” items are almost radioactive in most overseas markets in 2026
Sure- but I think the President is constitutionally incapable of accepting this.
Also a weaker dollar makes oil more expensive?
And a lot of other things as well.
I’m betting the EU breaks down first.
Hello.
Give this a look (although I believe most of us have aleady done so, right?).
So why is/are not 3% reals somewhere in our near future, in light of everything that the heads, young and old, are propounding in the financial press?
https://fred.stlouisfed.org/series/REAINTRATREARAT10Y#
And a 5% nominal is something important?
Hee hee!