The Treasury Strikes Back

As we wrote earlier this month the bond vigilantes were on the warpath sending the yields on 30-year sovereign debt to generational highs. ( See: https://shulmaven.blogspot.com/2026/08/the-bond-vigilantes-strike.html ) With the headlines screaming “bond market rout,” Secretary of the Treasury Scott Bessent announced that he was doubling the treasury’s bond buyback program from $2 billion to $4 billion a week starting in early September to be financed in the short-term bill market. In essence the treasury is engaging in a version of “operation twist,” a policy that historically had little long-term effects.

 

In response the yields on the 30-year U.S. Treasury bond declined from 5.3% to 5.19% and the yield on the 10-year dropped from 4.7% to 4.64%. In a clear way Bessent told the speculators that shorting bonds was not a one-way street. In response gold and bitcoin rallied and the dollar declined.

 

However, Bessent, as former hedge fund trader, knows full well that temporary interventions of this type do not work unless they are backed up by the underlying fundamentals. In this case nothing has changed as fiscal deficits continue to mount, AI spending soars and there is a global build-up in military spending.

 

Thus, it will take a lot more that $4 billion a week to halt the secular bear market in bonds that we are now in. If Bessent wants to engage in a policy of yield curve control it would require the full cooperation of the Federal Reserve, which at this time seems unlikely. Why?  It would unleash a collapse in the dollar with a concomitant increase in inflation.

 

Net. Net. Look for yields to work their way higher as the summer turns to autumn. 

2026: A Year of Turbulence

  “ When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

                          Chuck Prince, Citigroup CEO, July 2007

 

Before discussing the outlook for 2026, I would like to review what we got wrong and what we got right about 2025. (See: https://shulmaven.blogspot.com/2024/12/2025-revenge-of-bond-vigilantes.html )

 

·       Yet again we were wrong about the stock market. Instead of the S&P 500 trading in a 6400-5500 range stocks traded between 6900- 4900 and closing at the top of the range. We thought stocks would end the year lower.

·       We were right about inflation running at 3% annual rate. The year-over-year change in the CPI of 2.7% reported for November will be revised higher to correct data errors.

·       We were right about tariffs and the mass deportations of illegal/undocumented immigrants.

·       We were wrong about the 10-Year U.S. Treasury yield exceeding 5%. The yield peaked early at 4.79% and trended lower towards 4%.

·       We were mostly correct about the passage of the Trump tax cuts thinking that the 2017 cuts would be extended and the SALT deduction would increase to $20,000, it turned out to be $40,000 with an income cap. We were wrong about other aspects of the Trump tax package that passed. (i.e., no tax on tips and overtime)

·       We were wrong about Congress taking down two Trump cabinet appointees.

·       We were right about Israel attacking Iran’s nuclear infrastructure.

·       We were right about France being on the road to becoming the new Greece.

 

Because I am a glutton for punishment here are my thoughts about 2026.

 

·       Inflation will run hotter than what the market expects. It will end the year at a 4% run rate. The combination of fiscal stimulus, monetary ease and AI capital spending will propel inflation higher. 3% will be the new 2%.

·       The yield on the 30-year U.S. Treasury bond will approach 5.5% causing both the Treasury and the new Trump Fed to institute a policy of yield curve control. It has already started with the Fed buying $40 billion of T-Bills a month through April and the Treasury swapping long term bonds for T-Bills.

·       Gold will surge past $5,000/ounce.

·       Stocks will trade in a broad 7500-5500 trading range and close down by more than 10%. The $310 of S&P 500 estimated earnings will not be enough to levitate stock prices. Put simply, the time to dance will soon be over.

·       NVDIA margins will take a big hit late in the year as competition forces price cutting. (See: https://shulmaven.blogspot.com/2025/12/the-economic-obsolescence-to-nvidia-gpus.html )

·       The Democrats will seize control of the House gaining anywhere between 15-40 seats and could very well take the Senate. Just to note the last time one party controlled all three branches of government was 2003-2006 inclusive and before that it was 1977-1980 inclusive. Americans like divided government. I would also point out that in wave elections partisan redistricting actually hurts rather than helps. ( See: https://shulmaven.blogspot.com/2018/07/gerrymandering-wont-save-republicans-in.html )

·       The Minnesota Medicaid scandal will reach into the offices of Governor Tim Walz and Congresswoman Ilhan Omar.

·       Israel will again attack Iran’s nuke and missile infrastructure.

·       Khamenei will meet his virgins in the sky and Maduro will be out.

 

As usual I end with I am often wrong, but never in doubt.

My Review of George Selgin's "False Dawn: The New Deal and the Promise of Recovery, 1933-1947"

The Recovery that Failed

Libertarian economist George Selgin has written an intriguing history of the New Deal and role Keynesian thought played in it. The book is largely a critique of Eric Rauchway’s “The Moneymakers.” (See:   https://shulmaven.blogspot.com/2015/12/my-amazon-review-of-eric-rauchways.html ) In the main I agree with Selgin. Simply put, many policies attributed to Roosevelt weren’t really his and by and large Roosevelt was wary of deficits as a macroeconomic policy tool. In Selgin’s framework the New Deal consisted of three R’s: recovery, relief, and reform. Selgin focuses on the recovery aspects and notes that Roosevelt’s deficits came from funding relief.

To begin with the ideas behind the Emergency Banking Act of 1933 which closed and then reopened the banks came from Hoover’s treasury department, namely Secretary Ogden Reed and Under-Secretary Arthur Ballentine. Further Roosevelt opposed the deposit insurance provisions of the Glass-Steagall Act because of the moral hazards associated with it. That issue would come to the fore in the 1980’s. A criticism of Selgin is that he does not give credit for how successful deposit insurance was during the 1937-38 downturn. The bank runs of the early depression were over.

 

As to deficit financing, the biggest deficit took place in 1936 when the World War I veterans’ bonus was paid out. Roosevelt opposed it and his veto was over-ridden. The payout provided a short-term boost to the economy and played a significant role in his re-election. However, in 1937 the lack of such stimulus played a role in that year’s downturn.

 

In the Spring of 1938 Roosevelt and his advisors finally took Keynes’ advice and embarked on the first true Keynesian stimulus of his administration. However, in the light of the World War II spending that was to come, it was far too little.

 

Selgin credits the massive gold inflows of the 1930’s for the modest recovery that took place. The gold came from Stalin’s stepping up gold production in the Soviet Union and European flight capital fearing Hitler. It was the gold inflow that enabled the Fed to embark on a policy of monetary easing, a policy that was halted in late 1936 as the treasury sterilized the gold inflows out of fear of inflation.

Roosevelt did take the U.S. off the gold standard in 1933 and raised the price of gold, a stratagem that Keynes advised. To Keynes it would be path to monetary ease. However, according to Selgin the increase in price of gold came from the ideas of George Warren who thought that a rise in the price of gold would automatically increase commodity prices. It did not.

 

Along the way Selgin notes how Roosevelt’s reforms stalled the economy, and the anti-business nature of his policies greatly weakened private investment. That would not turn until World War II ended and the feared depression did not take hold. Selgin observed a rise in business optimism in the aftermath of the war; however, this sentiment was not reflected in stock prices, as Wall Street experienced a three-year bear market from 1946 to 1949.  Stock market investors at the time were clearly worried. As a result, it would have helped to have some discussion of stock prices during his 1933-1947 history.

 

 

 

My Amazon Review of William Walker's "If War Should Come:....."

 

War On

 

This is William Walker’s fourth novel about the banker/diplomat/spy Paul Muller, a man who moves in the highest circles of the Swiss government.( Shulmaven: My Amazon Review of William Walker's "A Spy in Vienna.....")  In prior novels we find Muller in Danzig, Vienna, France and Germany, this time we find him in Romania, Turkey, and Finland as he intersects with prewar crises and the start of World War II. Thus, we see those historic events through the eyes of neutral Switzerland. With the war on the great fear in Europe is that of the Russo-German de facto alliance created by the Molotov-Ribbentrop Pact would destroy the West.

 

The novel opens in September 1939 with Muller acting as a representative of the Bank for International Settlements where he takes possession of the Polish gold reserves being transported by train from the Polish/Romanian border to port of Costanza. This is sort of a follow-up to Alan Furst’s great novel “The Polish Officer.”

 

From Romania he gets caught up in the intrigue of Istanbul, Turkey where neutral Turkey is under pressure from Germany and Britain to enter the war on their respective sides. German Ambassador Franz von Papen and his wife who Muller had a dalliance with her in Vienna make a cameo appearance here.

 

The novel ends with Muller on the Finnish border fighting for the Finns in response to Russian aggression in November 1939. Quite a life telescoped into four months of 1939.

 

My quibble with Walker here is that he gets wrong the price of gold, the number of grams in a troy ounce and the price of jewelry in the Turkish bazaar of 1939. My sense is that he used today’s prices for 1939’s. Otherwise I found his latest novel to be a satisfying way to get a sense of Europe at war, but it is not quite as good as his earlier efforts.

For the full Amazon URL see: War On (amazon.com)

 

 

My Amazon Review of Robert Shiller's "Narrative Economics: How Stories Go Viral & Drive Major Economic Events"

Telling Stories

My UCLA colleague Ed Leamer always reminds me that human beings are story telling animals. Here Yale economics professor and Nobel Laureate Robert Shiller has written a whole book on the subject as to how convincing narratives, whether true or false, can influence economic behavior. Some of the narratives he discusses are:

·        Housing prices can only go up.

·        Technological advancement leads to unemployment.

·        “New Era” booms in the stock market.

·        Gold is the only true store of value.

·        It is socially unacceptable for wealthy people to be extravagant in hard times.

When these ideas go viral they obviously can effect economic behavior. In order to track how viral an idea can be Shiller uses the science of epidemiology to track its rise and fall counting its appearances in publications or in the case of today how it trends over the internet.

Although Shiller doesn’t really give us a formal analytical framework as to how we can integrate a narrative into making predictions about economic behavior, he certainly makes the case that economists have to take into consideration prevailing narratives when trying to understand the macro economy where both booms and slumps can get exaggerated by the presence of mass psychology. This concept is far from new, but Shiller expresses it in a different way.

The full amazon URL appears at: https://www.amazon.com/review/R4XHVF8GCEJOX/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of William L. Silber's "The Story of Silver: How the White Metal Shaped America and the Modern World"

Silver Bull

N.Y.U.  Economic historian William Silber has a real fondness for silver as a monetary metal. He starts his story in ancient times but his history really begins with Alexander Hamilton establishing a bi-metal standard in 1793 valuing silver at 1/16^th of an ounce of gold, creating the 16-1 gold/silver ratio that would legally stand until 1873. That standard valued silver at $1.29/ounce.

He is not happy about the “Crime of 1873” where Senator John Sherman demonetizes silver and puts the United States on the road to the gold standard which occurs in 1879. By using the then populist slogan, he puts himself squarely on the of the pro-silver/pro-inflation forces extant in the country at the time. Unfortunately Silber fails to distinguish between a good deflation caused by rapid increases in productivity and a bad deflation distinguished by a collapse in aggregate demand. The 19^th Century silver wars culminate with William Jennings Bryan’s “Cross of Gold” speech at the 1896 Democratic Convention. By then gold becomes more plentiful and the U.S. enjoys the full benefits of the gold standard.

One of Silber’s heroes is Nevada Senator Key Pitman who leads the silver bloc in the Senate which counted fourteen senators among the seven mining states. In the 1930s Pitman convinces Roosevelt to raise the price of silver through huge treasury purchases. That ripples across the Pacific breaking China, then on the silver standard, leading to a flood of illegal exports that cause a credit contraction thereby weakening the economy. That in turn will make it easier for first Japan and then Mao’s Communists to take over the country.

Silber’s most interesting character is Henry Jarecki, a Yale psychiatrist who become enamored of silver. Jarecki sees that silver is undervalued and buys up as much coin and silver certificate currency to redeem at the U.S. Mint at $1.29/ounce. Soon the mint runs out of silver and the price explodes. Jarecki would leave Yale and found Mocatta Metals, a leading precious metals trading company.

Silber spends most of the book in excruciating detail describing the Texas Hunt Brothers corner on the silver market in 1980. An operation that nearly bankrupts Wall Street and triggers Fed action. To me, he is way too sympathetic to the Hunt Brothers.

Simply put Silber describes silver as a dual functioning metal. It is both an industrial commodity and a store of value. He makes his case on the store of value proposition when the price of silver surges with gold amidst the short inflation scare that existed following the financial crisis of 2007-2010. In essence it seems Silber has more faith in metals than the fiat currency of the Central Banks.

Though not as good as his earlier books on Paul Volcker and the 1914 closure of the stock market, “The Story of Silver” is a good read for those interested in economic history.

The full Amazon URL appears at: https://www.amazon.com/review/R291D01TPCA1DW/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv