The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.

 

As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.

 

Oil almost  $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.

 

It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.

 

In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.

 

While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.

 

That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.

 

The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.

 

The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves. 

 

Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.

 

I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.

 

In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.

 

We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.

 

The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices. 

 

As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.

 

It was to be expected. Financial markets almost always confront a new Fed chair. That may still be true, but Kevin Warsh isn't the one in the firing line. It is the U.S. Treasury Secretary Scot Bessent.

 

The bond vigilantes have had their way in the bond market recently. When Kevin Warsh took over the Fed in May, he made it clear the Fed would take a back seat and let the markets set the proper level of interest rates, at least on the long end. OK, said the bond vigilantes, let's see what you got.

 

Since then, fixed income traders, or bond vigilantes as Wall Street calls them, have trashed the 10-, 20-, and 30-year U.S. Treasury bonds. They have sold or shorted bonds, sending yields on the thirty-year higher than at any time since 2007 (just before the Financial Crisis). The U.S. ten-year benchmark bond yield hit 4.50 percent as well, with strategists predicting it's on its way to 5 percent. Around the world, the same thing was happening in other countries' fixed income markets. Why?

 

The continued rise in oil prices, record deficit and debt levels, rising interest costs, and demand for borrowing were too much weight on one side of the scales. Up until this week, equity markets tried to ignore the moves; despite strong corporate earnings fueled by the enormous boom in AI infrastructure investment, they faltered.

 

Truth be told, some of that AI investment has also been an issue. Worldwide, companies that need trillions of dollars more in the AI race have been tapping bond markets globally for funds. That has set up further competition between private and public needs in the borrowing arena worldwide.

 

This was not what the administration wanted to see, at least here in the U.S. The stock and bond markets have become the lynchpin of success for a president already battling a multitude of negatives with midterms less than three months away. Something had to be done and fast as yields ticked higher and markets crumbled on Wednesday a week ago.

 

In this financial gunfight steps the government's financial sheriff, a hedge fund manager by trade, and one of the real gunslingers in town. Scott Bessent, Secretary of the U.S. Treasury, announced his department planned to double government debt buybacks, beginning in September, to the tune of $4 billion. Bond yields immediately tumbled, and the stock market surged.

 

The Treasury's purchases, he said, will target the long end of the yield curve where the bad guys had shorted massive amounts of long-dated Treasuries. To pay for this added expenditure, investors surmised that the Treasury will probably need to sell even more bills and bonds on the short end at their weekly auctions. And herein lies the rub.

 

Unlike the Federal Reserve Bank, the Treasury cannot print money. They indeed have a lot more money than any single bond vigilante, but it's not inexhaustible. The Vigilantes, after a day or two of indecision, were back to their old tricks and yields began to rise again. To gun down the guys in the black hats, Bessent would need more than a couple billion.

 

So, a few days later Treasury people floated the story that they could use the Treasury's almost $1 trillion General Account (the government's checking account) to finance the purchases. Nobody said they would, but the threat was enough to at least push yields down slightly on government bonds this week.

 

Wall Street immediately mounted up the free-market posse. From their high horse, various well-known managers decried this interference in the free-market system where price discovery is the bible in determining the worth of any asset. "Let the bond market speak," said one famed investor. Interesting how that works. It's OK for the government to buy shares in various companies, bail out industries, determine how much companies can sell and to whom, but don't mess with something so sacrosanct as the nation's Treasury markets.

 

Will Bessent's plan work? In the short term, he had stemmed the rapid rise in yields that had thrown the stock market into a dizzy. Both the 10-year and 30-year bond yields had moved down by about 10 basis points. However, Friday's speech at the Jackson Hole Economic Forum threw a wrench into Bessent's play.

 

The Fed chief made it clear that the Fed had more work to do on the inflation front. Markets took that to mean an interest rate hike could be imminent. Bond yields went right back up and are now trading at yields higher than before Bessent's announcement. It appears the Fed and the U.S. Treasury are working at cross purposes.

 

Critics say that without fixing the underlying causes of the backup in interest rates — government spending, inflation, debt, etc. — his efforts are no more than a pimple on an elephant's derriere. They may be right but don't be surprised that in the days ahead, Bessent decides to increase the amount of bond purchases the Treasury makes.

 

Next week, I will discuss where the Fed stands and why this could simply be part of a developing and ongoing plan first mentioned to readers in my columns on sovereign wealth funds back in June.