Dear Reader,
For the first time in our nation’s history, U.S. Treasuries carry risk. This is a big deal.
Moody’s downgraded U.S. debt from AAA to AA1.
They’re basically saying the U.S. can default on its loans.
Realistically, the risk isn’t that the government just doesn’t pay…
The “default” risk is that we’d see so much money printing they’d degrade the value of whatever bond you have.
That coupon you’re getting paid every year will just get smaller and smaller.
What we saw in the markets yesterday, basically, was the result of the 30 year bond rallying to a 5% yield, which is a big number. And the 10-year note ran up to 4.5%.
Remember, stocks and yields trade inversely.
They are like a seesaw.
Yields go up, stock market goes down, yields go down, stock market goes up.
So basically, what you have to watch out for is a situation where the stock market is largely determined by the 10-year treasury yield, which has broken 4.55%.
That’s going to keep a ceiling on stocks for the time being.
It seems that the bond market is in control.
The fear here is the U.S. government spends so much money, runs up such a huge deficit…
And then doesn’t take paying back its debts seriously. It’s like the U.S. government is saying, “look, we’ll pay you 4.5% now, which may be worth nothing if we keep printing money.”
So people are really starting to look at U.S. treasuries in a very different way.
Now, for its part, the Trump administration, Treasury Secretary Scott Bessent, said the other day, it’s a backward indicator.
Meaning, Moody’s is talking about something that’s already happened.
And of course, what’s he going to say?
But this has real ramifications for the role of the U.S. dollar as the world’s reserve currency.
China’s assault on the dollar has reached a critical phase…
They’ve dumped $72 billion in U.S. treasuries in the last few months alone…
Plus, they just convinced Saudi Arabia to end its 50-year “petrodollar” agreement with the United States.
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So this has real ramifications for a whole bunch of things.
And it’s really interesting, what I’ve been thinking about here is the Weimar Republic, Germany, pre-World War II…
You had a situation where inflation got so bad that individual cities started to print their own currencies based on metals.
And they would actually pull metal out of their buildings - pull copper out of copper leaf in the buildings or from the pipes.
The stories are crazy when you read the history of this, and they’d say, “we’re gonna back our currency by this asset.”
It’s astonishing how well they started to break the country into little sections - cities and areas issuing their own currencies.
Right now, we are seeing the infrastructure forming to make this happen in America…
Arizona is launching its own stable coin, for instance.
We are starting to see states considering launching their own cryptocurrencies.
It’s an interesting time in American history where other countries look at us and say, “if they don’t even trust their own U.S. dollar, why should we?”
When our own government supports crypto over the U.S. dollar, you’re basically telegraphing to the world, “why would you trust the U.S. dollar? Why not just trade in this currency or that currency?”
This is very harmful.
Again, we have China dumping treasuries and turning the world against the dollar.
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I’m not sure the people doing this understand how things unravel through history.
I’m not sure there are any historians making these decisions, because all it does is really hammer the U.S.
Let us hope President Trump and the Republicans running Capitol Hill right now propose a more sober, responsible budget, because I’ll tell you something…
The thing that could make this stock market take off like crazy, just like during the Clinton years…
Would be a more balanced budget.
If you remember when we had a balanced budget during the nineties, the government didn’t have to borrow money from the bond market anymore.
All that excess money that would’ve gone into U.S. bonds poured into American business.
Money bond investors would’ve spent on debt went into the stock market and we had the ‘90s boom.
Let us hope the people running our country today can harken back to a lesson just 20, 25 years old and really get it together.
Because they’ve certainly knocked down the size of government back to ‘90s levels, which is great.
Let’s see if they can really bring some fiscal discipline to the rest of the process.
If that happens, the stock market’s going to take off.
If it doesn’t happen, yields stay high, putting a ceiling on the stock market at this point until the narrative changes.
In this market, we have to be very picky about our stock picks.
In a bear market you can buy the greatest companies on earth and the market takes care of the rest.
When the greatest companies are priced this high, you have to dig deeper.
One of my top recommendations right now, brand-new, is a deep value play.
It’s trading under a dollar, which I usually avoid.
And I’ll be honest, it looks like a “fixer upper” on the surface, which is why it’s stayed so low.
But on closer inspection…
It provides a service so valuable, 99.9% of their customers renew…
It’s moving from a low margin business in hardware to a high margin software business…
It’s loaded with cash and is using it to buy back its own stock…
And other deep value investors have been taking notice and started scooping up shares.
Now is the time to buy this “fixer upper” in a market where a lot of stocks look toppy.
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