A Stroll Through BubbleLand

Today, much like a country newcomer at a local fair, we roam through BubbleLand, wide-eyed and amazed. Having spent years hunting deer on the ‘back 40,’ surely we can hit some marks and claim a prize teddy bear, right? Is the ‘Naked Lady’ truly a lady? Would anyone with a sound mind dare ride the ‘Death Swirl?’

Amid the flashing lights and animated carnival barkers, it’s tough to concentrate on the crucial issues.

The conflict with Iran? Artificial intelligence? Midterm elections? Surging interest rates?

Which of these will ultimately topple the tent remains uncertain. However, Wednesday morning suggested interest rates as the leading contender. MarketWatch reported:

The U.S. Treasury on Wednesday will be asking investors to hand over another $16 billion for 20 years to help finance the nearly $1.8 trillion U.S. budget deficit so far this year.

The answer from investors probably will be “fine, but you need to pay us close to a 5.28% yield” — the going rate for existing 20-year Treasury debt on Tuesday, and the most it’s cost Washington to borrow this way since the 20-year tenor was auctioned six years ago. With long-term Treasury yields hovering at multi-decade highs, traders have begun asking the uncomfortable question: How much will the U.S. need to pay to convince the world to keep lending it money?

Meanwhile, Barron’s chimed in:

30-year yield rises to highest level since 2007 as oil and Treasury supply bite bonds

The Wall Street Journal also weighed in:

Bonds are getting hammered, and Wall Street says the rout won’t end anytime soon

Really? The bond sell-off had wrapped up before breakfast was done. According to CNBC:

Treasury yields pulled back on Wednesday from multi-year highs seen earlier this week, with the long end of the curve dropping sharply after the Treasury Department announced an upscaled buyback operation of U.S. long-term debt.

The Treasury Department said it will double the size of its government debt repurchases, lending support to longer-dated bonds.

“Repurchase?”

With what funds?

That term masks the reality. Essentially, the Fed plans to ‘print’ money to acquire its own debt, pushing yields down and further inflating the economy. Gold instantly sensed the impact. At 8 a.m. Wednesday, it traded at $4,416 an ounce. Just an hour later, someone holding 10 ounces had gained $1,000.

By day’s end, the pieces aligned to foreshadow America’s financial path. Reuters reported:

‘US debt crosses $40 trillion threshold after doubling under Trump and Biden’

Government spending is unstoppable, and climbing interest rates are unaffordable. Expect further interventions…more debt, and a dollar vanishing like spun sugar.

Underneath this financial spectacle, two matters are most pressing: the sheer size of outstanding debt and the cost of servicing it. As these escalate, so do the chances of a financial crisis. The Fed can delay disaster by ‘repurchasing’ its own debt — yet this only deepens future troubles.

Continuing our tour through BubbleLand, let’s remain vigilant.

Here’s some ‘good news’ from Charlie Bilello:

S&P 500 Q2 earnings are now on pace to rise 50% YoY, the highest growth rate since Q2 2021. And the 29% upside surprise in Q2 earnings versus expectations at the start of earnings season is officially the biggest upside surprise on record.

Don’t get carried away. These aren’t genuine ‘earnings.’ They’re bubble earnings generated by investments made by the ‘hyperscalers’ into other AI ventures, with more expected. Next year’s earnings projections stand at twice the usual ‘normal’ 15% rate. So far, the S&P 500 has jumped 15% this year — again, double the typical pace. However, with many companies pouring vast amounts into AI, the ‘Death Swirl’ could soon topple.

All top ten S&P companies rely heavily on the AI bubble. Sandisk, Dell, Seagate, and Micron have each climbed over 200% this year. Overall, stocks are so inflated that a patient, dividend-focused investor would need to wait a century to break even. This surge isn’t grounded in real revenue growth, but rather on the hope of capital gains.

Seasoned Wall Street operators know the playbook. This mindset underpins another possible Peak Bubble warning that emerged recently. The Street noted: