Original title: The Periphery

Original author: Arthur Hayes

Original compilation: Kaori, BlockBeats

(Any opinions below are the personal opinions of the author and should not form the basis for investment decisions, nor should they be regarded as recommendations or suggestions for engaging in investment transactions.)

When talking about war and precious lives lost, my words may seem sarcastic and flippant. The reality is that I believe military men and women around the world should be praised for their willingness to risk their lives to fight for a fictitious concept of nationhood. I am not willing to do so myself, and therefore I do not believe I have the right to vote for any country to be involved in the war. I have a strong disdain for politicians who sit in their seats of power and take no chances by sending wonderful people to war. Most of these politicians have no family members serving directly in the military, nor have they served personally. Yet they are happy to send others to risk their own deaths for personal political and financial gain. War is not a video game, war is wasteful, war is nasty, war is deadly. So, I say to all these weak liars, F*YOU!

Life experiences are filled with a series of events that are beyond our control. You did not choose to be born or choose who your parents are. Life deals you a hand and your response defines who you are and your success or failure.

The reaction is more important than the triggering event. The United States responded to the war on terror in response to the 9/11 attacks in 2001. Across three presidents and two political parties, the United States has fought wars in Iraq, Afghanistan, Syria, and many other undisclosed places. Whats left after more than two decades of fighting a war on ideas with no clear metrics for success? Millions of lives have been lost and nearly $10 trillion has been wasted. What sparked this disproportionate response was an incident that left thousands of Americans dead and the destruction of several buildings that had long since been repaired or rebuilt.

Hamass attacks on Israeli civilians on October 7 prompted Israeli politicians to declare war on Hamas. Hamas is an organization. But organization is just an idea in the human mind. The only way to eradicate an idea is to eradicate everyone who thinks it. As a result, Israel responded by waging war against Hamas and anyone who supported them.

The empires decline was due to multiple threats occurring simultaneously on the fringes. Peace under the United States is not directly threatened by anything happening in Gaza. But Israel, the pet of peace under America, needs billions of dollars every year to defend itself in a hostile environment. For the aristocrats of Pax Americana, the price is worth it, as it preserves a strong American image and creates a fifth column in the oil-rich Middle East.

One cannot abandon any ally in times of need—otherwise, your other allies will no longer pledge allegiance to the flag. This is how the United States got dragged into Ukraines war with Russia, and now Hamass war with Israel. Pax Americana must therefore go bankrupt in order to support her ally Israel.

Bankrupting the empire? How can hundreds of billions of dollars bankrupt the hegemon of the American economy? Some readers may ask.

I acknowledge that bankruptcy is a strong word - I would soften it to increase the cost of its debt to unsustainable levels. Once a government cannot afford its debt, central banks have to step in and print money to fund the government. This is when the fun of fixed supply financial assets like gold and cryptocurrencies really begins. The long-term end of the U.S. Treasury market reasonably underestimates a future in which the United States will be forced to spend billions or even trillions of dollars through proxies to wage war not only in Ukraine, but now in Israel, and possibly even in the broader Middle East. The last time the US entered the Middle East it cost $10 trillion; how much will it cost this time?

Rather than review the lessons of history and speculation about military strategy, lets look at how markets have reacted to recent events. What I find interesting is how the Treasury market reacted to recent statements from Federal Reserve (Fed) board members and US President Joe Biden. The financial instruments I focus on are the 10-year and 30-year Treasury bonds, as well as the long-term Treasury exchange-traded fund (ETF) TLT. Finally, I will compare the responses of gold and Bitcoin to movements in the Peace of America risk-free reserve asset.

mission completed

The Fed believes it can beat inflation by raising borrowing costs by raising the policy rate (federal funds) and shrinking the size of its balance sheet, which is mostly made up of U.S. Treasuries and mortgage-backed securities (MBS). When monetary conditions are tight enough (which is a vague concept), they will stop raising interest rates. This is what Sir Powell has repeatedly claimed in various press conferences and speeches.

At a press conference at the Feds September meeting, Powell essentially said the Fed was very close to completing its rate hikes. Several Fed governors then spoke out and espoused the view that rising long-term rates (Treasury yields >10 years) meant the Fed no longer needed to raise rates because markets were also constraining monetary conditions.

Minneapolis Fed President Neel Kashkari said on Tuesday that it was likely that no further interest rate hikes would be needed. —Reuters, 10/11/23 —Reuters, 10/11/23

Feds Logan: Rising yields may mean less need to raise interest rates. —Bloomberg, 10/9/23 —Bloomberg, 10/9/23

Feds Daley said rising bond yields could displace interest rate hikes. —Bloomberg, 10/10/23 —Bloomberg, 10/10/23

The U.S. Treasury market sold off sharply as the Federal Reserve halted its tightening policy, causing yields to surge. A rare phenomenon in modern financial history began to appear: the feared bear market interest rate hike. Interest rate hikes in bear markets refer to a general rise in yields, with long-term yields rising more than short-term yields.

If the Fed isnt going to raise interest rates to fight inflation, why should anyone hold long-term bonds? This may seem counterintuitive, but put down the TikTok video and think with me.

The specter of inflation is still with us. Manipulating US government inflation statistics, the core Consumer Price Index (CPI) remains more than double the Feds 2% target. The Fed should keep raising interest rates until there is a recession or until a major financial services company goes bankrupt. Once either of those two things happens, the Fed will cut interest rates because inflation will fall against a weakening economic backdrop. The market is forward-looking. Therefore, during a rate hike cycle, as long as the Fed is committed to raising rates to curb inflation, the yield curve will at some point become inverted (long-term interest rates are lower than short-term interest rates) as long-term investors anticipate weaker economic conditions going forward. .

When a recession or financial disaster occurs, short-term interest rates will fall rapidly as the Fed aggressively lowers policy rates. This is the so-called oh shit moment. The yield curve will turn from inverted to rising (long-term interest rates are higher than short-term interest rates), but the curve will become steeper as overall yields fall. This is called a bull market accelerator and is a typical trend in the yield curve in modern financial history.

At present, the United States has not experienced economic recession and financial disaster. For well-informed traditional financial boosters like Paul Krugman, regional banking crises dont count; they need to see companies like Bank of America fail before they acknowledge the deep corruption of the U.S. banking system . As a result, the market (aka the bond market watchers) expects the Fed to continue raising interest rates to combat inflation. But the Fed has said that interest rate hikes are on hold, so the bull market acceleration scenario is not going to happen. So why do vigilantes continue to hold long-term bonds? Instead of doing that, they will make their point by selling long-term bonds at the margin.

The difference between 2-year and 10-year yields (white), the difference between 2-year and 30-year yields (yellow)

The Federal Reserves September meeting ended on September 20, observing that the bear market worsened at an accelerated pace after the Fed signaled a pause.

In addition to the Feds failure to fulfill its mandate, attention is suddenly focused on the massive amount of debt the U.S. Treasury must sell to fund the governments operations. Thats not to say the data wasnt known before - anyone can download the debt maturity and sales schedule, which clearly shows the coming debt tsunami. However, the market only started paying attention to the issue after the Fed hinted at a possible pause, as we can see by looking at various opinion pieces by prominent investors in mainstream financial media.

Bond market contrarians have been challenging Yellens policies in recent weeks by raising bond yields to levels that could trigger a debt crisis. In this scenario, higher yields crowd out the private sector, triggering a credit crunch and recession. Since the root cause of the problem is profligate fiscal policy, the government will have to cut spending and raise taxes to appease bond market dissenters, exacerbating the recession.

The Fed is too timid to raise interest rates, the federal government is spending more than Sam Bankman-Fried on bupropion, and markets are on edge. But why is raising interest rates so dangerous in a bear market? Well, let me tell you.

Lions tigers and bears oh my gosh!

In order to understand why this market structure is so harmful to the global financial system, I needed a deep understanding of bond mathematics and fixed income derivatives. Ill keep the jargon to a minimum, but for those who really want to understand this subject, get out your trusty John C. Hull Derivatives textbook. When I was still working for the demons of traditional finance, I used to keep a copy on my desk.

Let’s use the example of mortgage lending to briefly illustrate what happens to a bank’s hedging strategy when interest rates rise. First, lets look at a 30-year fixed-rate mortgage that gives the borrower the option to prepay part or all of the loan at any time without penalty. When a bank lends, the mortgage appears on its balance sheet and must be hedged.

What risks does the bank face because of this mortgage loan? There are two risks: interest rate risk and prepayment/term risk.

Next, Im going to talk about mortgages and shorting Treasury bonds. When you short a bond, you receive money but pay the published yield. For example, if I short a $1,000 face value bond at 99% with a 2% yield to maturity, I would receive $990 today, pay 2% interest annually, and repay $1,000 at maturity. USD principal. Im a little loose on the bond calculations, but you know what I mean.

Ill use the word deadline loosely here. To be precise, a long-term bond with a ten-year maturity will fall in price by 10% when interest rates rise by 1%. Long-term mortgage bonds have negative duration, and shorting Treasury bonds has positive duration. When yields fall, bonds with positive maturities make money; when yields rise, bonds with positive maturities lose money.

Interest Rate Risk

The bank offers a fixed interest rate for the entire 30-year loan. However, banks cannot predict the deposit interest rate 30 years from now. Remember, banks borrow money from short-term depositors and lend it out at higher long-term interest rates. If interest rates rise, and deposit rates rise with them, banks may suffer losses. Imagine if a bank issues mortgages at a fixed interest rate of 3% and the deposit rate rises to 6%, the bank will lose money because it receives 3% interest from mortgage borrowers but has to pay 6% interest to Depositors who provide funds. Therefore, banks must sell some Treasuries to hedge against these losses.

Prepayment/Term Risk

What if a bank decides to short a bond? Maybe that would lessen its losses on the mortgage. If a bank charges a 3% interest rate on a mortgage and shorts a 2% yielding bond, its profit is 1%. That sounds great, but which maturity bond should you short? Suppose you are a trader responsible for managing a banks mortgage portfolio. You might think that if you have a 30-year mortgage, you should short a 30-year bond. But this is wrong. Because borrowers can repay early!

If interest rates fall, borrowers will refinance. This means they take out another loan at a lower interest rate and use the funds they receive to pay off the higher interest rate loan. All of a sudden, what you thought was a 30-year asset disappears and youre left with a short position in a 30-year bond. You can no longer get any income from your mortgage payments by offsetting your expenses on the bond. In short, youre stuck.

If interest rates rise, borrowers will stop refinancing and stick with cheaper mortgages. However, you can still get into trouble if you dont play options long enough. Once the bond matures, you must repay the principal. At this point, you now need a deposit to back the mortgage that is still on your books. Given rising interest rates, interest rates on deposits are higher than on mortgages.

As a bank, the term, or length, of your mortgage will increase and decrease as interest rates change. Therefore, your expectations for future interest rates will determine how long a hedge you buy.

Look at the upper right quadrants - they represent what would happen if a rate hike occurred in a bear market. Very rare. This makes sense because in the past, the Fed has typically raised interest rates, triggered a recession or financial crisis, and then lowered rates later.

Banks trading desks will use this historical data to formulate their expectations for the future path of interest rates and hedge accordingly. The current interest rate regime is not included in these models, so banks and other financial intermediaries related to bonds or interest rate products are not properly hedged. As interest rates rise in the manner of a bear market rate hike, the duration of bonds held on banks balance sheets lengthens. Because bonds lose money exponentially when interest rates rise, this is called negative concavity. Trading desks began to incur huge losses because their hedge durations were too short.

So, whats the solution? As interest rates rise, traders must short more bonds with longer maturities. At this point, banks could be trapped in a fatal spiral of negative concavity.

Here is the negative concave fatal spiral of a bank’s trading desk:

1. Interest rate hikes intensify in the bear market.

2. The duration of the trading department increases.

3. Because banks are now net short duration, the total loss on the bond portfolio increases.

4. Traders increased short positions to cover duration, causing bond yields to rise further.

5. The duration of the trading department increases.

6. Repeat steps 2 to 4.

I used a simple example using a mortgage that was hedged with Treasuries, I know this is not exactly how hedging works in the mortgage sector, but using this simple example gives the reader a general idea.

We cant forget the real issue here, which is that during and after the 2008 global financial crisis, the Fed and other central banks cut interest rates to zero or close to zero and kept printing money to buy bonds to suppress yields. The consequence for pension and insurance funds is simple, as they have huge capital holdings in the trillions of dollars and must earn a high enough return on assets to pay future benefits: look for yield. why? Because they have a generation of older people who have retired (or are retiring) and are likely to need health care paid for by pension and insurance funds. Healthcare and living costs are not growing at 0%, so pension and insurance funds must somehow increase their earnings to deliver on the financial promises made to baby boomers.

The fixed-income trading arms of global investment banks are a major source of income for pension and insurance funds, and they are willing to sell products that provide higher yields to clients. Somewhat ironically, as interest rates dropped to zero and they printed money to save the traditional financial system from their stupid policies, they turned around and made money selling products to the very institutions that were also hurt by these money-printing policies. But how can these products offer higher yields than government or corporate bonds? Banks do this by embedding options. The client sells an interest rate option and collects a premium, which is reflected in the return as a spread. The most common product is the adjustable bill structure.

In order to provide complete and accurate information to those in the know, I must quote this quote from my OG Volatility Fund Manager, David Dredge:

In technical terms, structured banks end up holding a series of so-called Bermuda swaps, which hedge based on a stochastic future probabilistic path of the bonds duration, that is, the probability of a call date. As interest rates rise and the probability of a call decreases in subsequent years, they adjust their hedge positions, which results in selling plain swaps with longer maturities.

Lets get back to whats happening in the swaps market. My next question to Dredge is: So to keep it simple, when traders are faced with the moment of Oh, crap, theres something wrong with my model, theyre all rushing to sell one which leads to selling long bonds in the cash market. Greek mark?

Dredge replied: “As the bear market for rate hikes continues to intensify and traders have sold too many back-end payment swaps, they will find that they have oversold the back-end implied volatility and sold long-dated bonds. (Technically, the swap was sold, but not that much of a difference).

Beneath the veneer of record profits, the worlds too big to fail banks hide a ticking time bomb. Im talking about banks like JP Morgan, Goldman Sachs, BNP Paribas, Nomura, etc. They sold trillions in notional amounts of these products to desperate pensions and insurance companies and will now find themselves taking bigger losses than Three Arrows Capital. To hedge and prevent losses, these banks all have to trade in the same way. The more they hedge, the more they lose. All of this is due to bear market interest rate hikes, which are directly caused by the policies of the Federal Reserve and central banks around the world. Talk about the “human snake” of the traditional financial system.

The scale of the problem is partly invisible to global banking regulators. These products are traded bilaterally over the counter. Banks are required to report some things and not others. Banks and their customers go to great lengths to legally conceal risks. Banks hope to earn bigger bonuses, based on accounting profits, by taking on more risk. Clients dont want to admit they are insolvent. It’s a filthy cesspool of willful ignorance. As a result, no one knows at what interest rate percentage everyone will go broke, or what the size of the losses might be. But rest assured, global citizens, when the financial system is brought to the brink of collapse, your central banks will print the currency necessary to save this filthy fiat financial system.

We know something unusual is happening because bond volatility, as measured by the MOVE index, is rising at the same time as yields. This tells me that selling is exponentially leading to more selling. This is what triggers increased volatility. Then, the market will suddenly explode, seemingly out of the blue, and the corpse of a systemically important traditional financial institution will surface.

MOVE index (white), 2-year minus 10-year yield spread (yellow)

They appear to be highly related.

The Fed knows this, which is why they are trying to do their best to prevaricate, claiming that their policy operations are lagging and therefore they must pause to study the effects. Mr. Powell, how long are you going to sit and wait? The real reason for their pause is that while raising rates is expected to prevent a bear market rate hike, if the Fed continues to raise rates, regional U.S. banks will be in the red again. Remember, depositors would rather choose to do business with the Fed and get an interest rate of 5.5% or higher than keep their deposits and get a lower interest rate and risk a bank failure. Bank conditions in these areas are dire, but unlike the chisel-like impact of damage from successive Fed rate hikes, the damage is slow and rhythmic, as is the case with the onslaught of bear market rate hikes. Also, let me remind you that the US banking system is facing nearly $700 billion in unrealized losses on US Treasury securities. As long-term bond prices continue to fall, these losses will accelerate.

Once several more regional banks fail, the Federal Reserve and the United States will take measures to rescue these banks in batches. Authorities demonstrated this earlier this year with Silicon Valley Bank, First Republic Bank and others. But what the market doesnt yet believe is that the entire balance sheet of the U.S. banking system is actually guaranteed by the government. And if markets, particularly bond markets, come to agree on this view, inflation expectations will soar and long-term bond prices will fall further.

This introduction to what a bear market rate hike is and how it affects banks is designed to explain to you why long-term interest rates will rise rapidly in a self-reactive manner. It also illustrates another problem facing the Federal Reserve and the U.S. Treasury.

knee-jerk reaction

Back to Hamas’s confrontation with Israel. U.S. Treasuries were higher, yields were lower, gold was slightly lower and crude oil was slightly higher when markets opened on Monday following Hamas initial attacks on Israeli civilians and soldiers on Oct. 7. Critics believe that investors are seeking an unprecedented safe-haven asset, namely U.S. Treasury bonds, which are the purest assets dominated by the United States. The United States is strong, the United States is strong, the United States is just, and the United States is a safe haven for capital when it is afraid. Wow wow wow!

Does this make any sense?

At first glance, crudes lackluster response suggested the market did not believe the conflict would spread to the wider Middle East. Hezbollah is keeping calm on the border in northern Lebanon, and Iran is issuing some tough rhetoric, but it doesnt appear they will get involved directly. U.S. President Joe Biden and his administration have tried to calm tensions. They have not come out to accuse Iran, which the United States has always criticized, although some US senators have taken the initiative to call for strikes against Iran. The market has placed a lot of hopes on it.

Oil prices are likely to rise slowly as Saudi Arabias Crown Prince Mohammed bin Salman (MBS) continues to cut production. Rumors had been that MBS would increase production after Saudi Arabia and Israel normalized relations. But now this detente has been put on hold as MBS needs to stand in solidarity with its Arab and Muslim brothers and sisters. Whats more, young Saudis are very pro-Palestinian. MBS has no choice but to fully support Palestine.

The market is once again confident and buying U.S. Treasuries (especially long-term Treasuries). This is clearly shown by the fact that the interest rate curve between short-term and long-term Treasuries has become more negative sloping in subsequent moves.

But as things unfolded, it became clear that Israel was not going to spend the night quietly.

Instead, Israeli Prime Minister Bibi Netanyahu announced that the Israel Defense Forces (IDF) would respond strongly to Hamas. He authorized the IDF to take decisive action to eliminate Hamas, declaring that their actions would affect generations. Bibi is taking tough measures.

Every Hamas terrorist is dead – Bibi The Strong

Thats all well and good, but Israel is surrounded by Arab and Persian states that believe Palestinians are suffering in an apartheid state. If Israel strikes back too hard, these Arab states will have to respond, fearing civil unrest as their populations urge them to take steps to protect their religious and ethnic kin. Added to this is the potential refugee crisis caused by Palestinians moving into neighboring countries. Specifically, many other Arab countries do not want Hamass ideology to challenge their rule, which is why they prefer Hamas to remain within Israel. The big question is, will Iran and its proxy Hezbollah enter an open conflict with Israel?

If Iran joins, does that mean the United States joins too? Israels aggressive foreign policy is based on unwavering support from the United States. What about Russia? If her ally Iran faced the United States, would she step in through proxies? If Russia intervenes, how will China respond?

There are many questions and no easy answers. What about U.S. Treasury bonds?

The United States spent $8 trillion in Afghanistan, which ended in disgrace after 20 years of fighting, and that war was a hide-and-seek battle with impoverished farmers.

Biden has repeatedly reiterated that the United States will support Israel, but the U.S. Treasury market has resumed its decline as the cost of the war continues to rise. The yield curve is once again trending towards a bear market with interest rates rising. Nothing spectacular happened, and then Gazas largest hospital was bombed.

The Dilemma of Pax Americana

As you know, Im a cynical person. I have said repeatedly that the most important thing in politics is re-election.

Israeli Prime Minister Benjamin Netanyahu is currently on trial for bribery, fraud and breach of trust. The trial is still ongoing. For an embattled politician, the best hope is a war to get fearful civilians to support their leaders at all costs.

The Hamas attack was horrific for those who died and those who remain imprisoned, but it is enabling Bibis political rehabilitation. Therefore, he must react in the most positive way, assuring the citizens of Israel - and possibly those who judge his guilt or innocence - that he will keep them safe, so he is the best person for the job (That job is to eliminate Hamas and its ideology).

Israel’s aggressive response has left large swathes of Gaza in ruins and killed thousands of Palestinian civilians — posing problems for the pacifist ruling elite under the United States. The world is watching Biden and wondering will the United States condone and financially support this behavior?

The United States can support Israel but risk being drawn into a war with Iran and other countries in the Middle East. Whatever the reason, Iran says its red line is a ground invasion of the Gaza Strip by the Israel Defense Forces. This is a breaking point.

Israeli airstrikes have disabled airports in Damascus and Aleppo. Syria is a client state of Russia. Russia, once an ally of Israel, is now distancing itself from Israel. How would Russia react if the United States supplied bombs designed to destroy Russian allies? Will this response require U.S. military intervention in other parts of the world?

These are just two examples. As Israel continues to conduct airstrikes against parts of the Middle East, I believe there will be more similar situations to come, regressing the Middle East back to Old Testament times.

Biden can control the situation by telling Israel that there are limits to U.S. support. The threat is that if Israel continues this behavior, the United States will withhold financial support. Seeing this, other U.S. allies may reconsider whether its worth following U.S. advice. That’s because many governments have marginalized minority groups who call for a greater political voice or greater economic benefits. These minority groups are sometimes suppressed by force. Such force could embarrass the United States, which is considered a supporter of human rights. Without U.S. support, coexisting with hostile neighbors will be more difficult for many allies.

Americas elite has no chance of winning. Whichever way they choose regarding their stance on Israel, it will weaken the empires position. The empire will either spend trillions of dollars helping Israel fight its enemies in the Middle East, or the empires allies will begin to defect if their domestic behavior is questioned and potentially ostracized.

Hamas started a conflict, and now the empire must make a choice. There are no good options for this declining empire. what goes around comes around.

Now let us continue talking about which path Imperial America ​​has chosen.

Back to the situation in the Middle East

Israels military operations have had such a negative impact on its relations with its Arab neighbors that Biden attempted to meet with many of these leaders, but they all withdrew at the last minute. Ultimately, Biden simply landed in Israel, affirming that the United States would support Israel no matter what. I think video conferencing is sufficient and will save millions of dollars in travel costs and reduce the burden on American taxpayers.

The U.S. Treasury market resumed its decline as Israel escalated military action while the U.S. remained silent. It is increasingly clear that markets have discounted the cost of future military support for Israel and other allies that will surely be challenged.

How do you feel about the U.S. national debt?

Budget

After explaining to the American public why the United States must support Ukraine and Israel, Biden asked the U.S. Congress for $105 billion. The following is the detailed allocation:

$60 billion for Ukraine

The United States continues to invest money in the wrong places. The war situation reached a stalemate. Ukraine has squandered hundreds of billions of U.S. taxpayer dollars while Russia clung to territory it had seized at the start of the war. Throughout Bidens speech, he repeatedly mentioned Russian President Vladimir Putin as an example of a despicable dictator who must be defeated. It doesn’t look like the United States is trying to extricate itself from this quagmire.

$14 billion for Israel

This is just the beginning of Biden’s commitment to unwavering support for Israel from the United States. Biden essentially said the United States will do whatever it takes to ensure Israel gets what it needs to continue its fight against Hamas.

The United States was definitely involved in this war. Now its your turn, Iran?

If Iran steps in, support for Israel could run into trillions of dollars and take less time than it would take to approve the Blackrock Bitcoin ETF. Never underestimate that bald white man in New York City!

$10 billion for Ukraine and global humanitarian aid

The reason Ukraine needs aid is because of the weapons that keep Ukrainian President Zelensky and his band of improvised soldiers fighting. Stop funding wars and there will be no need for more humanitarian aid. If the U.S. continues its current policy, Biden will continue to seek more funding from the U.S. Congress, even though it may not actually be clear what that policy is.

$14 billion in border funding to combat drug trafficking, fentanyl

Some believe that the fentanyl crisis is a modern-day opium war waged on American soil. In the 19th century, China was forced by the threat of warships to allow the British Empire to traffic drugs on a large scale within its borders. Many landmark buildings in Shanghais Bund and Hong Kong were built by opium traffickers such as Jardine Matheson, the Ghidori family, the Sasso family, etc. This is not illegal and is approved by the British Parliament. May everyone be happy and healthy!

Is it possible that there are countries that are not cracking down on the export of cheap fentanyl to the United States? Regardless of who is responsible, this is yet another attack on Americas fringes with no end in sight.

$7 billion for Indo-Pacific

The United States is busy courting friendship and influence in Asia. Former US President Obama launched the Asian pivot more than a decade ago. The United States actively seeks support from countries such as India and the Philippines, and supports Taiwan, Japan, Australia and New Zealand.

Billions of dollars, billions of dollars, soon real money. The bond market listened to Bidens speech, read his budget, and went into disarray. The next morning, bond yields rose sharply.

If youre a long-term investor in U.S. Treasuries, the most worrying thing is that the U.S. government doesnt think its spending too much. This is what Treasury Secretary Yellen said when asked whether the United States could afford two wars.

Sky News: At this point in time, can the United States and the West afford another war?

Grandma Yellen: Of course the United States can afford to support Israel and meet Israel’s military needs. We can and must also support Ukraine against Russia. The U.S. economy is doing extremely well.

Source: Sky News

Well, what followed was a sell-off in the long-term Treasury market.

The difference between the 2-year and 30-year yields.

The difference between the 2-year and 30-year Treasury yields turned positive for the first time since mid-2022.

If U.S. defense spending goes into absurd mode, trillions of dollars will be borrowed to support the war machine. As the U.S. enters a true wartime economy, Biden refers to all those Americans who produce deadly items like bullets — as if that justifies the spending — which crowds out the production of other goods and drives up inflation. The workers who make bullets, tanks, and bombs are the same workers who dont make cars, clean adult diapers, or say, Would you like some more fries?

Thats why bonds are selling off and yields are rising.

More important, though, is the price action of gold and Bitcoin.

Gold prices have risen since Israel stepped up pressure on Gaza. This suggests markets are discounting future escalations in U.S. support for Israel that could escalate the conflict, potentially involving Iran. Since you don’t want to own the bonds of a country embroiled in two never-ending wars, investors are starting to put their wealth into apolitical safe havens like gold.

Bitcoin had little reaction at the start of the Hamas-Israel conflict. But as U.S. Treasury yields rose and the bear market deepened, Bitcoin rallied sharply, surpassing $30,000.

Neither gold nor Bitcoin has a return on investment. So if they rise when Treasury yields surge, that tells me that both safe-haven assets are discounting a future of more government spending and inflation.

Bitcoin (green), gold (yellow), long-term US Treasury bonds (white)

Since the Fed’s meeting on September 20, 2023, long-term U.S. Treasuries, or TLTs, are down 11%, Bitcoin is up 11%, and gold is up 1%. The market is worried about inflation, not economic growth, which is why Bitcoin and gold are rising along with long-term bond yields.

In this article, I talk primarily about the United States and its financial and moral dilemmas. But what if the world is locked in a proxy war between the US and Russia/China everywhere? All major economies must increase the production of war materiel for delivery to their allies. For example, due to increased train traffic between North Korea and Russia, there is speculation that North Korean leader Kim Jong Un is supplying ammunition and weapons to Russia to continue the fight. Every dollar, ruble or renminbi spent on a bullet is a dollar, ruble or renminbi that is not used to produce the food and other supplies we need.

Everything requires energy, and without inflation there would be no war.

If this is the new reality, I dont want to own any countrys bonds. This is all bad news. Gold and Bitcoin are starting to tell us this message.

Capital flows

Lets put it all together.

The Fed tells us that rate hikes will continue until inflation is eliminated. As a direct result, Treasury watchdogs began selling long-dated bonds. As a result, the yield curve has intensified in a bearish manner (yields rise on the 2-year versus the 10-year and the 2-year versus the 30-year). This triggered spontaneous action by banks around the world who had to somehow sell more bonds, which caused volatility to increase as yields rose.

As Biden has stated, the United States will firmly support its allies and make an indefinite commitment to invest all necessary funds in armaments to support Israels war effort. Add in spending in Ukraine, and the U.S. military budget will really explode—especially if Hamas’s allies, like Iran, respond by intervening in the conflict through their proxies. This would increase future government borrowing, and there is no limit to the amount of capital that could be wasted in a war. As a result, bonds are selling off and yields are rising on expectations that the U.S. will expand its war spending on neighboring countries in the future.

Banks structural hedging needs and the U.S. war machines borrowing needs mirror each other in the U.S. Treasury market.

If long-term U.S. Treasuries no longer offer safety to investors, their funds will seek alternatives. Gold, and more importantly Bitcoin, will start to rise on real concerns about global wartime inflation. So what should I do with my investment portfolio?

Ideally, I would have liked to wait for a financial crisis to occur or for the Fed to change policy and start cutting interest rates. But the market rarely gives you the opportunity to fully meet your expectations. Biden is trying to draw the United States into another conflict with no clear end date. Of course, the U.S. Congress can say no, but there are few politicians bold enough to speak out against the military-industrial complex, and even fewer would take a stance that does not support Israel. If Afghanistan consumes $8 trillion, how much money would be wasted by going to war with a real adversary like Iran?

Bitcoin surged above $30,000 on false rumors that the U.S. Securities and Exchange Commission approved BlackRock Inc.’s spot Bitcoin exchange-traded fund (ETF). When cryptocurrency Twitter started suggesting that Cointelegraph (the source of the rumor) may have been conducting 100x leveraged long trades, posting false rumors, and then dumping on ordinary people, the price of Bitcoin quickly fell back to $27,000.

But now, after Bidens speech, Bitcoin, as well as gold, are rising against the backdrop of a sharp decline in long-term U.S. Treasury bonds. This is not speculation about whether the ETF will be approved, but Bitcoin’s discount to a very inflationary global war scenario that may occur in the world in the future.

When yields rise too high, the end result will be for the Fed to end any pretense that the Treasury market is a free market. Instead, it will become what it truly is: a Petermine village in which the Fed sets interest rates at politically convenient levels. Once everyone realizes the game we are playing, the Bitcoin and cryptocurrency bull run will be in full swing.

This is the trigger, now is the time to start moving short-term U.S. Treasuries into cryptocurrencies. The first stop is always Bitcoin, then Ethereum, and finally my beloved shitcoin. Ill start small in case Im wrong, but you cant sit around forever waiting for the perfect opportunity. The perfect opportunity is often right in front of you, and youre just too focused on the past to notice.