(Kitco News, Thurs. Oct. 26th, 2023) – The rout in the bond market is signaling that investors are fed up with massive debt levels, according to James Lavish, Managing Partner at Bitcoin Opportunity Fund, who is warning of a potential systemic credit event, which would trigger another massive liquidity dump by the Federal Reserve.
Earlier this week, markets digested the 10-year U.S. Treasury yield surging past the 5% mark for the first time since 2007 and then reversing.
The reversal was in part due to billionaire investor and Pershing Square CEO Bill Ackman announcing he was ending his bearish bet on long-term Treasuries. Ackman posted on X that “there is too much risk in the world to remain short bonds at current long-term rates.”
Ackman had earlier disclosed his short stand on 30-year Treasuries in August, amplifying the stress on the bond markets.
At the time of writing, the 10-year yield was at 4.9%, and the 30-year yield was at 5.03%.
One of the reasons why the yields on long-term Treasuries have been going up is investors are concerned about the mounting amount of debt now at $33.5 trillion.
“Why would the 10-year be going up? It makes no sense unless it’s because the investors are now seeing that the Treasury has dumped $2 trillion of debt onto the market over the last three months,” Lavish told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News. “In the last just three weeks, they dumped $600 billion of debt onto the market this week. We’re seeing investors pull back and say: ‘Hold on, that’s too much debt. There’s no way that we can keep up with this’.”
Making things worse is the realization that the only way out of this situation is inflation, which is why investors are demanding a higher yield. Lavish sees high inflation going forward.
Watch the video above for an explanation of what can trigger this major systemic credit event.
Another Massive Liquidity Dump?
When the Treasury market sees these kinds of signs, the Fed knows that it is getting close to the point where it can’t raise rates anymore. “They are concerned that they’ll have to step in and do what’s called yield curve control and have the Fed enter and start buying in the open market again,” Lavish explained.
The Fed will be forced to step in if the credit event has a contagion aspect to it. “The problem is that it can be so big or so far-reaching that it has a danger of what we call contagion, which affects other companies. And if that happens, then you see the whole market drop. That’s the danger,” Lavish said.
The market has come to rely on the Fed stepping in with a rescue plan when things fall apart, which is the only thing holding up the markets right now, he added. “We’ve been taught ever since the Black Monday in 1987 that the Fed and the Treasury will team up to step in and save the market.”
Lavish breaks down what this credit event could look like and its impact on financial markets, watch the video above for details.
Gold and Bitcoin have ‘tremendous upside potential’
Once the next credit event hits the markets, gold and Bitcoin have “tremendous upside potential,” according to Lavish.
“The credit event would be a situation where you have a high probability of contagion from counterparty risk between large banks or large institutions. It would force a market sell-off in virtually everything,” Lavish said
The first thing that will happen is a drop in largely all assets, including gold and Bitcoin, which will be followed by a strong rally.
“You have this V kind of a drawdown on a market event like that. And then the recovery comes when the Fed and the Treasury push tremendous liquidity into the market to make sure that it doesn’t collapse,” Lavish described. “There is the only thing that the Treasury really cares about is making sure that the Treasury market remains liquid so they can keep borrowing, they can keep selling bonds to the world.”
To get Lavish’s gold and Bitcoin price targets, watch the video above.
Lavish also outlines Bitcoin’s reaction to the spot Bitcoin ETF approval. Watch the video above to get the percentage gain estimates.
Posted by:
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com