The Bond Market Trap: Why Everything Is About To Change

Exploring the bond market's role as a volatility trigger and the economic maneuvers shaping asset prices and central bank policies.

Key Takeaways

The bond market is central to understanding upcoming volatility across all asset classes.
Market interventions are deliberate and aimed at controlling narratives and investor sentiment.
Inflation metrics and Fed policies are being adjusted to maintain market stability and delay bearish trends.
There is a disconnect between market expectations for rate hikes and the actual likelihood of those hikes.
Significant market corrections could have widespread negative impacts on liquidity and earnings.

What the video covers

The bond market is positioned as the key volatility trigger affecting all asset classes globally.
Central banks and governments are actively managing markets through interventions like yen intervention and doubling of buybacks.
There is a narrative of 'good cop, bad cop' between key economic figures to control market expectations and maintain stability.
Inflation measures have been adjusted to appear less sensitive to short-term inflationary pressures, influencing policy perception.
Market manipulation and narrative control are used to prepare investors for upcoming economic changes and potential stimulus.
The Fed's guidance has become less predictable, creating uncertainty around rate hikes despite market pricing high odds for increases.
Economic data shows weakening trends, but markets are still being managed to avoid bearish sentiment until conditions are right.
There is skepticism about the sincerity of hawkish signals from the Fed and the actual likelihood of rate hikes.
Potential large market corrections could severely impact collateral values, earnings, and liquidity in the near future.
Growth is expected to come from business investment rather than consumer spending, with debt management being a critical issue.

Chapters

Why is the bond market considered a volatility trigger?

The bond market influences interest rates and liquidity, affecting all asset classes. Its movements signal shifts in economic conditions and investor sentiment, triggering volatility across markets.

What interventions are being used to manage the markets?

Interventions include yen currency interventions, doubling of Treasury buybacks, and strategic stock purchases to stabilize markets and prepare investors for upcoming economic changes.

How is the Fed's approach to inflation measurement affecting market expectations?

The Fed has adjusted inflation measures to ones less sensitive to short-term pressures, which helps maintain a narrative of controlled inflation and delays expectations of aggressive rate hikes.

Full Transcript — Download SRT & Markdown

Speaker A

This is all economics 101. They know exactly what they're doing, and they're showing you. They've already started to, you know, buy the long end of the curve, whether it's through that yen intervention or the doubling of buybacks. They're getting people comfortable with it. They've already started buying stocks, whether it's Intel or MP to again get people comfortable with both of these things are at all-time highs. We've never seen this before. Talking about never seen it before. They're getting the world comfortable with what's coming. Let's just start with you right now. Is the bond market the volatility trigger across the board for every asset class on earth?

Speaker A

comfortable with it. They've already started buying stocks, whether it's Intel or MP to again get people comfortable with both of these things are at all-time highs. We've never seen this before. Talking about never seen it before. They're getting the world

Speaker A

Um, look, I have an opinion here which is out of the ordinary, which is that this whole wars Jackson Hole drunken Miller predating that is Kabuki theater.

Speaker A

Um, look, I have a opinion here which is out of the uh the ordinary uh which is that this whole wars Jackson Hole drunken Miller predating that is Kabuki theater.

Speaker A

Um, it is a Yeah, good. You're not alone. That's good to hear. We're Yeah. Uh, I feel like everybody else seems to disagree. Um, there there's a pricing well there's a pricing of a 66% odds of, uh, you know, a rate

Speaker A

uh a rate hike coming. I think that's ridiculous. Um I it is ridiculous. Yeah. Yeah. So we agree. But but point here is um nothing has changed here. You know, look, uh, the Worsh and Bent are flying back and forth on Air Force One,

Speaker A

uh, a rate hike coming. I think that's ridiculous. Um, I it is ridiculous. Yeah. Yeah. So we agree. But but point here is, um, nothing has changed here. You know, look, uh, the Worsh and Bent are flying back and forth on Air Force One,

Speaker A

up. This is a this is a narrative machine. And why would they have two sides diametrically imposed in their views of what's happening? Um because you need breaks and gas. You want to manage the market. You want to manage

Speaker A

uh, talking daily in, you know, they they work for Drunken Miller. Drunken Miller's out in the Wall Street Journal op-ed op-ed kind of taking on Bent in in the public. You know, what do you think's going on, guys? Come on, wake

Speaker A

do be able to do all of these things, right? So, you need a good cop, bad cop.

Speaker A

up. This is a this is a narrative machine. And why would they have two sides diametrically imposed in their views of what's happening? Um because you need breaks and gas. You want to manage the market. You want to manage

Speaker A

is out there. Yan intervention, doubling the the buyback in, you know, in in the Treasury buybacks. These are real things. This is what they're doing. We know what he's doing. Okay. What has worse actually done? First of all, he

Speaker A

expectations. You want to move things the way you want. You want to also preserve, you know, and war the legitimacy of of kind of, uh, central bank policy and independence of the Fed. You want to support the dollar. You want to

Speaker A

So he has no accountability to guidance. Three, he has changed the inflation measure and very conveniently chose the measure that is the least sensitive to inflationary pressures in the short term.

Speaker A

do be able to do all of these things, right? So, you need a good cop, bad cop.

Speaker A

why would we do anything in front of that? So, okay, maybe something happens next year based on the new framework, but there is no new framework. So, in the meantime, what do you do? You got to do the dance so that you can buy some

Speaker A

This is a stable gas breaks type, uh, machinery of narrative. Okay, this is what we are what we're dealing with here. Let's take the narrative away for a m for a second and let's look at what they're actually doing. Okay, the scent

Speaker A

Axios will let us know post haste. It's the same damn thing. It's controlling the narrative and controlling markets. Okay. And and so if the market's now taking this one hook, line, and sinker, good luck. I think it's going to end up the same way that

Speaker A

is out there. Yen intervention, doubling the the buyback in, you know, in in the Treasury buybacks. These are real things. This is what they're doing. We know what he's doing. Okay. What has worse actually done? First of all, he

Speaker A

good cop bad cop routine? Well, right now they haven't been able through both uh you know yen intervention and the doubling of the buyback to get markets going in the right direction. They haven't been able to resolve the yield

Speaker A

voted with the doves in the first, uh, you know, um Fed meeting. Two, he has completely removed any form of guidance.

Speaker A

tariffs and then we had 10% tariffs on some, zero on others, six months, nine months. We'll talk about it later. Then they then they get repealed. What happened last year or this year? I apologize. End of a civilization. We'll

Speaker A

So he has no accountability to guidance. Three, he has changed the inflation measure and very conveniently chose the measure that is the least sensitive to inflationary pressures in the short term.

Speaker A

Both situations Vbottom take it down expand vault get shorts in trend following CTAs short.

Speaker A

this done so far. These are the facts, okay? Like everything else Well, and to Jem's to to Jem's point, right? He's got these, uh, task forces that are going to ostensibly give us the new new at the end of the year and then

Speaker A

If you want to manage the market you this is how you do it. And so they have a midterm coming up. They need to get the market going. The way they take it up is to a a little nice take down, get

Speaker A

why would we do anything in front of that? So, okay, maybe something happens next year based on the new framework, but there is no new framework. So, in the meantime, what do you do? You got to do the dance so that you can buy some

Speaker A

Surprise, like we're actually going to stimulate, right? That's actually a really a a really interesting kind of uh shuffle here because let's say you get a softish services ISM this week like you just got manufacturing and then you get a softish

Speaker A

time. Ilia, I hear we have a deal in two weeks in the street of Hormuz.

Speaker A

The data has been weakening all through August. The PCE numbers are saying inflation is moving the Feds way at the core. The three-month annualized, six-month annualized are going down, not up. And so you look at this and you go, okay,

Speaker A

Axios will let us know post haste. It's the same damn thing. It's controlling the narrative and controlling markets. Okay. And and so if the market's now taking this one hook, line, and sinker, good luck. I think it's going to end up the same way that

Speaker A

market's going to go, oh my god, this is the best and greatest day in all of life.

Speaker A

anybody's expectations on oil turned out. It is a manipulation of markets, an attempt to control things into the midterm. My opinion, why do you introduce this war straw man or whatever you want to call it, the the bad the

Speaker A

Trump wants a strong non-farm payrolls. Um and that actually then reiterates the view that Worsh is going to um uh you know uh they're going to he's going to raise rates. Then you get a little extension of this decline, a

Speaker A

good cop bad cop routine? Well, right now they haven't been able through both, uh, you know, yen intervention and the doubling of the buyback to get markets going in the right direction. They haven't been able to resolve the yield

Speaker A

Uh you need people to start dumping and getting scared and getting really bearish. Nobody's there yet except for kind of us. We were ahead of, you know, ahead of this game. Um, but I'm telling you, once they start to see a 2% type

Speaker A

issue. So what do you do? what they've done for the last two years. Take it when you can't take it up, you take it down to take it up. You know, and last year in 25 we had a liberation day 150%

Speaker A

again multiple times. They've tried to keep stimulating here when they can't. The move is take it down to take it up until you get the V expansion, until you get a real kind of bearish sentiment coming here. They're not going to turn

Speaker A

tariffs and then we had 10% tariffs on some, zero on others, six months, nine months. We'll talk about it later. Then they then they get repealed. What happened last year or this year? I apologize. End of a civilization. We'll

Speaker A

here. And they're probably going to turn it right into the Fed meeting um and really get you going in a positive direction.

Speaker A

be here tomorrow. Like nuclear bomb kind of depression photos via social media. Next day we got a deal in two weeks.

Speaker A

six% range that it was at some points earlier in the summer. Uh, is this a market that's finally starting to signal signs to you, Jim, that things are going to be unglued here for a little bit?

Speaker A

Both situations V bottom take it down expand vault get shorts in trend following CTAs short.

Speaker A

They want to take it down and take it up as soon as possible. So, I my my bias I think it I would not hold a short position. And I want to be clear, past September 28th and my best guess is that

Speaker A

So you can turn it the other way. If you can't generate the the buying under behind you as bescent as a hedge fund manager you create the flows to benefit you and then you squeeze the flows.

Speaker A

will do whatever they have to do to to kind of uh but but by the end of the quarter they're going to squeeze this thing and by the way last remember March what did they do specifically? They use

Speaker A

If you want to manage the market you this is how you do it. And so they have a midterm coming up. They need to get the market going. The way they take it up is to a a little nice take down, get

Speaker A

29th end of the quarter, we had this rip right in the right in the end of the quarter. Um that is not a coincidence.

Speaker A

people scared, get the yield expectations high, and then surprise, we're not going to raise rates.

Speaker A

enough of all expansion, turn it early, I'm sure they're going to want to do that. That'll be right in that Fed meeting, set the opex. Um, but if they can't uh, you know, look for that other window right at the right before the end

Speaker A

Surprise, like we're actually going to stimulate, right? That's actually a really a a really interesting kind of, uh, shuffle here because let's say you get a softish services ISM this week like you just got manufacturing and then you get a softish

Speaker A

what. And and could be as soon as two and a half weeks we get a bottom and a turn here.

Speaker A

jobs report again. Market's going to go wait a second war keeps telling us to look at the data. What's the data say?

Speaker A

Uh little bit of a save the day there for me. We were getting close to the short put spreads out of the short iron condor that I was in which right now we're staying inside the expected move thus far. Uh that was down all the way

Speaker A

The data has been weakening all through August. The PCE numbers are saying inflation is moving the Feds way at the core. The three-month annualized, six-month annualized are going down, not up. And so you look at this and you go, okay,

Speaker A

a double beat tier versus 98 cents expected. 3.41 billion versus 3.35. Uh going into today, the expected move for the 3 days was down to about 325 or up to 400 and we're still in the midst of that range here. So two inside moves

Speaker A

well, what's the stock market going to do? If war says, well, I told you all to look at the data. I didn't say listen to me. I said look at the data. What's the data say? No hike. And then the stock

Speaker A

Well, Palatoto here uh closes at 362. It's up to 380. I got my short iron condor here that's working. So, we're going to scalp some scalp some out of there. And then uh Credo CRDO. This is also a beat, but not enjoying it. Double

Speaker A

market's going to go, oh my god, this is the best and greatest day in all of life.

Speaker A

And these shares are down 430 was the close. 435. The expected move had us down to 360 or so or all the way up to about 510. And we're currently trading at 380. So Ilia Je a lot of volatility

Speaker A

I think that I think you're right on. I actually don't think it's going to happen yet. I do think we could actually see we'll see what the numbers say, but a non-farm payrolls that that is stronger than expected because God knows

Speaker A

you highlighted at the very beginning it's about rates it's about the narrative it's about what they're trying to achieve at the index level the market I want to reiterate there's a reason we have a hedge fund manager as the head of

Speaker A

Trump wants a strong non-farm payrolls. Um and that actually then reiterates the view that Worsh is going to, um, uh, you know, uh, they're going to he's going to raise rates. Then you get a little extension of this decline, a

Speaker A

this is a coordinated action. The more you start seeing it for what it is, the better off you are. There is a big coming kind of uh you know again not to sound conspiratorial. I'm not usually that guy but they have they are being

Speaker A

little pull the rubber band further. Yeah. Pull the They need to pull the rubber band further. This is not enough.

Speaker A

of a side story um amidst kind of the bigger picture. Jim you had the view a few weeks ago that if uh what we thought was playing out around Bessence and CO was coming true then you had a view of

Speaker A

Uh, you need people to start dumping and getting scared and getting really bearish. Nobody's there yet except for kind of us. We were ahead of, you know, ahead of this game. Um, but I'm telling you, once they start to see a 2% type

Speaker A

pullback, right, you want to be a buyer of stocks, a buyer of gold, and uh they're actually, if anything, going to try and do the exact opposite on bonds where they they take the yield up, spike it to take it down. Um and so we'll um

Speaker A

daily decline, when you get a real tail tail or one and a half percent and V starts to actually expand, look over your shoulder because Bent's coming in with a hatchet, uh, to kind of take out your your short. So, um, they've done it

Speaker A

Okay. So blade. Yeah. I've got to ask the question then because if oil today is one of these facilitators of what's happening in rates Ilia yes. It did. Bessant tap Heg Seth on the shoulder and say like, "Oh, give us some

Speaker A

again multiple times. They've tried to keep stimulating here when they can't. The move is take it down to take it up until you get the V expansion, until you get a real kind of bearish sentiment coming here. They're not going to turn

Speaker A

Labor Day weekend. Just be prepared." Sorry to interrupt. I know that was I know. But am I crazy? Am I crazy in thinking that those two things? I don't think anything is crazy anymore.

Speaker A

it. And my guess is, uh, that they're okay with the bearish news for now. Anything they can get to expand V, but but expect that this is, uh, very much a manipulated, uh, outcome so that they can turn it

Speaker A

deciding crypto regulation." I think like take us back even four years, we would go, "This is an outrage." Are we surprised? No, we're not surprised. Snowflake. How dare you?

Speaker A

here. And they're probably going to turn it right into the Fed meeting, um, and really get you going in a positive direction.

Speaker A

on the shoulder and said, "Hey, we could use a missile over the straight of Hormuz." I'm saying it's not far-fetched at this point, but also it doesn't matter because really the thing is the reaction function in markets, right?

Speaker A

You know, I I can't help but notice over the course of the past few days, the SIBO's core 1M index has really started to get moving to the upside here. It's no longer, you know, in the four, five,

Speaker A

now. They seem to be hawkish." which again I have a very hard time believing that not because they're influenced by the president necessarily but that anybody on that FOMC is going to go you know what we are trying to turn the page

Speaker A

six percent range that it was at some points earlier in the summer. Uh, is this a market that's finally starting to signal signs to you, Jim, that things are going to be unglued here for a li

Speaker A

Just wait a meeting or two if that's what you really want to do. But the market is not saying I'm with you guys.

Speaker A

And that's a misread I think. Yeah, Jim. I I see the market pricing in like oh the Fed Wars was hawkish that I know. He was saying stop pricing things in anticipation of what you think I want you to do. And so the market says,

Speaker A

"Okay, well, if you don't want us to follow your lead anymore and you're not going to give us guidance, here's what we're telling you. You got to raise rates. You have to raise rates for us." Which sets up this really fascinating

Speaker A

showdown because right now the market's priced in for 68% according to the Fed Watch tool. Jee, I've gone back and looked to all of the available data in the Fed funds history. When you work out the percentage pricing, the Fed has

Speaker A

literally never disappointed the market as long as there's been a 55% chance of something in one direction or the other.

Speaker A

So if the market's priced at 65% and the Fed actually does not hike, that will be the first time in history that we've seen that big of a discrepancy between market pricing and an actual outcome.

Speaker A

So you think in No, of course not. If you're looking to catch the market and turn it, that would that would Yeah, exactly. You know, we'd never seen a a 20% rally in two months uh coming from anything less than a 20% decline in

Speaker A

markets until this year. I think a lot of people forget that Bessant that who's not Bessant, it was um Worsh and Denmiller co-wrote that OpEd in December 2018 imploring the Fed not to hike rates anymore.

Speaker A

Exactly. And now he, you know, at Jackson Hole worse writes a a speech that literally mirrors the the op-ed coming from uh if you if you take an AA model and you overlay them, it's the AI model will tell you they they are

Speaker A

literally talking about the exact same facts, exact same points, almost matching. It seems like it couldn't be a coincidence. And was the economic advisor at Dukane before this current gig, right?

Speaker A

Yeah. I mean, literally coming into the role from Dukane. It is such kabuki theater. The fact that this is even a debate in my mind blows my mind up. Um, so, so I'm glad we got, you know, a couple guys agreeing here.

Speaker A

Um, but you got to start seeing it for what it is. Uh, and and we got to start talking about it like like it like it is. People are afraid to talk in these terms because it comes across as

Speaker A

conspiracy. If you can't see what's happening, right, I can't help you at this point. Well, I mean, and it's not necessarily conspiracy. It's just this is what their view on policy is. This is what they think we need to be doing.

Speaker A

Okay. It's market manipulation because the markets are too big to fail. Candidly, this is again why we have hedge fund managers in place. You know, at the end of the day, you have $150 trillion of public equities and $300 trillion of

Speaker A

public and private equities that are priced off the public equities. When it goes up 20% in two months like it just did, what happens? That's a $50 trillion of new collateral. That puts the 10 trillion dollars of fiscal spending we

Speaker A

did for 10 years. It's like a drop in the bucket. Markets are everything. It is driving all the capex, all the earnings growth.

Speaker A

It is it is if this if the market come what do you think happens when you take a $380 billion stock like Anthropic and you get priced it at$2 trillion. What happens to that $1.6 trillion?

Speaker A

goes direct to capex, shows up as earnings and the appreciation and then that those dollars go into capex um which drive earnings again. It is a circle and the the liquidity is no longer driven by the economy. It has

Speaker A

been this way for quite some time but is it is further than it's ever been by far. It is now markets are everything.

Speaker A

If the market in two quarters, quarter over quarter, just goes down 20%, just goes back down where it was, that is a $50 trillion draw in collateral. What do you think that does to earnings? What do you think that does to to liquidity? Uh

Speaker A

the same exact thing we're seeing the opposite way. The boom and earnings goes the exact opposite way. And so, um, very few people kind of everybody thinks the markets are some type of ticker that reflects what's happening in the

Speaker A

economy. That's not how the system works. the market is the driver of the economy more than the opposite. They both matter but I'm telling you the markets are so big they drive all the liquidity nowadays. Uh and by the way even the

Speaker A

economic outcomes uh just from a consumption basis 50% of all consumption comes from the top 10 10%. And that the m you know the earnings of that top 10% are one to one correlated with outcomes of markets as well. So,

Speaker A

Eva Eisman made um the point he was on a podcast that um it worries him as a bull here and as a as as somebody that's long um that basically the entire thing rests on the fate of two companies that lose

Speaker A

money, Open AI and um and Anthropic that lose money in the in in the billions just as an order of doing things. And so if ever there were a capital constraint and then you look at what's being uh the

Speaker A

policy at the long end. If ever there were a capital constraint and those companies fumbled the ball, that would be an almost instant recession. And that would be that feedback loop from what's happening there. I mean, Chris, you and I have

Speaker A

been talking about it uh ad nauseium since we got those first quarter GDP numbers where business investment contributed more to growth than did the consumer except business investment is 14% of GDP and the consumer is 68.

Speaker A

So, what does that mean? that business investment added more to GDP and it's five times smaller than the consumer. How fast is that going and how weak by turn is the consumer? Well, it's not great. You know, listen, all this conversation here

Speaker A

makes me think about Oracle because if rates are going up and we're going to see stocks down, uh that probably is going to be bad news for the companies that have had the greatest financing concerns throughout this whole shindig

Speaker A

uh for two to four weeks though. Well, that's fine. and and then like they're going to be right back at it and squeezing it like you've never seen before until the midterms.

Speaker A

So don't get caught. Like this is the thing. It the market is too big to fail.

Speaker A

That's the reality. And the only way out of this mess and and we have debt which is unsustainable and growing and pushing the long end of the curve. How do you deal with others?

Speaker A

There's only one way out. You print money and you buy stocks. You got to just run it so hot that that you got to inflate it all away.

Speaker A

Besson said that today. Can only grow our way out of the debt. Can't can't raise taxes.

Speaker A

And how do you grow your way out? He did say that. How do you grow your way out of this debt?

Speaker A

Inflation. Get a sovereign wealth fund. You buy $5 trillion worth of equities. You pile uh you know money into these stocks to drive more and more capex and more and more growth. And then you hold the long end of the curve down and you do QE at

Speaker A

infinity. That's how this is economics 101. This is how you create an inflationary loop.

Speaker A

But you do create growth. In the 1960s and 70s, most people think growth was slow because markets didn't do well. No.

Speaker A

We had 3.8% real nominal was super hot. We had 3.8% real GDP growth. That's why without the buying of stocks, stocks did poorly.

Speaker A

Right? Because the discount rate goes to the moon and multiples contract and profit margins contract.

Speaker A

This is all economics 101. They know exactly what they're doing and they're showing you they've already started to, you know, buy the long end of the curve whether it's through that yen intervention or the doubling of buybacks. They're they're getting people

Speaker A

comfortable with it. They've already started buying stocks whether it's Intel or MP to again get people comfortable.

Speaker A

Both of these things are at all-time highs. We've never seen this before. Talk about never seen it before. They're getting the world comfortable with what's coming. I'm telling you, next year into a decline, we are going to see

Speaker A

a launching of a sovereign wealth fund in the trillions of dollars and QE infinity at the long end of the curve at the same time. That is the run hot that's coming for the next year and a half, two years into 28.

Speaker A

And that's how it starts. It will go for the next decade. This is the new normal.

Speaker A

Prepare yourself. H we we're not stopping this train, I no matter what we say or do.

Topics:bond marketvolatilitycentral bankFed policyinflationmarket interventionyield curveeconomic narrativerate hikesmarket manipulation

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