Your 401(k) Is a Bet on Washington

In April of last year, I told readers to own gold, silver, and the miners, and to avoid long-dated Treasuries.

I called the bond market a secular bear and said real returns on long Treasuries would get eaten alive.

Earlier this month, the Treasury announced it will at least double its buybacks of long-dated government debt, to $4 billion per operation, starting in September. The 30-year yield had just hit its highest level since 2007.

Washington is now the buyer of last resort for its own debt.

If you own a target-date fund, a 60/40 portfolio, or a bond allocation of any kind, you already have a position here. You are long the credibility of the U.S. Treasury market. Nobody asked whether you wanted that trade. It came bundled as the default.

That credibility is the asset Washington is now spending.

I have believed since 2020 that gold and hard assets would be the defining trade of the decade, and I have had 1,000 ounces of gold riding on it since May of that year.

Before we are done today, I will show you exactly what would prove me wrong.

Employment Is Falling and Yields Are Rising Anyway

Full-time employment in this country is falling. The ten-year Treasury yield is rising. Those two lines are not supposed to travel in the same direction.

When full-time employment declines persistently, it has historically meant a recession is forming.

Recessions pull yields down.

Money runs to Treasuries, demand goes up, yields come down. That is the mechanism the entire 60/40 portfolio was built on, and it has worked for forty years, but…

It isn't working now.

The Citi Economic Surprise Index has been in a downtrend all year, and the ten-year is yielding over 4.6%.

Wall Street's answer is that rising yields signal strength, a healthy economy demanding a higher return on its money.

That story requires the economy to actually be healthy.

Last quarter, AI-related sectors grew 13.8% year-over-year.

Everything else grew 0.8%.

Personal consumption is two-thirds of economic activity, and consumer discretionary shares are down 1.9% this year while the S&P 500 is up 12.3%. The index is being carried by roughly 8% of the economy while the other 92% lies flat on its back.

So the bond market is looking at a weakening economy and demanding more compensation anyway.

That happens when investors stop worrying about growth and start worrying about whether they'll be paid back in money that's worth anything.

If a weaker labor market no longer brings interest rates down, Washington has a 1970s problem on its hands.

Almost nobody currently managing money on Wall Street has traded through one of those.

Interest Now Costs More Than Medicare and Defense

The current debt trajectory was set under an assumption that rates would stay near zero indefinitely.

They didn't.

Federal net interest costs have nearly tripled since 2020, from $345 billion in fiscal 2020 to roughly $1 trillion this year.

Interest is now the second-largest line item in the federal budget, ahead of Medicare and defense, behind only Social Security.

It consumes close to one out of every five dollars the federal government collects in revenue. The Committee for a Responsible Federal Budget projects that share reaches one in four by 2036, with annual interest doubling again to $2.1 trillion.

That's the baseline, and the baseline assumes rates behave.

CRFB ran the sensitivity in April: if all interest rates come in a tenth of a percentage point above projections, which is where they have been trending this year, deficits increase by $387 billion and interest costs reach $2.2 trillion by 2036.

One tenth of one percent moves the number by almost four hundred billion dollars, which tells you how little slack is left in the system.

It took the United States roughly two hundred years to accumulate its first trillion dollars of federal debt. The most recent trillion took less than half a year.

Bill Dudley, who ran the New York Fed for nine years, wrote in Bloomberg last week that the recent interventions are diversions, and that the idea we can grow our way out of a $40 trillion debt burden is "wishful thinking."

Druckenmiller Told Bessent to Stop

Stan Druckenmiller taught Scott Bessent the business at Soros Fund Management.

The two of them, alongside George Soros, built the 1992 trade that broke the Bank of England. If anyone alive understands what happens when a government defends a price the market disagrees with, it's these two, and they learned it together.

Last Monday Druckenmiller published an op-ed in the Wall Street Journal telling his former protégé to stop.

He pointed out there was no dysfunction to fix. No failed auctions. No dealer balance sheets seizing up. No forced unwinds. Volatility was contained and trading was orderly.

On the timing of the operation, he wrote that debt management that even appears to follow the political calendar spends "the one asset that took two centuries to accumulate: the credibility of the Treasury market. That asset doesn't regain its value so easily."

He also wrote:

"You can't buy your way out of a solvency conversation with liquidity tools. You can only postpone the conversation and raise the eventual price."

Yields fell when the buyback was announced. By the next afternoon, they were back where they started.

The market read the operation, priced it, and dismissed it inside of 24 hours.

Suppress yields and you pressure the currency. Let yields run and you blow up the budget. There is no third door.

The Fed Is Talking About Hiking Into a Slowdown

Kevin Warsh gave his first Jackson Hole speech as Fed chair on Friday. He said inflation is not meaningfully slowing.

He said the 2% target is firm and fixed. He said financial conditions are not currently restrictive. July PCE had come in hot two days earlier at 3.7% annual.

Futures markets now put the odds of a rate hike before year-end above 70%.

So the labor market is weakening and the Fed is talking about raising rates.

Gold sold off about 3% on the news and closed the week at $4,469.98.

Gold has hurt people worse than that this year.

It peaked at $5,597 on January 29 and gave back nearly $500 in a single session the following day.

It sits roughly 20% below that high right now.

Anyone who bought the January high and used a normal stop was carried out on January 30 and has spent seven months watching from the sidelines while central banks bought.

Gold falls when real rates rise. That’s normal, it is expected, and it will happen again. Anyone telling you gold only goes up is selling you something.

But ask why rates are rising.

Inflation won't come down, and the Treasury can't fund itself at a price the market accepts without stepping in as its own buyer.

Those are the exact conditions gold exists to price.

Central Banks Bought $42 Billion Into a 16% Drawdown

While retail investors watched gold correct, the institutions that issue currency were buying it.

Central banks purchased a record 289 tonnes of gold in the second quarter, up 62% year-over-year and more than five times the revised first-quarter figure of 57 tonnes.

At the quarter's average price that's about $42 billion of bullion in three months. Poland added 51 tonnes. China added 33, its largest quarterly addition since late 2023.

And yet gold fell roughly 16% during that quarter, its worst quarter since 2013.

They bought the drawdown. What does that tell you?

In the World Gold Council's most recent survey, 89% of reserve managers expect global gold holdings to rise over the next twelve months, and 74% expect to hold fewer dollars within five years.

Compare that to the last great gold bull market.

Through the 2000s, when gold rose more than sevenfold, central banks were net sellers the entire way up. This time they're the largest buyers on the planet and they're adding into weakness.

You should have the other side of this too. Total central bank buying in the first half of this year was the lowest first half since 2022. Russia sold 22 tonnes to help cover a budget shortfall, and Turkey sold as well. The demand is real, and it is neither universal nor a straight line.

I Sat Through a $220,000 Loss

On May 13, 2020, I bought 1,000 one-ounce American Gold Eagles. All in, the invoice came to $1,848,190. That's $1,848.19 an ounce, including the premium.

People told me I was crazy. My accountant wanted me to get checked out for brain damage.

Gold had just been through the March crash and come roaring back, and the read was that I'd bought a panic top with real money.

For a while they looked right.

Gold ran to $2,070 that August and then gave every dollar of it back.

By late 2022, spot was under $1,630, and my position was worth about $220,000 less than I paid.

It stayed down there, more or less, for two years.

I didn't sell an ounce.

At Friday's close of $4,469.98 those same thousand ounces are worth $4,469,980. I still haven't sold an ounce.

I bought bitcoin in 2013 for the same reason I bought the gold.

And in January of last year, when bitcoin dropped below $100,000 and the headlines went to funerals again, I wired a million dollars from my brokerage and bought more.

I wrote at the time that I wouldn't pretend losing a million dollars would be nothing to me. But I did it anyway, because the reason I owned it hadn't changed.

So weigh what I say accordingly, in both directions. I have a big bet, and I'm talking about it publicly. Discount me for that.

But I'm not asking you to stand anywhere I haven't stood myself, including two years of being down $220,000 while people I respect told me I'd made a mistake.

What to Do This Week

What made that 2020 position work had nothing to do with picking the right entry.

Before you buy any hard asset, write down what would have to become true in the world for you to sell it, and price levels don't count.

Mine was straightforward: if the federal government demonstrably reduces its primary deficit and interest costs stop compounding, the reason I own gold and bitcoin goes away, and I sell it.

That's the whole discipline, and it's why the $220,000 drawdown never moved me.

A price stop would have shaken me out of gold four separate times between 2020 and today. It would have taken me out at $1,630 in 2022 and again on January 30 of this year, when the metal dropped $500 between one session and the next.

Every one of those exits would have been noise.

The condition never changed, so I never sold.

Right now that condition is moving in the opposite direction.

Interest costs are compounding, the primary deficit is widening, and the Treasury has started buying its own paper to keep the market from saying so out loud.

Until that reverses, I know exactly what I own and exactly why.

Do the same exercise this week. Write down what would make you wrong. If you can't finish that sentence, what you're holding is a hope wearing the costume of a position.

Stay sharp.

— Double D

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