The flashbacks are coming on strong. Who thought myself and Donald Trump would be ratified for new office in the same week? Not me. Anyway, enough about me… said the Donald never. Seriously, do we really have another four years of these whining streams of consciousness, aka press conferences. As Los Angeles burns and Gaza starves, the world is still digesting The Accused’s quasi-declaration of war on Panama, Mexico, Canada and…… Denmark. Clearly, the Orange Toddler is emboldened, as Putin’s number one fan boy, to threaten the invasion of both Panama and Greenland for “national security” reasons. One could be dismissive of these attention-seeking words of intimidation but this feels different, and probably Putin derived. Hamlet this is not, but Act I of this tragedy was Ukraine. Who knows what Act II could be in a new world order of misinformation, security over-reach and sovereign destruction? Taiwan would top most risk lists. However, Estonia or Finland might disagree, as the Baltic plays host to “infra-destructure” warfare. I might disagree too. There’s a bigger bully boy out there and possibly a reason for hope.
We have written many times before about the perils of depending on “other people’s money”. In most cases, the most catastrophic financial implosions have involved high levels of debt or leverage. However, in certain cases catastrophe has been avoided. The phrase “my word is my bond” speaks to credibility but I’m thinking of a more threatening type of bond today. Recall the famous words of Clinton White House strategist, James Carville….
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
Liz Truss might attest to that intimidatory power. Her lettuce-life UK premiership was ended by the UK government debt markets (Gilts) going into freefall after her mini-budget ignored all rational advance warnings and almost blew up the UK pension fund system. The Bank of England saved pension funds with a swift monetary/funding intervention but there was no saving Chancellor Kwasi Kwarteng or his delusional prime minister. Fast forward to 2025, and bond markets for me are the big start-of-year story. And, it’s not looking good for the UK….again. In fact, things have deteriorated since the Truss budget debacle. It appears that an election pitch along the lines of “the other lot are awful, vote for us” is failing to convince the all-powerful debt markets that the new government of Sir Keir Starmer has any credible grip on the economy. Try these bond market data points for starters…
UK government long-term borrowing costs – priced in the 30-year Gilt/bond markets) – are at their highest levels since…. 1998.
UK government medium-term borrowing costs – priced in the 10-year Gilt markets – are at their highest since 2008.
In real terms, this means that the UK government is going to spend more on interest costs than on national education this year. Meanwhile, the politics of the country is consumed by “grooming gang” criminality which has been widely known about since at least 2015 (Jay Report). Oh, and UK Treasury Minister, Darren Jones, has just soothed House of Commons members’ fears saying “it is normal for the price of gilts to fluctuate”. Fluctuate? I can think of other “F” words being used on City financial trading floors right now. However, the ‘reality bite’ of bond markets might not be confined to the UK.
The US government has been racking up monster debts too – just the $34 trillion at the last count. So, for those believing Trump is either going to buy Greenland for trillions of dollars or spend similar amounts on military invasions of US allies (I know, genius stuff), there’s a tiny bond detail which merits some attention. At this week’s US government monthly auction of 10-year bonds/debt instruments traders pushed the yields/costs to be paid by the US government to an 18-year high of 4.68%. It might not look like a particularly big cost but this is the foundation of all pricing in the US house mortgage and car finance markets. So, if the bond markets are threatening mortgage or car financing costs to rise to levels not seen in almost two decades, then be assured that the bond bully boy will trump the fantasy words of Agent Orange. This is an example of debt markets warning about spending inflation and unsustainable government budget deficits. But, there’s another type of warning which the bond markets can deliver.
Ultra-low interest rates(bond yields) can also point to multi-year stagnation caused by a national (including government) debt crisis. Japan is the classic multi-decade example of minimal GDP growth or inflation and super-low interest rates. But, there’s a new contender for zombie debt stagnation: China. The Middle Kingdom’s $11 trillion government debt market is sending some very strong signals. The gap in costs/yields between the US and Chinese government bond markets is the highest in history. Chinese 10-year bonds are yielding just 1.6%, but the bigger story is in the long-term 30-year bond markets. Japanese 30-year bond yields are now higher than China’s which starkly signals a “Japanification” of the Chinese economy. The credibility of China’s economy is at stake but critically that of President Xi too. Interestingly, Xi’s new nickname on the Chinese internet is “the elementary school student”. Of course, an invasion of Taiwan could distract the Chinese population but there’s also a real possibility bond markets could signal Xi being toppled from power.
As a final thought and one recently raised by David McWilliams in an excellent podcast there could also be a reality check around the tariff threats of the incoming Trump administration. Maybe it’s not quite as bad as invading your allies, but imposing tariffs on your biggest trading partners could prompt a painful bond bite-back. McWilliams makes the very good point that the Chinese and Japanese own/hold trillions of US government bonds. If these trading counterparties sell them as part of a bigger trade tariff war then US government interest costs and US consumer finance costs will painfully spike. US government interest costs already exceed $1 trillion annually which, if it were a standalone government department, would actually outspend the US Defense Department’s annual budget. My money is on financial pragmatism watering down most of the actual tariff outcomes. In fact, another part of the financial world is hinting at Trump threats not quite happening in a different market. Despite the threats to roll back cleantech and renewable initiatives of the Biden administration, it would seem the markets are not quite convinced. Indeed the latest data from Wall Street might surprise; apparently the share price performances of clean energy stocks and fossil fuel stocks are in a statistical dead heat since Election Day (Source: Callaway Climate Insights).
Perhaps there’s a new lesson soon to be learned in geopolitics….
Your words are only as strong as your bonds.
