I. Prior to the Iran War, the 10 Year Treasury Yield Was Under 4%. It Has Now Risen Almost 1/2% – And the Financial World Is Freaking Out!
Economies can’t handle interest rate shocks (the mortgage industry is a case in point), and the repercussions put politicians in deep peril.
So, it is a certainty that nobody is freaking out more than Trump administration officials.
This is because oil prices and interest rates are up again today! (Mortgage rates have now climbed almost 5/8%!)
But here’s a fascinating and comforting reminder: In 1993 and 1994, 10 Year Treasury Yields rose from 5.2% to over 8.0%! (A 3% increase!)
This was in response to Clinton’s efforts to push through a massive stimulus bill that the bond market did not like.
Clinton advisor, James Carville, famously said this: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope… But now I would like to come back as the bond market. You can intimidate everybody.”
Carville was referring to what economist Ed Yardeni calls “The Bond Vigilantes.” These are the bond traders who have the power to force every president’s hand by demanding higher yields or interest rates.
They pushed back on Johnson’s Vietnam War spending, Nixon’s monetary policy, Reagan’s tax cuts and stimulus, Clinton’s stimulus, and now Trump’s Iran War.
We’re seeing this play out in real time as the Trump Administration pushes peace talks and damage control whenever rates spike – like we saw Sunday evening and early this morning (which is why I am blogging about it again).
“The Real War” is the President vs. the Bond Market. The bond market is winning (again), and it might just deserve the Nobel Peace Prize.
II. Why Did Gold Crash?
At the risk of having too long of a blog, I have to discuss gold’s price crash because it is SO INTERESTING!
It’s also very good news!
Gold prices hit a record $5,400+ per oz earlier this year but fell to under $4,400 a few days ago – in the face of a war!
Joe Brown posted this excellent video today: Why Did The War Make Gold Crash?
People mistakenly believe that gold always shoots up in the face of geopolitical or financial crises – but that is not the case – and Brown explains why.
- Companies need cash/forced to sell. When the economy slows, firms are forced to sell whatever they have to raise cash – and gold usually ends up getting dumped when it is all that companies have left. Companies are also selling Treasuries for this reason too – which is partly why rates are climbing. Note too that gold prices plummeted after 2008 for this reason.
- Central banks need cash. The world’s central banks face the same issues as private firms, and they are selling their gold reserves too.
- Correction/”Blow Off Top.” Gold prices have surged by 2.5x over the last 2 years. Brown reminds us that we often see corrections after runups like that.
- Gold investors anticipate monetary policy (GOOD NEWS #1). This is very good news indeed for mortgages and real estate, as falling gold prices indicate that investors expect tighter monetary policy. This, in turn, implies cooler inflation, which implies lower rates.
- Gold prices are falling because investors expect the Iran War to be short-lived (THE REALLY GOOD NEWS). Gold investors, in the aggregate, are as savvy as oil investors (“wisdom of crowds”), and if the war were going to escalate, we’d see gold prices soaring, as investors would be clamoring for gold as a “safe haven.”
FINAL POINT: Gold implies that the war won’t last too much longer, and the bond market won’t let it. This implies that rates will fall again this year. Hang in there.
