The Market Outlook for the Week Ahead, or The Bond Vigilantes are Back!
A friend of mine once told me that when he dies, he wants to be reincarnated as the bond market. I don’t blame him. So would I.
The administration can talk up stocks, fire entire government agencies, ignore court rulings, arrest judges, and intimidate its own political party. The one thing it absolutely CAN’T do is control the bond market, which so far is giving the president’s performance a firm thumbs down by taking bond yields up to new 2025 highs, and prices to new lows.
Even if Trump appoints the most dovish Fed governor in history, which is likely in a year, the bond market won’t wear it for a second, potentially taking yields into double digits. The Fed can only control overnight interest rates. It can only affect long-term rates through quantitative tightening or easing, which now stands at $6.7 trillion of easing. The bond market is in charge of everything else.
The bottom line is that the bond market was far more willing to lend to President Biden than President Trump. That’s what the numbers say. That’s not just because Trump plans to increase the National Debt from $36 trillion to $51 trillion over the next 4-10 years. Trump has also threatened to withhold tax payments to foreign investors, impose limitations on capital flows, and default.
Let me tell you why the bond vigilantes are seeing red. The just-passed House budget plan assumes massive increases in tax revenues because it thinks the economy is growing at a 3% annual rate. News flash no 1: It isn’t. The economy is, in fact, shrinking as it does in recessions. It assumes that tariff revenues will double. New flash No. 2: tariff revenues have shrunk dramatically because of the collapse of international trade.
The US Treasury also assumes that foreign investors will continue to buy 30%-50% of our new bond issues. News flash no. 3: foreigners are selling huge amounts of their US Treasury bonds, not buying, which is why 30-year bond prices have collapsed and are basis points away from an 18-year high in yields at 5.18%.
The bond vigilantes are not to be taken lightly. The last time they were this upset was in 1979, when they took ten-year US Treasury bill yields up to 16%, causing a three-year-long recession. Stocks fell by 30% from already very low lows. The 20% inflation rate then was caused by the second oil shock and a collapsing US dollar, not tariffs.
I remember all this well because I was in the White House at the time during the administration of Ronald Reagan. Don’t kid yourself, this can’t happen again.
If it does, you can expect the S&P 500 to plunge to 3,000 or less. That’s because the S&P 500 price earnings multiple in 1979 was only at 7.9X versus 21X today.
The stock market seems to have tunnel vision, as it can only listen to one story at a time. After the inauguration, it saw high tariffs coming with laser-like focus, and the Index fell by 21%. On April 9, when tariffs were cut from 145% to 30%, the stock market decided that AI is more important than tariffs, and they soared by 23%. It will worry about tariffs when it actually sees them, which may be weeks or months off. Now bond yields are the order of the day, taking stocks down again.
Whatever happened to the original bond vigilantes? Inflation fell from 20% to 0.6%. The budget deficit ground down to zero during the Clinton administration in 1999. Then, people thought that the bond market might cease to exist, and insurance companies were making contingencies for investing in corporate debt instead. The bond vigilantes disappeared forever to become a footnote in history.
Oops!
Europe has responded to the trade war, including the 50% tariff threat issued on Friday, with their “TACO” Strategy-Trump Always Chickens Out. Trump’s cave on Chinese tariffs, from 145% to only 30%, has given Europeans hope that the best response to the trade war is to do nothing and let Trump negotiate with himself. They are aware that the longer negotiations drag on, the greater the political price Trump has to pay at home.
Even a 30% tariff will bring a US recession, but that beats the heck out of a depression that the 145% tariff would have caused. Could Europe be hanging on for the same 30% deal?
I wonder if the Chinese and the Europeans are talking to each other?
Recession expectations may leap from soft to hard data on Thursday, May 28, at 8:30 AM when we get the first preliminary read on Q2 GDP.
My May performance is down -2.43%. That takes us to a year-to-date profit of +25.97% so far in 2025. My trailing one-year return stands at a record +83.00%. That takes my average annualized return to +50.46% and my performance since inception to +777.86%.
It has been another wild week in the market. I took profits in my (SPY) short when the Dow Average suddenly cratered by 1,000 points. I took a small loss in (TLT), preferring to get out of the way of a rampaging hoard of bond vigilantes. I added two new longs in (MSTR) on the dip. That leaves me 60% short in (MSTR), (GLD), (AAPL), and (QQQ), 20% long in (MSTR), and 20% cash. We are about to retest the market lows.
Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break evens. That is a success rate of +78.72%.
Try beating that anywhere.
Stocks Crash on Treasury Bond Yield Spike, with ten-year yields hitting 4.6%. Wall Street’s worries about a ballooning deficit that threatens America’s status as a safe haven were reflected in a $16 billion Treasury sale of 20-year bonds that bombed, with stocks, bonds, and the dollar falling. A Foreign boycott was a major issue. The prospect of a House bill that could add up to $16 trillion to the national debt over the next 4-10 years has sent all asset classes into free fall, except for gold.
The Bond Vigilantes are Back, and are not to be taken lightly, as seen by yesterday’s failed auction of 20-year US Treasury bonds. The last time they were this upset, they took the ten-year US Treasury bill yields up to 16%, causing a three-year-long recession. Stocks fell by 30% from already very low lows. The 20% inflation rate then was caused by an oil shock and a collapsing US dollar, not tariffs.
Trump Threatens 25% Tariff Against Apple, unless the company builds iPhones in the US, which can’t be done. The shares dropped 6% on the news. The Dow dumped 400 points at the opening. Another day, another trade war. Maintain your (AAPL) short.
Walmart (WMT) is Planning Mass Layoffs, some 1,500 jobs, as demanded by the high prices brought by the trade war. Walmart is the largest U.S. private employer with about 1.6 million employees. It employed about 2.1 million employees worldwide in total, according to its website. It is also the country’s biggest importer, with about 60% of its imports, mainly items such as clothing, electronics, and toys, from China.
The company had last week said it would raise prices for some products by the end of May as President Donald Trump’s trade war hits its supply chain and increases expenses.
Existing Home Sales Hit 16-Year Low, down 0.5% to 4 million units. Inventory jumped 9% MOM and 21% YOY. That is a 4.4-month supply, a five-year high. The median home price is at $414,000, up 1.8% YOY. First-time buyers accounted for 30% of the sales. Homes over $1 million are doing better, up 6% YOY. The contract cancellation rate doubled due to the stock market crash.
US dollar Hits Two-Year Low, as the “Sell America” trade continues. It’s almost unprecedented for a currency to fall when its interest rates are rising. Debt, default, and trade wars are now the larger concern. Keep buying dips in (FXE), (FXA), (FXB), and (FXY) on dips.
New Home Sales Hit Three-Year High, up 10.9%, but rising mortgage rates and economic uncertainty remained headwinds for the housing market. Builders are definitely trying to unload inventory ahead of a recession. Data for February and March was revised significantly down, taking some of the shine from the unexpected increase in sales last month. New homes are now cheaper than existing ones.
Weekly Jobless claims are Unchanged, down only 2,000 to a seasonally adjusted 227,000 for the week ended May 17. They expect claims in the coming weeks to drift into the upper end of their 205,000-243,000 range for this year, mostly driven by difficulties adjusting the data for seasonal fluctuations. Economists, however, see layoffs picking up in the second half of 2025 as the administration’s tariffs dampen demand, snarl supply chains, and stoke inflation.
Investors Flock to Non-US Equity Funds. Investors poured $2.5 billion into ex-US mutual funds and ETFs. It’s the highest inflow on record and reverses a three-year trend. Confidence in the US is falling as long as it is demolishing the economies of foreign trading partners.
Tesla Sales Aren’t Recovering, with forecasts ranging from zero growth to down 10% YOY. The first three months of the year didn’t go as planned. Tesla delivered about 337,000 cars in the first quarter, down 13% from a year earlier and far below what Wall Street expected. At the start of 2025, the first-quarter delivery estimate was about 455,000 vehicles, according to FactSet. The miss even had Chief Financial Officer Vaibhav Taneja citing brand image “challenges”. Sell all (TSLA) rallies.
Gold Jumps 1% on US Bond Downgrade. Credit downgrades and eventual default have been the dream of gold bugs for the last 50 years. Gold is the last flight to safety asset. Buy gold (GLD) on dips.
My Ten-Year View – A Reassessment
We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.
On Monday, May 26, is Memorial Day and a National Holiday. All markets are closed.
On Tuesday, May 27, at 7:30 AM EST, the S&P Case Shiller National Home Price Index is announced.
On Wednesday, May 28, at 1:00 PM, minutes from the last FOMC Meeting are disclosed.
On Thursday, May 29, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get the preliminary read for Q2 GDP, which should indicate whether we are in recession or not.
On Friday, May 30, at 7:30 AM, we get Core Personal Consumer Expectations. At 1:00 PM, the Baker Hughes Rig Count is published.
As for me, when I first met Andrew Knight, the editor of The Economist magazine in London 50 years ago, he almost fell off his feet. Andrew was well known in the financial community because his father was a famous WWII Battle of Britain Spitfire pilot from New Zealand.
At 34, he had just been appointed the second youngest editor in the magazine’s 150-year history. I had been reporting from Tokyo for years, filing two stories a week about Japanese banking, finance, and politics.
The Economist shared an office in Tokyo with the Financial Times, and to pay the rent, I had to file an additional two stories a week for the Pink Newspaper as well. That’s where I saw my first fax machine, which then was as large as a washing machine, even though the actual electronics would fit in a notebook. It cost $5,000.
The Economist was the greatest calling card to the establishment one could ever have. Any president, prime minister, CEO, central banker, terrorist, or war criminal would suddenly be available for a one-hour chat about the important affairs of the world.
Some of my biggest catches? Presidents Gerald Ford, Jimmy Carter, Ronald Reagan, George Bush, and Bill Clinton, China’s Zhou Enlai and Deng Xiaoping, Japan’s Emperor Hirohito, terrorist Yasir Arafat, and Teddy Roosevelt’s oldest daughter, Alice Roosevelt Longworth, the first woman to smoke cigarettes in the White House in 1905.
Andrew thought that the quality of my posts was so good that I had to be a retired banker, at least 55 years old. We didn’t meet in person until I was invited to work the summer out of the magazine’s St. James Street office tower, just down the street from the palace of then-Prince Charles.
When he was introduced to a gangly 25-year-old instead, he thought it was a practical joke, which The Economist was famous for. As for me, I was impressed with Andrew’s ironed and creased blue jeans, an unheard-of practice in the Wild West where I came from.
The first unusual thing I noticed working in the office was that we were each handed bottles of whisky, gin, and wine every Friday. That was to keep us in the office working and out of the pub next door, the former embassy of the Republic of Texas from pre-1845. There is still a big white star on the front door.
Andrew told me I had just saved the magazine.
After the first oil shock in 1973, a global recession ensued, and all magazine advertising was canceled. But because of the shock, it was assumed that heavily oil-dependent Japan would go bankrupt. As a result, the country’s banks were forced to pay a ruinous 2% premium on all international borrowing. These were known as “Japan rates.”
To restore Japan’s reputation and credit rating, the government and the banks launched an advertising campaign unprecedented in modern times. At one point, Japan accounted for 80% of all business advertising worldwide. To attract these ads, the global media was screaming for more Japanese banking stories, and I was the only person in the world writing them.
Not only did I bail out The Economist, I ended up writing for over 50 business and finance publications around the world in every English-speaking country. I was knocking out 60 stories a month, or about two a day. By 26, I became the highest-paid journalist in the Foreign Correspondents’ Club of Japan and a familiar figure in every bank head office in Tokyo.
The Economist was notorious for running practical jokes as real news every April Fool’s Day. In the late 1970s, an April 1 issue once did a full-page survey on a country off the west coast of India called San Serif.
It warned that if the West Coast kept eroding, and the East Coast continued silting up, the country would eventually run into India, creating serious geopolitical problems.
It wasn’t until someone figured out that the country, the prime minister, and every town on the map were named after a type font that the hoax was uncovered.
This was way back, in the pre-Microsoft Word era, when no one outside the London Typesetters’ Union knew what Times Roman, Calibri, or Mangal meant.
Andrew is now 86 and I haven’t seen him in yonks. My business editor, the brilliant Peter Martin, died of cancer in 2002 at a very young 54, and the magazine still awards an annual journalism scholarship in his name.
My boss at The Economist Intelligence Unit, which was modelled on Britain’s MI5 spy service, was Marjorie Deane, who was one of the first women to work in business journalism. She passed away in 2008 at 94. Today, her foundation awards an annual internship at the magazine.
When I stopped by the London office a few years ago, I asked if they still handed out the free alcohol on Fridays. A shocked young writer ruefully told me, “No, they don’t do that anymore.”
Sometimes, change is for the worse, not the better.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
50 Chart for Ten-Year US Treasury Bond Yields
