Rising Bond Yields Help Gold, Not Hurt It
Most investors get the link between yields and gold backward. They believe rising interest rates hurt the stock market (they do) and also hurt gold and silver (they do not). On the week, gold closed down 1.4% near $4,284 and silver fell about 3% to $64.17, driven by the false belief that rising bond yields are bad for precious metals.
Rising bond yields are good for gold and silver. They harm the economy, lead to bigger budget deficits, more money printing, and more inflation - and inflation is good for gold. Inflation destroys fixed income and bonds. Gold is the savior in that setting.
When it comes to inflation, treasuries take the hardest hit. If you want a safe haven from inflation, you cannot buy US treasuries, because treasuries are not a safe haven when inflation is the threat. Gold will be the last safe haven standing.
Question: if a sovereign holds US treasuries in reserve and wants to sell them and dump dollars, what replaces that asset? Answer: gold. Central banks losing money on treasuries, and wanting to avoid losing more, will buy gold. A central bank could buy stocks (if not overpriced) or real estate, but foreign central banks will not load up on US stocks or real estate. Their only real alternative is gold, and they will keep buying it. Gold is how you hedge a weak bond market because it is the ultimate inflation hedge. This is all very bullish for gold and silver. Traders will figure it out eventually; meanwhile it is a chance for investors who understand it to buy more.
Bitcoin dropped a bit on the week but held near $84,000, still keeping much of the prior week's gain, and rose again Monday. MicroStrategy gave up a lot of its gains, down 5.6%. Stretch, despite weekly share buying, is still not at par - it closed at $98.54, down 0.3% on the week, giving a yield of 12.2%.
The Market's Hidden Weakness: Worst Breadth in 100 Years
The major averages appear to shrug off rising bond yields, but that masks what is happening to most stocks in the S&P 500. The index sits only 0.7% below its all-time record high, yet the average stock in the S&P 500 is 19% below its record high.
The average includes the stocks making record highs. Remove the top 70 stocks and look at the other 430: their average is 21.7% below their highs. So on average, 86% of the S&P 500 is in a bear market. Drilling into individual stocks, 60% of all S&P 500 stocks are more than 20% below their highs - bear market territory.
Look at the weekly highs and lows: just last week, 14 of 500 stocks made new highs, but 41 made new 52-week lows. That is roughly 3-to-1 new lows to new highs in a market almost at a record high. You normally do not see 3-to-1 new lows unless the whole market is in a bear market.
Breadth measures how all stocks are doing against the averages - the generals compared to the troops. Breadth in the US market has only been this bad twice in the last 100 years.
The first time was January 1973, the peak of the 1960s Nifty Fifty stock bubble. After that high, the S&P dropped 48.2%, nearly 50%, and did not make a new high until the early 1980s - a brutal bear market warned by breadth as bad as now.
The second time was late 1999 to early 2000, the peak of the dot-com bubble. After that peak the S&P dropped 49.2%, and the Nasdaq dropped almost 80%.
Both precedents ended with the S&P falling nearly 50%. To bet against a repeat, you have to argue this time is different - that lousy breadth is acceptable now even though it was not in 1973 or 2000. If it is different this time, it may be worse, because the economy's fundamentals are much weaker now. The only potential wild card is AI, but there is no certainty how fast AI benefits will reach the economy, or whether that will be fast enough to stop history from repeating. It has already repeated twice; a third time is plausible. The most dangerous words in investing are "this time it's different," because people always say it and it never is.
Bill Ackman's Bad Advice on Rates and Inflation
Bill Ackman (talking his book, and heavily invested in the Fannie Mae and Freddie Mac trade, so he has clear incentives) is criticizing the Fed for raising rates because "this time it's different." His claim: AI and data center returns are so great that companies will keep borrowing no matter how high rates rise, so rate hikes will not deter borrowing, and the Fed should not even try.
Ackman also argues rate hikes will make inflation worse, not better, by building a higher cost structure passed to consumers. That part is true, but it is always true - higher interest rates are a cost, like wages, raw materials, insurance, and rent. All business costs get passed to the consumer, because a business that cannot cover its costs goes out of business. Businesses must sell products for more than they cost to produce, and interest on borrowed capital is part of that cost.
But rising rates slow inflation by stopping the consumer from borrowing, not the businessman. Business borrowing to produce is fine - that raises supply. The problem is the consumer borrowing to spend, which is pure demand and drives prices up. Consumption spending must be clamped down, meaning consumers and governments have to stop borrowing, because government spending and consumer spending fuel inflation. The key distinction: does borrowed money create additional goods, or only additional demand?
The Fed cannot simply follow Ackman's advice and stop hiking, because then it would do nothing about inflation.
Question: what is Ackman's actual recommendation? Answer: raise the inflation target - just surrender. He wants the Fed to stop hiking and lift the target to 2.5% to 3%.
Question: why 2.5% to 3%? Answer: because that is conveniently where the Fed claims it is - headline inflation is higher, but core is about there. Ackman just wants to move the goalposts because we cannot score where they are. But if the Fed followed this advice, inflation would climb well above 3%, to 4% or 5%. Then the goalposts move again. And if Ackman fears rate hikes needed to rein in 2.5% to 3% inflation, the hikes to rein in 4% or 5% would be far larger. That is the flaw in his advice.
Portfolio Incentives Behind the Argument
Ackman gives advice that helps his own investments. He needs rates to stop rising because they are hurting his portfolio, so he wants the government to pursue policies that enrich him.
By contrast, my recommendation would harm my own holdings. I still recommend the Fed hike rates a lot - hundreds of basis points - shrink the balance sheet, shrink the money supply, and let stocks, bonds (including the ones I own), and gold and silver fall. I advocate policies harmful to my own portfolio because I know they are correct and will work. My portfolio is built on knowing my advice will be ignored, so I still speak the truth.
If the Fed did exactly what Ackman wants, those policies would also help my portfolio - I would probably earn a better return than he does (though maybe not in total, since his base is bigger) if the government is dumb enough to follow him. Maybe Ackman sincerely believes what is good for Bill Ackman is good for the country.
Moving an inflation target makes persistent inflation look acceptable without making prices fall, turning a temporary miss into a new baseline. Even moderate annual inflation compounds into large losses of purchasing power.
The China Meeting: Much Ado About Nothing
The president's meeting with Chairman Xi from China had lots of pomp, photo ops, and little substance. None of the big things were accomplished.
The president is trying to get China to back away from buying oil from Iran, but got no commitment. The only thing he got from Xi was a statement that Xi does not want Iran to have a nuclear weapon - which is no big deal, since nobody wants that. The real question is what China will do to stop Iran from getting a nuclear weapon, and the answer is apparently nothing, because China will keep buying oil from Iran.
China will also keep buying oil from Russia, with no commitment on Russia achieved. This is despite Congress, in a bipartisan vote, giving Trump permission to put 100% tariffs on countries that keep doing business with Russia - which includes China. Nothing on China's business with Russia came out of the summit.
Congress authorizing this is absurd: why punish Americans? If China does business with Russia, punishing Americans does not solve that problem.
China has shown it does not need the United States. Its trade surplus hit a record high last year and will beat it this year, topping $1 trillion - the mirror image of the US trillion-dollar deficit. The US trade deficit with China has been shrinking, but that has not solved the problem, because the overall deficit is still enormous. The US now just buys the same goods from other countries at higher prices.
Tariffs Change Suppliers, Not the Deficit
China is doing great without the US, selling to other buyers the goods it used to sell to Americans, and keeping a huge surplus. None of the US trade tariffs are really harming trading partners - they are harming Americans and the US economy.
This is one reason higher interest rates will hit Americans especially hard: they are already struggling with higher prices caused in part by tariffs.
Nothing has moved on the trade war with Canada, the biggest US trading partner. Everything imported from Canada will get more expensive. Some individual US companies will be harmed by losing Canadian customers, and some Canadian companies will lose US customers - but there is a big world Canada can trade with. The US is the one with massive trade deficits.
Tariffs change trade routes without erasing the underlying imbalance. When imports shift from China to other suppliers, the US still faces the same demand for foreign goods at different prices and higher borrowing costs. Households get squeezed from both financing costs and consumer prices. The key question is who ultimately absorbs these policy costs.
