They’re Back

We start today in the way-back, in 1993, with a quote in The Wall Street Journal that appeared just a couple months before I joined the paper’s Dallas bureau.

The Clinton Administration was having a heck of a go with bond vigilantes, an aggressive segment of institutional bond investors who are docile most of the time, but can morph in an instant into a tribe of angry villagers with financial pitchforks deadly enough to change the course of government.

As Clinton came into office, the bond market feared the nation’s first Democrat president in a dozen years was going to upend the anti-inflation consensus of the 1980s, after the tumultuously inflationary 1970s.

For a moment, there was a belief that Clinton was going to launch a huge fiscal stimulus plan… and the bond vigilantes transformed from docile Dr. Jekyll into murderous Mr. Hyde.

They dumped US debt in vast sums, driving bond yields higher just at the moment Clinton said he was already concerned about the debt.

And suddenly… no more fiscal stimulus jibberjabber. And the vigilantes returned to their docile state.

Which brings me back to James Carville, a Democratic political strategist (from my alma mater, LSU) who told the WSJ:

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone.

And that’s really the point of today’s dispatch, though it has taken me seven or eight paragraphs to get here. The point is this: They’re back.

The bond vigilantes, I mean.

They’ve retrieved the pitchforks.

Their growing ire this time is directed at prez-in-waiting, DJ Trump. As I’ve been saying for a few months now (often to commentary that I’m wrong… from my own readers, no less!), Trump’s policies are inflationary. Pure and simple. No two ways about it.

Please don’t come at me to shoot the messenger. What I’ve said—what I continue to say—is just basic economics.

I mean, consider this from PIMCO, one of the world’s largest bond funds. The investment firm a recently penned this in a note to investors:

At PIMCO, we are already making incremental adjustments in response to rising U.S. deficits. Specifically, we’re less inclined to lend to the U.S. government at the long end of the yield curve, favoring opportunities elsewhere…  we have become more hesitant to lend longer term given U.S. debt sustainability questions and potential inflation catalysts, such as tariffs and the effects of immigration restrictions on the labor force. The U.S. remains in a unique position because the dollar is the global reserve currency and Treasuries are the global reserve asset. But at some point, if you borrow too much, lenders may question your ability to pay it all back. It doesn’t take a vigilante to point that out.

That’s precisely what I’ve been saying since at least October.

Policies have implications.

In this case, assuming deportations, tariffs, and tax cuts happen to the degree Trump’s team is promising, the incoming policies are going to drive inflation higher. Which is going to cause the Fed to bring rate hikes back into vogue.

Which is going to cause bigger problems for the US.

Not only are Trump’s policies inflationary, they imply larger budget deficits, which means higher debts as those deficits accumulate each year. And then you have to apply higher interest rates across that larger—and growing—mountain of debt.

What do you get?

A four-word-storm that starts with S and ends in “Oh, good goobily goo, Fred! What’a we do now?” (Sanford and Son reference, for those who remember 1970s sitcoms.)

Again, I will say, none of this is inflammatory, off-the-wall thinking meant to degrade politicians lots of people like and voted for. It is simply the way the dots connect once policies are enacted.

Which is exactly why the bond vigilantes are sharpening their pitchforks.

They’ve already moved yields higher in the wake of Trump’s victory. But, as I write this, only marginally. They’re still on the fence, waiting to see what really comes of Trump’s policies.

If Congress quashes those policies or fundamentally revamps their scope and impacts, then the vigilantes might just keep the pitchforks in the barn.

But if those policies’ actions match the rhetoric, then you will want none of your money in US bonds (particularly bond funds and ETFs) because their price is destined to collapse.

The bond vigilantes will see to that.