The Bond Market Just Broke The Fed

So it looks like the central banks of the world are slowly losing control over interest rates. There is breaking news as we come on the air. The Trump economy is sputtering. We learned this morning that job growth in the past three months has all but ended. The jobs numbers changed again and we're now showing we actually lost 13,000 jobs in June. That is the first negative jobs report since 2021. And the most recent August one was also bad. We added only 22,000 jobs, which means unemployment is now at 4.3%. So to save the economy, the Federal Reserve might come in and cut interest rates by as much as half a percent, which is huge. And in the short term, that sounds like a good idea. But here's the problem. The bond market is telling us we actually might be in a recession already. Investors don't believe inflation or debt can be controlled, no matter what the Fed does at this point. Now, you might be thinking, Andre, I do not care about bonds. I don't invest in them. I don't buy them. But bonds run the world. They set the interest rates for the cost of things like mortgages, loans, and even the value of our currency. And it's not just happening in the US. It's happening across almost every G7 country around the world. In the UK, for example, the yield on the 30-year bond called the gilt just went up to its highest level since 1998. In Japan, their 30-year government bond yield hit a record high, and it's been moving almost at the same rate as the price of gold, which is something that should never normally happen. In Germany and France, their long-dated bonds are also at multi-year highs. And here in the US, the same thing. Even though the Fed is telling us they are preparing to lower interest rates, the opposite is happening. The yield on long-term bonds is going up. Everywhere you look in the world today, the long end of the bond market is going in the opposite direction of where we want it to go. And the thing that's interesting is that normally, when economies get weaker, central banks cut rates and the bond market follows. The rates also go down. That's how monetary policy is supposed to work. Right now, it's not. This is the special situation we're in, which is we have two-sided risk. Risk to both of our goals. And if central banks are losing their ability to control interest rates, that's usually one of the first warning signs that the world economy is in trouble. Now, I know that all of this is insanely complicated, so in this video, I'm going to try to explain why this is happening across the entire world, and I want to explain what it means for your investments like Bitcoin, gold, stocks, the housing market, and what I'm personally doing to prepare. So with that said, let's get into it. Hi, my name is Andrey Jik. Hope you're doing well. Come for the finance and stay for the bonds. Now, in this video, you're going to learn more about economics than you ever wanted to, and it's going to put you to sleep, so enjoy. Now, it's important to understand that whenever you hear nerds like me talk about yields or interest rates, it's the same thing. A bond is basically a loan. So when you buy a bond, which you can do inside your favorite brokerage app right now, you're essentially loaning money to a government, or in the case of what's called a corporate bond, you're loaning money to a company, and in return, they promise to pay you back with interest. So the yield is just the return or the interest rate that you make for lending them your money. And there's a very special rule you have to remember. When bond prices go down because people sell them, the yields or interest rates go up. And when bond prices go up because people are buying them or the government is, their yields or interest rates go down. So you can think of it kind of like a seesaw. But the problem today is that bond yields or rates are going up at a historic pace, which means bond prices are going down. In the US, the interest rate on the 10-year treasury went up from less than 1% in 2020 to over 4% today. And that is the fastest increase that we've seen in four decades. And this is not just a US story. In Japan, bond yields used to be stuck around zero for decades because the Bank of Japan literally put them there by force under something called the yield curve control. But just this year, the cap came off and their yields immediately broke to record highs, which is a huge change for what used to be one of the most stable bond markets in the world. In the UK, the 30-year bond yields haven't been as high since 1998. And that's despite their economy growing at a really slow pace. So in other words, this is not a normal cycle. It's something a lot bigger. So when you hear me say that central banks are losing control, it's because the bond market is now pushing interest rates higher, no matter what they say. The two have sort of disconnected. And history shows us that when bonds stop listening to the central banks, it's usually one of the first warning signs that something's wrong with the financial system. So that's the nerdy overview. But now let me explain exactly what's happening around the world because the numbers are kind of crazy. So here's the numbers. And you might have to watch this section a couple of times. So press the J button on your keyboard to go back 10 seconds if you need to. But it's going to get very, very nerdy. Now, here in the U.S., the 30-year Treasury bond is wanting to touch 5% interest, if it hasn't already. And it's happening even though the Fed is telling us that they're going to lower rates. Now, I want to remind you of something that happened to the U.S. economy that we've been through, which marked that a recession was most likely going to happen. If you remember, for the last couple of years, the U.S. yield curve became inverted. Meaning, if you ever wanted to borrow money, it was more expensive to borrow for the short term than the long term. And that's not supposed to happen. That's bad because normally, if you're buying a Treasury bond, you would want more money for locking your money away for longer because you take more risk. So you're like, you know, if I'm going to give you my money for two years, fine, pay me $100. But if I'm giving you my money for 10 years or 30 years, pay me more money, right? That's how it should be. So the line or the curve, as economists call it, slopes upward. That's when the economy is healthy. So that makes sense. Now, an inverted yield curve is when the opposite happens, and it usually signals a recession will happen in the future. In fact, here's a chart that shows what happens when the 10 and two-year Treasury bonds become inverted. You can see a kind of countdown clock begins, and we get a recession at some point after the inversion. Now, in the year 2022, our curve inverted, and it went on to become the longest inversion of all time for about two years straight. Now, we have not yet declared this recession, but today the curve is steepening again, which at first sounds good. Sounds like we're recovering, but we're not. That's because in a healthy looking line, the steepening happens because short-term rates fall as the Fed cuts, while long-term rates might drift a little higher, but they stay relatively stable. That's a good steepener. What we're seeing now is not that situation. The curve is becoming steeper because short-term rates are still high. It's still expensive to borrow money. Short-term rates are not really going down, even though the Fed is saying that they will. And long-term rates are rising even faster. That's what's called a bear steepener. It means we're basically saying, we don't trust the government to control inflation or debt over the long run, so pay us more. And that's not good. Now, here's something else that's really interesting. Did you know it's possible to get exposure to XRP without ever having to buy it? That's because the Gemini Credit Card XRP Edition offers instant XRP rewards on purchases with no annual fees. You can use it just like any other card, whether it's gas, groceries, or your next meal out, but instead of points or miles, which lose value to inflation, you're instantly earning XRP or one of over 50 other cryptos straight to your Gemini account. You get up to 4% back on gas, transit, and rideshare, 3% back on dining, 2% back on groceries, and 1% on everything else. And because it's a MasterCard World Elite, you can use it anywhere MasterCard is accepted. For me, it's been as easy as filling up my tank and knowing I'm getting rewarded in crypto automatically. But the reason the XRP Edition really blew my mind is because XRP rewards earned on the Gemini Credit Card and held for at least a year have appreciated an average of 452.9% over time. Now, of course, past performance isn't a guarantee, but it's pretty powerful to think about what consistent earning can do. And right now, Gemini is offering a special promo. When you sign up and get approved, you can earn $200 in XRP after spending $3,000 in your first 90 days. Just click the link in the description down below or go to Gemini.com forward slash Andre to apply and start earning instantly. See rates and fees in the description for more info. Thank you, Gemini, for sponsoring this segment. And now let's get back to it. All right, but hold on, Andre. How do you know that that's not good? It's a really good question. So let me bring this all together and explain how we know. Take a look at this chart. This chart right here shows that when there's a steepening of the yield curve between the 10 and two-year treasury bonds, when the 10-year or the long-term rates rise faster, eventually there's a recession. Because a recession is all these gray vertical bars right here. And here's what the 10 and two look like today. The curve is going up. When the 10 and two-year treasury bonds get steeper, like right now, it almost always happens right before a recession. By the way, here's that same chart, but now overlaid with recessions again. You can see almost every single time we dip below the zero line, that this red line right here, that's the inversion, which we already had, if you remember back in 2022, and it lasted for a really long time. But when we go back above the line, eventually a recession follows somewhere at the end of it. Now you might notice there's also one small exception, which happened back in the mid-90s. If you look really close right here, the curve in 1998 almost looks inverted. There's a little red area right here, but it wasn't really a true inversion. It was more of a flat line, and it was really quick, and the economy just kept growing. That was basically a false positive. But when the curve inverted again in the year 2000, it lasted longer, and that one did accurately predict the 2001 recession. And if we fast forward to today, what we just went through wasn't shallow. We were inverted for almost two years. It's the longest inversion in history. And that's what makes this really interesting. What we're seeing right now is the government losing control over long-term interest rates. So even if the government doesn't want to admit it, the bond market is moving independently from central banks. Long-term rates are going up out of fear. As you can see, every time that happened, we were in a recession at some point after that. What's interesting, though, is that all of this is happening not just in the U.S., but across all the different parts of the world. Over in the U.K., for example, the yield on their 30-year government bond is the highest level since 1998. Now, the U.K. economy today is barely growing. Their GDP is crawling. And yet their long-term borrowing costs are going higher and higher. The best analogy I can think of to explain what's happening is it's like trying to pay off a huge credit card bill that keeps getting bigger and bigger at the exact same time that your income is expected to go down in the future. Now, this is not the first time the U.K. bond market went through something like this. Back in 2022, former Prime Minister Liz Truss tried to push through unfunded tax cuts. So investors panicked, their bond interest rates went up, and the entire U.K. pension system almost collapsed. The Bank of England had to step in and buy their bonds just to keep the system from breaking. Now, in Japan, for decades, their bonds were basically frozen at zero because the Bank of Japan controlled them through the yield curve control. Now, investors used to joke that Japanese bonds were basically free money, but not anymore. This year, Japan's 30-year bond yield broke above 3.2%, which is a record high. And where it gets crazier is that Japanese bond yields have been moving almost at the same rate as the price of gold. And that similarity or correlation is not supposed to exist. Bond interest rates and gold are supposed to move in the opposite direction, but somehow they're moving in the same direction. And there's also Europe. In Germany, the 30-year bond yield is also at its highest level in about 14 years. In France, their 30-year bond is at the highest level since 2009. So all of this is happening all around the world. And if borrowing costs continue to stay this high for this long, it's going to put a huge pressure on all of their economies. So now let me put it all together and sort of explain what this actually means for your investments. Now, this is not a prediction by any means. It's just a sort of basic overview. But every company and every stock will be a case-by-case basis. But let's take a look at overall how stocks get affected by this. The value of a stock is basically the value of all the cash a company will make in the future brought back to today's dollars. That's something called the discounted cash flow model or the discount rate. And that rate is tied to the assumption about interest rates. So when yields go higher, those future profits get discounted more heavily, which makes the stocks worth less today. This is why high growth tech stocks usually get hit the hardest when interest rates go up. They make most of their money into the future. So higher rates compress their values more. That's why we might see stocks become more volatile. And they go up and down when news like this happens because investors don't know what to expect from the bond market. Mortgage rates are also tied to long-term treasury yields. And if the 10-year treasury is going higher, then mortgage rates are also going to stay high too. And that makes it more expensive to obviously buy a house, which pushes affordability down to levels we haven't seen in decades. So if borrowing costs stay this high, home prices will either have to stall or come down. But right now, most people think if interest rates come down, home prices will explode. Now, I don't know if I agree with that. The contrarian point of view is that at best, home prices will stay flat or they'll grow at 1-2%. And at worst, we might see deflation as rate-locked owners list their homes, which could flood the market with more inventory, which puts downward pressure on home prices. Combined with weak jobs reports that we're seeing, and you get potentially deflation or stagflation. Then there's what people call hard assets like gold. Normally, when real yields or rates go up, gold goes down. But this year, both are going up together, which is a really rare signal that investors are losing trust in the whole system. The way it's supposed to work is if bonds are paying a comfortable interest rate above inflation, most people just prefer to hold bonds instead of gold because gold doesn't pay anything. But lately, gold has been moving higher, even as the real interest rate or real yields have gone up. And that shouldn't normally happen. That tells us that investors don't fully trust the bond market right now. And they're looking for things outside the system. So gold becomes sort of a vote of no confidence. And the price goes up, which is exactly what we're seeing right now. And then there's Bitcoin. Same story as gold. In the short term, Bitcoin and other risk assets can go down when liquidity dries up because of high yields. They suck the money out of the system, but that's a short term. Over the long term, though, Bitcoin follows gold. And if governments are forced into endless borrowing cycles with higher deficits, which is what they're doing, Bitcoin is one of the few assets that is not tied to that government balance sheet because it's outside that system. So the price in the long term should go up. So having said all that, if you made it this far into the video, here's how I'm personally investing and thinking about all of this. The reality is, by a lot of measures, I think we're already in a recession because household debt is stretched. Credit card balances are at record highs. The job market is weaker than headlines were telling us. There's social unrest. People are angry at immigration policies. Birth rates are at the lowest they've ever been. And now the bond market's in trouble. But since the government has changed the definition of what it means to be in a recession, I guess we're not officially in one yet. I think history shows us that cycles like this always end through one of two ways, either through more inflation eating away at our debt or through some kind of a reset. And it forces that system to change. Now, unfortunately, that reset mechanism is usually something like a conflict or a war. And I think we're seeing a lot of evidence of this around the world. There's more and more conflict. And leaders are starting to take sides and form new strategic alliances. Now, from an investment point of view, I have no idea what the best investment is. I have my guesses, but I don't know. And that's why I'm diversified. I own a portfolio of stocks, which you can find down in the link below where you can see all my holdings. I own some real estate. I own Bitcoin, which is becoming bigger and a bigger part of my portfolio. I keep some cash on the side by holding it in short-term treasury bonds. But here's what I think is the strongest likelihood of happening in the future. Regardless, if we're in a recession or not, I think there's going to be more social unrest, more geopolitical issues, more division. The wealth gap will get bigger and bigger to the point where our kids or maybe our grandkids could see a shift from labor to capital. Meaning, instead of it being important to find a job and make money, it'll make more sense to just invest. I think there is this weird future where money will make more money faster than labor ever will. Especially with everything that we know that's coming with robotics and automation, working might be a secondary thing. And I think the world of money will expand into the internet. It'll become global, tokenized, fractionalized, but that's a separate video. The point is this. The worst thing that I think I can do in this market is not to be invested and to be left behind because I'm afraid of something like a recession. Now, I could obviously be wrong, but I'm going to stay invested, and that's the best I've got. But I'd love to hear your thoughts. If you made it this far into the video, I appreciate it. I hope you have a wonderful rest of your day. Smash the like button. Subscribe if you haven't already. I'd love to see you back here next week. I'll see you soon. Bye-bye.