Bond Market Prepares for Epic Showdown Vs. Trump 2.0 - Inflation to Decide Winner

Let’s take a look at the United States 30-Year from another angle by way of a chart I just found in my list that we used back in those critical days of early 2020 in gauging the coming inflationary recovery (and future inflation problem). I’ve marked it up further today in an effort to tell a story.

My general view of this story is that what people call the “Everything bubble” is actually a long-term bubble in monetary policymaking (you can always count on government from either side of the aisle to auto-stimulate through fiscal policies) that has been periodically interrupted by bubble bursts, liquidity events and inflationary recoveries as our policy heroes swing into action. This continuum of invasive policy is ongoing, but in 2022, after the latest and most extreme policy kick-save ever, the bond market rebelled, and today the trend is gone. Poof!

Now we are left to try to define what comes next after the end of an incredibly consistent and definable trend ended for this macro view.

30 year Treasury bond yield continuum

• Alan Greenspan kicked off the age of Inflation on Demand back in the relatively innocent days of 2001-2004. This represented the start of a multi-decade phase of ever more intense, chronic and intrusive monetary policy in response to any and all market liquidity crises. Ole’ Greenie laid the groundwork and Bernanke put it on steroids.
• Aside from the obvious effects of this policy (halting bear markets, resuscitating the economy, manufacturing inflation) the very acts of printing money and spending from an ever-growing bag of debt have created the ongoing and intensifying disparity between the haves (asset owners, who’ve seen their assets chronically rise due to inflation) and have-nots, who are not part of the investment class and whose paychecks have not nearly kept up with the macro parlor trick known as inflation, which has been inflicted upon society as a matter of… POLICY!
• Among other things, this dynamic – in my strong opinion – created the environment in which most recently the old party was thrown out, and the Trump party was given its mandates. I will guess that in 4 years, after the coming inflation and/or economic bust, the reverse may happen.
• With the Continuum of long-term yields having busted its trend to the upside the setup is for Trump/Powell 2 to be more intense and rancorous than Trump/Powell 1, which was pretty damn rancorous (recall Trump’s robo-tweeting, berating the Fed chief for not dropping the Funds Rate, despite the Continuum’s then in-progress rise to the red EMA trend limiters). We noted at the time that Powell’s Fed was going to do the bond market’s bidding, not Trump’s.
• Powell held his ground until the economy and inflation signals began to ease, when he began cutting rates, a regime that ended with a deflation scare and inflationary response for the ages, in Q1, 2020.
• Today the bond market is different. Captain Obvious wants you to know that. And it is not different in a pro-Trump way. If anything, Powell will – barring a complete capitulation to the will of the orange man – doggedly respect bond market signals.
• Hence, an economic downturn and market liquidation is almost necessary, if markets and the economy are to continue with a semblance of “business as usual”.

However, Trump 2 is presented as a force of nature compared to Trump 1. If this is all presentation and bluster with no real force behind him, Trump will probably have to sit back and eat the Fed’s decision to independently manage markets monetary policy-wise. However, Trump has a thing in his pocket called fiscal (i.e. governmental, political) stimulative policy, along with a mandate to use it however he, and the houses of Congress he puppeteers, see fit.

In other words, the Fed could be marginalized in this scenario, leaving our economic fate to a real estate developer used to getting what he wants and used to using credit/debt to get it.

It is shaping up as an epic struggle (in my opinion) between the bond market (and by extension, the Fed) and the government. Most administrations, including Trump 1, eventually wilt before the great and powerful Fed of Oz. But Trump 2? Is he bluster or is he a force of nature? Real or Memorex?

These are questions we need to take seriously, anticipate correctly and therefore, strategize by. 2025 may not be as simple as a contrarian bear play, although that is still my favored view. von Mises wants us to know that there is another option as well.

For those who want straight TA and straight answers, please pardon my detour above. But it is how I operate. I cannot in good conscience just issue prognostications without doing and showing the work behind it. The summary of the above is that I have not yet decided for myself which way I firmly believe the 2025 macro will go.

The alternative is an inflationary “crack up” that becomes ever more intense, with an absolute bull (in a China shop) at the helm of the economy. In that event, things could appear bullish for longer, but also capital would be in flight, probably aiming for real assets relative to paper (stocks, currency, etc.). It’s a world of increasingly divisive geopolitics and a big-time “grab” for these things could be in play.

Maybe a fitting and climactic end to the age of Inflation on Demand, after all.

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