Thrown Back to Earth
In July 2020, the real yield on Fed Funds loans was NEGATIVE 6%. And that was after 40 years of declining yields. The Fed was giving away money...and paying people to take it.
Friday, July 31st, 2026
Bill Bonner, from Poitou, France
In the news this week was Kevin Warsh, the new Fed chief. He and his FOMC had to make a decision on the key lending rate charged to member banks. On Wednesday, they announced a pass. The New York Times:
Fed Leaves Interest Rates Unchanged, Despite Three Votes for an Increase
Kevin M. Warsh, the Fed’s new chairman, vowed to fight persistent inflation without offering specifics about whether that would include raising rates.
The last time the Fed beat inflation was forty years ago. But controlling inflation when you have less than $1 trillion in debt...with stocks already on the floor...is one thing. Getting control when you owe $40 trillion, with stocks at an all-time high, is another. Inflation has been running at about twice the Fed’s 2% target rate for nearly five years. They are in no hurry to stop it.
Also in the news are the latest trade figures. Recall that ‘reciprocal tariffs’ were meant to wipe out the trade deficit, by shifting more industry to the US. When the plan was announced investors freaked out and the whole nutty program was downsized. And then, the Supreme Court declared it illegal and it was downscaled again.
For a giddy moment, it then looked as though what was left of the tariff program was working. Imports declined dramatically...and briefly...in 2025. But now, they’re up again, with a quarterly net which is worse than it was before the tariffs began. Mish Talk:
Trump’s Tariffs Didn’t Improve the Deficit but Did Increase Consumer Costs
Another policy belly-flop? Maybe. But Trump’s historic mission is to weaken the empire; it is as if he were parting the waters of the Red Sea.
And what’s this? What happened to that Golden Age? The Wall Street Journal:
US economic growth slowed to 1.5% in second quarter
Our guesses about how these dots connect will be found correct...or we will eventually be shown to be a fool. Either way, we will accept the judgement of history. But it’s the Primary Trend that counts. And we believe, for interest rates, it is going up. After an entire generation, the bottom in yields was hit bottom on March 9, 2020 with the 30-year Treasury bond yield at 0.99%. Now it’s 421 basis points higher.
Bonds have been a death trap for the last six years. But, in a world of ignorance, how can we possibly know what the long-term direction — bull or bear, up or down, long or short — will be?
Markets drift and flutter. They do not tell you where they are going. They publish no flight plans. They provide no GPS signals or road signs.
What star do we steer by? What helps the poor guesser to guess right? First and foremost, the markets themselves. They obey the basic laws of motion. Up is still up; down is still down. And there are limits to both.
When a market is near an all-time high, the upside is mostly on the downside, if you know what we mean. Governed by what may be the most reliable law in the universe, things tend to oscillate, up and down, with a ‘mean’ or ‘normal’ somewhere in the middle. The planets do not wander around the sun; they follow predictable orbits. So do markets mostly stay in their lanes.
In July 2020, the real yield on Fed Funds loans was NEGATIVE 6%. And that was after 40 years of declining yields. The Fed was giving away money...and paying people to take it. Investors could barely believe it. In their bones, they knew it couldn’t last.
They knew they should get out of bonds as fast as they could...but...but...prices had gotten so high...and been rising for so long...that it began to look as though markets no longer functioned...that bonds had left their orbit and were now headed out into space, to a distant solar system far, far away.
“Gravity is not just a good idea,” they joked with each other. “It’s the law!” But gravity didn’t seem to be working at all. Had the law been repealed? Did it break down? Was this truly a ‘new era?’ Investors held on...waiting for even higher prices.
Then, of course, gravity was suddenly the law of the land once again. In August, six years ago, for the first time in four decades, yields began an upward march (and prices marched off in the opposite direction). Bondholders were thrown back to earth — with their worst losses in history. And as far as we know, interest rates are still going up. The Wall Street Journal:
The 30-year U.S. Treasury yield rose to a 19-year high of 5.238% on Thursday after the Federal Reserve kept interest rates on hold, but left the market pondering about its future path.
And stocks?
Where is the gravity there?
Stay tuned.
Regards,
Bill Bonner
