The Biggest Threat to Your Portfolio Isn't Iran

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Tuesday.

Today is Tuesday, August 4th.

Today I want to talk about the bond market.

Because while a lot of folks are focused on the Iran war and oil prices — and I understand why — the bigger threat to your portfolio right now is sitting in interest rates.

The Warning the Bond Market Is Sending

The 30-year Treasury yield spiked to 5.24% last month.

That is the highest level in 19 years.

We haven't seen rates this high since 2007 — the last year the market was semi-normal before the financial crisis hit.

Remember what happened after that.

The Fed and every policymaker in Washington pushed rates down to the floor, tried to stimulate the economy, and issued an enormous amount of debt.

All that debt was issued at low rates.

Now rates are going up.

Which means our interest payments are going up with them.

That is a genuinely dangerous situation for this country.

For those of you who've watched this channel a long time, you know the number I watch most closely is the 10-year yield.

It hit 4.71% recently.

And you know what I've said about that 5% level.

That is a ceiling for the stock market.

The closer the 10-year gets to 5%, the more pressure on stocks to go lower.

Warsh's Approach

Some of this is intentional.

Kevin Warsh has a very small-government philosophy — and honestly, it's close to how I'd run things if I were in that seat.

He's stepping back from the dot plots.

Fewer public statements about what the Fed is thinking.

Possibly cutting from six meetings a year to four.

The reason is simple.

Warsh believes — and I agree with him — that the Fed has manipulated rates for so long that there isn't really a real interest rate anymore.

It's a suppressed, government-controlled rate.

And here's what that manipulation actually does.

When rates are pushed down artificially, investors can't get yield from safe assets.

So they chase it.

They take on more and more risk to fund retirement accounts and pension plans.

That's what economists call moral hazard.

You incentivize bad behavior.

Now Warsh is stepping back and letting the market set rates.

Which is the right thing to do.

But here's the catch.

When the market sets rates, yields go higher.

And when yields go higher, stocks go lower.

And as the US needs to refinance its shorter-term debt at these higher rates, interest payments balloon.

We are already paying well over a trillion dollars a year just in interest on our debt.

That is quite a pickle.

The Japan Problem

Now here's where it gets more complicated — and more important.

Japan has been walking a tightrope for years.

Low growth, zombie businesses kept alive by the state, an economy that has never really restructured.

And a yen that keeps going lower no matter what they do.

Since September 2022, Japan's Finance Ministry has spent $255 billion trying to prop up the yen.

It hasn't worked.

On July 31st alone — just a few days ago — Japan spent $52.8 billion in a single day intervening in currency markets.

The largest single-day currency intervention on record.

Now here's why this matters to every American investor.

Treasury Secretary Bessent stepped in to help.

Washington sold euros to buy yen — directly supporting Japan's efforts to prop up its currency.

Why would Washington do that?

Because the US is terrified of what happens if Japan runs out of options.

Japan is the largest holder of US Treasury bonds in the world.

If Japan needs to raise money to defend its currency, it will sell US Treasury bonds to do it.

And if Japan starts dumping US Treasuries, yields spike even higher.

That 30-year yield sitting at 5.24%?

It could go to 6%.

Maybe higher.

Plugging Holes in the Dam

Here's the honest picture.

The last three administrations — Trump's first term, Biden, and now Trump's second term — have added an extraordinary amount of debt.

Trump's first term: roughly $7.4 trillion.

Biden: $7.2 trillion.

This term is tracking toward $8 trillion or more.

We have so much debt that we're starting to do things just to keep the house from catching fire.

We're plugging holes in a dam.

You remember that old cartoon — Bugs Bunny sticking his finger in one hole, then another pops up, then another, until he's got fingers and toes in every hole and the dam is about to burst anyway.

That's where we are.

The Treasury Secretary is out there plugging holes before interest rates spike high enough to cause a real crisis.

A trillion dollars a year in interest payments.

Two trillion if yields keep rising.

Economic growth slowing.

The market crashing.

The whole thing turning into a disaster.

We are not in a great position right now, ladies and gentlemen.

When governments are drowning in debt.

When bond yields are hitting 19-year highs.

When the Treasury Secretary is out there defending the Japanese yen just to keep US interest rates from spiraling out of control.

That is the moment gold was built for.

Central banks around the world already know this.

They've been buying gold instead of US bonds for exactly this reason.

And if you want to go beyond owning gold itself, I put together a full presentation on what I think is the best-positioned name in this space right now.

The One Hope

I am genuinely hopeful that Warsh and Bessent — both of them students and proteges of Stanley Druckenmiller, one of the greatest investors who has ever lived — can find a path forward.

Whether that's transferring debt from the Fed's balance sheet to the Treasury.

Or making progress on the Mar-a-Lago Accord.

Or cutting some kind of deal with China that avoids a bigger conflict down the road.

The talent is there.

I hope they use it.

Have a wonderful day.

I’ll see you tomorrow.

“The Buck Stops Here,”