5-22-25 Bonds are Cheap?

Now for something completely different. Forget everything you've been told by others before. Get ready for the real deal. The full story. Real talk about money, markets, life. Now it's the real investment show with Lance Roberts, presented by RIA Advisors.

And good morning. Welcome to the show. Of course, it is Thursday, the second best day of the week. And it's really like the best second day of the week, cuz it's a 3-day weekend coming up, right? Cuz Monday is Memorial Day. So, hope you all have a very wonderful weekend. If you happen to live in Texas, it's going to be hot. But other than that, I actually, I love the uh, the, the recent headlines. Um, next week starts hurricane season. You, you knew that, right? Yeah. So, next week, hurricane season starts in Texas, or actually, just period, but it's for us in Texas. Texas, all that matters. Um, but all, all the headlines have now come out with, you know, all, all the the media has been saving up their climate change stories, right? So now it's like, by 2050, 2050 now. So by 2050, hurricane winds are going to be 14% higher than they are now. Right. So all right. Well, first of all, let's just start by the simple fact that meteorologists can't predict weather more than about three days. So, and that's, that's a, that's a, that's a study they actually did. They're accurate for about three days, not 30 years. But now, most of y'all are not old enough like me and Brent. Brent and I are old enough to remember Hurricane Carla.

Oh, yeah. Yeah. Yeah. And so, until you live through, and I actually lived through Hurricane Carla because I lived in Lake Jackson at the time. And uh, so once you've been through Hurricane Carla and then you know Hugo, Alicia, so forth, so on, so on. Hurricanes are like, "Yeah, let's have a party in the backyard." So, you know, it's like no big deal. But anyway, hurricane season's about to start here in Texas. So, get your generators all checked out. If you don't have your generator yet, get that done. Make sure you're stocked up on hurricane mix for your vodka and your other alcohol, so you'll be fine. Weathering out a hurricane is no problem at all.

Lash down the barbecue pit. Exactly. And fire it up. Exactly. Hey, barbecue pits worked horizontal just as well as vertical. Just depends on, yeah, exactly. Anyway, uh, back to, back to reality here. A lot of stuff to get into today. Michael Leewood's joining me this morning. Uh, we're going to be talking all about bonds today because headlines are running rampant this morning about the 20-year auction yesterday. Um, we'll, we'll, we'll get into that. But again, it's, it's, it's immediately starting to talk about how, you know, all the problems that are going on now because of this, this terrible 20-year auction yesterday. A, it wasn't that bad. But we'll get into all that story, all the narrative that's, that's been going on behind it. But the, the real question is, is, is now the time to start looking at buying bonds? Because nobody wants them, right? And so it's interesting just from a psychological perspective that when stocks are cheap, nobody wants to buy them. Well, when bonds are cheap, apparently nobody wants to buy them. So, we'll get into all the reasons behind it, all the, all the false narrative, uh, currently surrounding the bond market because it's, it's great, right? Narrative is what drives prices. And if I'm a heavy shorter of uh, bonds right now, that narrative is a very easy narrative to produce. So again, we'll, we'll get into all that this morning with Michael Eboots, but let's talk a little bit about markets. Yesterday, markets did sell off a bit yesterday. Finally, finally got that, that little bit of a pullback that we've been kind of looking for. And um, so, you know, nothing really has changed here. We are approaching a sell signal here, but again, it'll be a very mild one at best. But we are starting to approach that 200-day moving average. So, we've now got that first level of support. Now, importantly, the 20-day moving average has been very quietly sneaking up here and is now is about to um, kind of align with the 20-day, the 200 uh, day moving average and the 100. So, there is a lot of support that is building right around 5750 in this market. So, again, if we get a little bit of a pullback here, and we did start working off some of that overbought relative strength yesterday with that sell-off, that's good news. We needed this pullback, right? We needed this break, right? So, the, the, the whole headline around the bond market yesterday, the, the, the jump in interest rates, by the way, it is also not uncommon that Treasury market players short bonds going into the auction to get them cheaper. We saw a lot of that yesterday. It happens just about every auction. But, so that selloff yesterday on those concerns about higher rates started to finally, that was the catalyst that we finally needed. We, we said, "Hey, we need a reason to bring some sellers into markets, finally break them, get them to actually sell uh, some of their assets after this very strong run here." So, that's what started happening yesterday. And again, we're starting to pull back here. But again, that, that, you know, we're, we're, you know, building a lot of support here. And importantly also, too, the 50-day moving average has now bottomed and started to turn up. So, that's supportive for higher prices as well. So again, we're getting a lot of really positive bullish price action underneath the surface of the markets. Breath is improved, all those type of things. So again, um, we this sell-off yesterday was not the beginning of the next leg down in the markets, but again, this is the, this is what we've been talking about here for a while is we need a little bit of a pullback here to get the markets into a better position to, to start buying it. Um, but you know, when we start talking about kind of the rest of the markets, we kind of went through a lot of sector analysis yesterday as well. So as we, as we were talking about the different sectors, really looking at economic growth versus, um, you know, other areas of the markets, you're seeing a lot of, of support right, economic growth is still triggering around 2.3% for this current quarter. It looks fine. Uh, employment data is fine right now. There's really no sign of recession and we're seeing economically sensitive sectors continuing to perform well here. Um, which is also telling you the markets are okay with where economic growth is. And again, on a nominal basis, going back to yields for a second, on a nominal basis, 4.3% nominal growth and you're trading interest rates at about 4.5. So again, interest rates are trading about where economic growth is, which is, you know, where we were back in 2006, 2006, 2007, uh, prior to the financial crisis and before the Fed started suppressing rates artificially. So without Fed interventions, which we have right now, interest rates have risen back up to where economic growth should be, which is about normal. It doesn't feel normal, right? But that's about where economic growth is.

Um, one of the interesting things that are going on right now is Bitcoin. And again, Bitcoin has been on fire lately. Uh, new records yesterday at 110,000 uh, on, on Bitcoin. Uh, Bitcoin extremely overbought here now. Uh, it's had a great, it's had just a really terrific run here really ever since about April the 9th. So again, with that bottom in the markets over tariff concerns, everything else, you know, Bitcoin has sold off going into that tariff announcement just like the rest of the market, again, uh, you know, Bitcoin's a great proxy for stocks, right? So risk-taking in general, uh, but really ever since that bottom on April the 9th, Bitcoin's had a fantastic run, like stocks, it is now extremely overbought here, so if you were buying Bitcoin down here, this is where you kind of start taking a little bit of profits, just reducing your risk just a bit, doesn't mean go sell everything, not saying that at all. But again, when normally historically when you get Bitcoin this overbought, and, and we can kind of just go back and look at history. Last time we were this overbought was back in uh, early 2025, back in January, and then you had that big correction in, in price. So again, just, you know, Bitcoin is very sensitive because it's highly speculative. It's a risk asset, risk-on, risk-off asset. So it's going to track markets very closely here. So again, really pay attention to these overbought conditions because typically that's going to revert back into a sell-off at some point. So just, you know, it doesn't mean sell everything. It doesn't mean you have to be bearish on Bitcoin, nothing like that, but just understand that everything's going to ebb and flow in price over time. And again, you've got a risk asset that's got a high beta volatility. It's, it's basically a leverage stock trade. So, when you get really overbought here, that gives you a good opportunity just to take some profits, book some gains, and then look for your next opportunity uh, when it sells off to add back to it. But that's what you need to know before the bell this morning. We come back, we'll pick up with Michael Leewitz, get all into bonds, what's going on with bonds, the fundamentals of bonds, all those type of things. Hopefully, answer all of your questions. Again, lots of concerns here over the last couple of days, but we'll get into all that next with Michael Ewitz. Don't go away.

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And now another page from the Real Investment Advisors Investing Manifesto. A passive investment portfolio requires active risk management. It's not a choice, it's a necessity. Diversification doesn't protect against risk of loss. Let us actively help you reach your financial goals with RAIA Advisors. Neither bull nor bear. RIIA Advisors 281501791 or online at realinvestmentadvice.com. You're listening to the Real Investment Show. I have a few charts for you to pop through real fast here. Welcome back to the show this morning. Uh, I've got Michael Leewoods in the green room right now, hanging out, sipping on his latte. Let me set up our segment for the day. Um, give me this headline here um on the screen. I'm going to flip charts on you after this. So, this was one of the big headlines that were floating around yesterday. The 20-year Treasury auction goes badly. Yields spike as bonds sell off. And of course, you know, this was the, the big concern headline yesterday. Yields didn't move up yesterday on bonds. And the bond auction was, you know, uh, it wasn't as good as people had hoped for. But let's talk about bond auctions real quick. Here's a chart of, of bond auctions. And this is the 20-year bond auction, but they all look the same, whether it's a 30-year or a 10-year bond auction. Bond auctions tell you absolutely nothing about what's going on with bonds because again, bond auctions are all over the place. Uh, you have a bad bond auction one week, got a great one the next week. They don't tell you anything about much of anything. And, and more importantly, the 20-year bond auction. This was very small. It was 15 billion altogether. So it was a very small bond auction. 20-year bonds are not primaries like tens or 30s. So again, you know, and it wasn't the worst auction ever on record. It was the worst 20-year auction since the last one in like March. So, you know, we've had worse before. And when we had worse bond auctions before, going all the way back to, you know, 2000 and, you know, 2000, you know, it wasn't these big headline concerns of, oh my god, it's the debt and the deficit and the world's coming down. We've been running deficits since 1980. So again, bond auctions tell you nothing about anything about what's going on in the bond market because again, there's no trend to it. Now, if, if it was a trend to where every single bond auction was getting progressively worse over time and you, you never had a good auction along the way. Now, that might tell you something, but when you have, you know, volatility in bond auctions one, one month to the next, it doesn't tell you anything about what's actually going on in the bond market. But here was another story out this morning as well is the, the Daily Shot put out this chart discussing, um, this rising gap between US yields, uh, the US DJ JPY, the, the dollar versus Japanese yen correlation, uh, currency, uh, versus 10-year yields, like this huge gap, right? And their headline was rising gap between USD JPY and US yields a sign of rising fiscal risk. It certainly looks terrible. That's a very, that's a very disturbing chart when you look at that. Certainly concerns like, oh my gosh, we, we need to do something about our debt and deficit. Well, here's the problem with this. You don't need to move anything, Brent. Um, here's the problem with this. This is a long-term chart of USD versus JPY versus 10-year yields. Uh, there is a very, very loose correlation. In fact, there's many times historically that that correlation is actually negative and doesn't tell you anything about what's going around. You need to get the whole chart if you can. Um, the, but doesn't tell you much about anything that's going on relative to increasing fiscal risk or the debts or the deficits. What it does tell you though is that this goes back to 1980. Thank you, Brent. This goes back to 1980. What it does tell you is that rising fiscal debts and deficits lead to lower yields. So, because you have slower economic growth and, and speaking of that, what do we not have going on right now? This is, this is my last chart, I promise, and then I'll get to uh, Mike. He's finishing up. I just, I just heard him slurp the bottom of his, his latte. Um, but this is a chart of GDP. Nominal GDP going back to 1962 versus 10-year interest rates. If you'll notice, GDP is now about where we were previously at 4.3% back in about 2006, which is about where yields are. What is the difference today between where we are yield-wise versus where we were in 2006 and economic growth? Well, the differential between 2006 and where we are today is that in the middle of all that when you had extremely low yields, you had a Fed that was doing massive rounds of QE, suppressing interest rates. Central banks globally were doing QE, suppressing interest rates. We don't have that right now. Now, some, the Euro zone, those they're, they're cutting rates, but in the US, the Federal Reserve is not intervening. In fact, they're, they're tightening their balance sheet. So for the first time since 2006, interest rates are trading at about 4.5%. Global, uh, US GDP is trading at about 4.3%. Nominal. That's about where they should be. So this doesn't really tell, the point is this doesn't tell you anything about fiscal debts or fiscal deficits. Doesn't tell you anything about what's going on other than interest rates are trading about where economic growth is. Anyway, with all that backstory here, the whole concern, the whole narrative laid out there, Michael Eez, welcome to the show this morning.

Good morning, Lance. I'm very impressed. You got some bond game finally. Exactly. You, you really, a lot of what you said was is very true. Um, the 20-year bond, first of all, is it's kind of called an orphan security. It's not a, it is a benchmark, but it's not a true benchmark. When people say, "What are yields doing?" They'll give you the 2-year, the 3-year, the 5-year, the 10-year, the 30-year. Rarely do you ever hear someone give you the 20-year. And that's because it's just not a popular bond. And, you know, if you look at the yield curve, you could see that the 20-year has a higher yield than the 10 or 30, which makes no sense. It should be, you know, it should follow a linear line between or some sort of line between the two. And that's because it's just not that in demand. It's not that interesting. That's why the Treasury only auctioned off what, what they do, 18 million, 18 billion, something like that.

15, right? Much less than they do tens and 30s. It's just not a security people are following. And because of that, the auctions can get a little squirly. But it was amazing yesterday. You, the bond market got hit, the stock market got hit, and I immediately go like, what's going on? Worst bond auction ever. Terrible bond auction. And I'm like, wow, that's not good. But then you go look at the stats, it was actually an okay bond auction. You showed that bar chart earlier with the tails. So what, the, the bond trades in what's called the when-issued market before the auction. So, it's either an old bond and it's already trading or it's what's called a when-issued bond. And what they do is they say where was that bond trading before the auction and then what was the yield at the auction. In this case, the yield at the auction was one basis point higher than where it was before the auction. That's called a tail. Tail means there's slightly less demand. But you showed that graph. Every tail for the last whatever that was, two or three years. Yeah. has been one or two basis points. It's actually been at the lower end of the tails. So there was nothing weird about that. So the, what I'll also look at is what did dealers do? So the way the auction works is that everyone can bid in this auction. You and me, central banks, corporations, and the, the big primary dealers. There's what are there, 21, 19, 20? 20, 20 primary dealers. This is Goldman Sachs, JP Morgan, the, the big boys. And it's their job to make sure the auction goes off well and to facilitate trading in the auction before the auction. So, first of all, one thing they do is they like to sell the auction beforehand, that W, the when-issued bond, the WI bond, so that they can try to buy the auction cheaper. So you always have a lot of game playing before the auction and the 20 years probably even more so because it's not as liquid as 10 or 30s. But if you look at the stats, primary dealers took 12% or so of the bond. But they were not needed to support the bond. That means indirect buyers bought about 88%. Who are indirect buyers? The large chunk of them are foreign central banks. I don't have the exact number, but I would bet it's over 75%, right? Are foreign central banks. Those same foreign central banks that we keep hearing day in and day out are selling bonds en masse, it's those central banks. Um, if, if that 12% that the dealers took was 30%, 40%, and every auction, not again, one auction is meaningless, right? It tells you about the bond market in a 20-minute time frame. Who cares? Right. Right. What, what you want to see is consistency in auction results. So if dealers every, every time it was auction were taking 30% of the auction, 40%, that tells you there's a problem. There's not enough people interested. But that's not the case at all. And Lance, kind of one more point. The 10-year auction, which was what, a couple of weeks ago, right? Stellar. That, that went two or three basis points through. The yield was lower than where it was trading before and it was deemed one of the best auctions ever. I think dealers took about 5% of that auction, which is an incredibly low number. We never heard anything about it, right? Because narrative, it's a bearish narrative, right? It doesn't fit the narrative. And that, and, and so this is the, so the, the time we're going to spend this morning, so this is for everybody listening. Look, we, we talk about this on the show regularly is be careful with narratives because narratives are the thing that gets you into the trap ultimately. And this is going to be the context of the next segment of the show is talking about these narratives because the narratives are fine. Um, and they are, they are being used to manipulate markets. Narratives are always used to, to move markets in a certain direction. And so it's okay to understand what the narrative is. It's okay to trade on the narrative, but the point is you don't want to lock yourself into the narrative because the narratives without fail are wrong historically, right? I mean, you know, and um, Mike wrote an article uh, on the, which is on the website now. It's, it's out this morning. Uh, actually, I was out yesterday, but talking about the demise of the dollar, right? That narrative. And he took lots of quotes uh, about a research paper that was done on the demise of the dollar and why the dollar would demise. It was written in 1968, and we're still here. So narratives are always wrong, but doesn't mean we can't trade on the narrative, but there's also advantages to understanding what the narrative is because that provides you some of the very best investment opportunities historically. So we'll come back. We're going to get into the narrative and break it down where it's right, where it's wrong, and what does it mean for your money. Don't go away.

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You're listening to the Real Investment Show, and welcome back to the show this morning. So, just reading some chat, man. You some of you people are just spewing out this crazy stuff that has nothing to do with reality. Um, I wish I need to spend a whole show just correcting all of your mis-conceptions, I think. Um, get y'all out of the bunker, man. Um, so talking a little bit about narratives, and this is one of the big problems that is has plagued investors for a very long time, not just in the stock market but also in the bond market as well, is that you know these narratives, they're they're they're great, fine and dandy ultimately, but you know the the problem is that when you when you start banking on some narrative to come to fruition, and the current narrative is is the debts and the deficits run on an unsustainable level, and it's it's the demise of the US economy as we know it, and and this is you know just a function of the fact that we're trying to pass a continuing resolution.

The problem with a lot of these charts that you're going to see um that have basically been posting recently, let me see if I can just grab here one real quick just to kind of Okay, here here's a great great headline: "The terrifying implications from yesterday's dismal Treasury auction." Um, and here's a chart of the federal debt by the public as a percent of GDP plus scenarios with alternative CBO and Moody's and and without baseline extensions. Anyway, it just it shows the debt and the deficit just surging higher into the future. Well, the problem with, and I'm writing an article on this, the problem with those projections, you can leave it up for a second, Brent, so we can really get in the narrative of of, you know, this dire outcome. The world will end; we're going to have this surging debt. Problem is, it doesn't take into any account potential for economic growth, um, increased revenue growth from stronger economic growth. You cut taxes; you do deregulation. It assumes that everything remains exactly the same as it is today, and all you're doing is just adding debt. It doesn't account for anything that happens. It does it doesn't account for expiration of other spending programs. It doesn't account for inclusion of other revenue sources that may be derived, you know, tariffs, higher tariffs, those type of things in the future, whatever else comes along. Um, so these things, so these projections are great for narrative, right? Short-term scare the beeers out of you. But the reality is is that they rarely ever come true. In in 2000, good example, CBO expected that by 2010, the US would be running a $1 trillion budget surplus. We ran a $1 trillion deficit in 2010. And the world didn't the world didn't implode, right?

We've been doing a lot of spending. Absolutely. It's not a good thing. More debt, more deficits leads to a slower economic growth, lower interest rates. That's been going on since 1980. That's not going to change. But again, these worst possible outcomes, these tell risk rarely ever come true, right? Sure. Could it happen? Absolutely. Possibilities versus probabilities, maybe. But again, Mike, this is the the problem with a lot of these narratives is is is they're great for, you know, creating short-term market fluctuations. But the reality is that things rarely work out the way a lot of these narratives. And again, this goes back to your article yesterday on the demise of the dollar. You know, just doesn't really foster any truth.

Well, you know, you started this whole show with the hurricane stuff, right? and the weather forecasters. I think it was Malcolm Gladwell that wrote that. I want to say tipping point or one of his books. And basically what he showed was that for three days, weather forecasters have an edge over flipping a coin. Five days you could flip a coin and basically get the same results. And actually, when you go beyond five days, they're worse than flipping a coin or looking at the averages. So the CBO is like the the meteorologists. It's the same. They have the same track record. They they they have data and they just extrapolate it. They just assume that these trends will last forever. And like the weather, the economy and politics and everything else is very dynamic and it changes and it can change rapidly. Could get worse, could get better. But right now, all we have are these straight lines looking out to 2055. I mean, how many of you believe that anyone can tell us what's going to happen in 2055? That I mean, the the potential growth, the potential demise, the the the the huge range of things that could happen to this country are immense. So, what do we have? We have a a spending bill that on the margin looks higher than people were expecting, and they just extrapolated out to the moon. We don't know how it's going to turn out it all.

Lance, we're always talking about productive and unproductive spending, right? If if the debt used in that deficit is used more productively than it was in the past, that's a whole different outcome than if it's used less productively than in the past. And that that's one of the things that everyone gets wrong. Debt isn't bad. It's how you use the debt that can potentially be bad. If all the debt this country issued was all used productively and all the debt companies used was not used for buybacks but used to build and expand and innovate, our GDP would be two to three times what it was what it is. And we may have more debt, but we'd have much more GDP or income to pay for it. So, but no one's focused on any of the productivity. They're just focused on the debt, not what the debt's going to be used for. And that's a huge mistake.

Right. Yeah. and and you know look and and and it's the numerator denominator problem, right? They're focused on the numerator, not the denominator, which is GDP, and again so let's just let's just assume for a moment, let's take worst case scenario here, right? and and just assume that all the debt is issued just to continue you know funding social security medic, which is what it's for uh because that takes 100% of of tax revenue to cover that and then you know running the rest of government operations, so let's just assume the debt usage we're using right now doesn't change, but what if, right, Mike, if if all these stories about the innovation of AI and and this this massive leap in human productivity and human outcome from AI is going to come to fruition. Well, again, none of that deficit projection takes into account what the potential benefits of what AI will do in terms of e, you know, economic growth per capita or the GDP, the denominator of that numerator denominator equation doesn't take into account the impact of just that one aspect. Just that one aspect alone, regardless of anything else, doesn't take into account what that could do for economic growth as a function of the debt denominator you know kind of going forward, similarly what what if we can sign some sort of peace agreement with Iran with Russia with some of these foes that we have been wasting an incredible amount of military spending on and we can either cut military spending or use that spending for more productive ventures? There's just so much they can't capture. And look, it it's not that we can we know what's going to happen in 2055 either. We don't. But we're not lined enough to just assume it's going to be a straight line to 2055, right? And that's that's what we're saying is consider all the possibilities. And look, one possibility may be that the United States doesn't exist, that we go bankrupt, and that all those doomers are right. But another one is that productivity gets back on track and we're doing better and deregulation does have a positive effect and more global peace has a positive effect and we find new energy sources and you know you can come up with thousands of arguments on both sides of the coin. But the point is it's going to be a bumpy line to 2055, and no one has a clue where it's going to end up.

Well, and and this is why the CBO is historically wrong; they've been wrong. You know, every year they come out with forecasts. They're never correct. Um, so, you know, why we pay any attention to it at all is is something that is is a bit beyond me. But, you know, you know, again, it's a it's great for narratives, and right now the narrative is is interest rates are going up. So, I need to rationalize why are interest rates going up. So, I can come along now and I can use all this, you know, oh, it was a bad bond auction yesterday. That's why rates are going up. Um, and if you're really promoting a lot of bearish headlines, if you're a zero hedge or whatever, and you depend on bearish headlines for clicks and views and clickbait and those type of things, then it's great for that. And if you're a person that is personally just in the bunker expecting the demise of of everything, um, this is great for you. This is this is your narrative. And if you're and and again as we talked about in this morning in the in today's daily market commentary which is on the website, Mike wrote an article uh talking about bond yields are surging narratives versus fundamentals, but I posted this chart we have right so if you're a if you're in the bond market and you're shorting bonds for profit this is a great these narratives are great for you just like when somebody promotes a narrative about a company and and you you know pe companies like Muddy Waters and others that are famous short sellers. They can promote a ne a negative narrative about a company. They can drive the stock price down, you know, to to benefit their short position. Same thing in the bond market, right? These, you know, what drives yields are are traders and and and it's buyers and sellers on a short-term basis. And we have near record short levels on bonds right now, which is why yields are going up. They have that narrative advantage at the moment of using these headlines to help, you know, increase profitability in their short position on bonds. When that changes, bring that chart back up for me. You will notice that ultimately at some point rates always come down. And when they come down and they start to come down, those shorts will have to be covered. That massive level of short position that's in the bond market right now is huge buying fuel for bonds ultimately when yields start to come down and then and yields will come down at some point.

We're going to talk about this after the break. We're going to talk about Japan. We're going to talk about the US. We're going to talk about the implications for where yields are and the choices that central banks have when we come back from the break. Don't go away.

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You're listening to the Real Investment Show, and welcome back to the show this morning. So, the title of the show this morning is our bonds are cheap. And and we're going to talk about central banks here in a second, but um one of the the issues that's I find very fascinating in terms of narratives right now is that there's a lot of you your valuation gurus out there and y'all been in the chat lately talking about, oh, valuations on stocks are so high, blah blah blah. And yeah, valuations are high on stocks, absolutely, but you just can't wait to buy those. But valuations on bonds are actually relatively cheap. And Mike actually did part of this analysis this morning in his narrative that's in our daily market commentary. But here's a chart for you. This is real real 10-year total returns for stocks versus bonds going back to 1880. Uh these are some top-down charts. Uh bonds have rarely been this cheap uh historically. And when they are this cheap, they have been just fantastic buying opportunities for long-term investors. Of course, that correlates to the reason they're becoming u great investments is because the stock market is because of valuations is going to run into problems at some point. Now that doesn't mean you don't do this. Valuations are extremely terrible timing indicators. You should never use it for timing markets. But the point is is that valuations on bonds are cheap on a relative basis and a fundamental basis historically. But again, it could be several more years before that stock bond valuation impacts. Again, you know, markets can remain overvalued for a very long period of time, but eventually valuations do matter. It does equate to either lower or higher rates of forward returns based on where you're starting your valuation journey at. So for most investors, if you're buying bonds today and have the fortitude to buy a 10-year bond and hold it for 10 years, you're likely going to make a good bit of money on it just from a pure valuation basis. Stocks are are going to be more challenging. But again, as investors, going back to narratives, the narrative from the market is buy stocks, they always go up. Doesn't matter what the valuation is, and you can't wait to buy those, but you won't buy what's fundamentally cheap because you're worried about some narrative about the end of the world or whatever. And and you know this brings us to to central banks. Uh Japan has been trying to get to wean themselves off of monetary support. The Federal Reserve has weaned itself off. We're we're have been reducing the balance sheet now for the last four years. And so for the first time in the last 15 years, we have not had the Federal Reserve in the bond market influencing bond yields. And that's why yields are rising back to where they should be relative to economic growth and inflation. So if you take a, you know, take nominal economic growth plus inflation, you're at about 4.3%. It's about where yields are, give or take a little bit. So you know, but we don't have the Federal Reserve stepping in and suppressing yields artificially for whatever reason. Japan is in the same position. So Mike, before I go any further with this, what are your thoughts about what's going on in Japan right now? and you know kind of what's happening there.

Japan's central bank, the Bank of Japan is finally letting markets be free markets. That's all that's going on. They have they have if you think the Fed is aggressive, they're nothing compared to what the Bank of Japan has done. They've presided over negative rates for the better part of the last 10 or 15 years. They capped interest rates; the 10-year interest rate was capped at 1%, which they finally got off in 2023, and they're slowly but surely letting the market find the right rate. And look, you know, with everything they've done, the 10-year rate is only 150 160, and their 30-year rate is 3%. It's still pretty low.

Oh, Lance, you know what their debt to GDP is, right? Right. Oh. Oh, it's twice or more than twice what ours is. Yeah. 250%. Yeah. Right. Right. And and unlike us, they don't have the world's reserve currency and they don't have investors around the world world clamoring to buy their auctions or to lend them money. So, you know, that that kind of goes against the whole deficit narrative, too, that deficits do matter. I'm not saying they don't, but look at Japan and look at their yields, right? So, so, so the big story in Japan is they do have a little bit of inflation. It's finally above their 2% target. Their economic activity is looking a little better than it has for the last 20 30 years, more than that. Maybe 40 years. Right. Right. Consumers are spending a little more, meaning that they're not saving as much. It's looking a little bit brighter, although it's still pretty grim. Um, you know, and that's another thing. They have a debt to GDP ratio. Their GDP hasn't been growing in ages. It's actually shrunk, and ours is growing. Our demographics are a lot better as well. So, you know, Japan's just a story of what happens when you stop suppressing markets. Yields go higher. The concern is the yen carry trade, and that we saw a little glimpse of it in August 2024 last year where basically a a lot of investors borrow in yen and because the interest rates are cheap and the yen happen to be depreciating. The yen has been somewhat appreciating, and Japanese interest rates are going up, meaning that that yen carry trade is not as attractive as it was. So the risk here is if Japanese bond yields or the yen if the yen appreciates too fa fast or yields go up too fast that yen carry trade once again collapses and that's a deleveraging of the entire financial system stocks bonds you name it gold bitcoin everything so you know if we're talking about it you know the bank of Japan and the fed and other central banks are talking about and discussing it as you know we We didn't talk about this, but you know as well as I do that Bessant and Powell are on the phone every day trying to figure out what they can do, when they should do it, how they can do it. So this isn't just will investors step in and buy. There's a line in the sand. We just haven't hit it yet.

Right. Well, so that that's what I was going to get to is that you know the one thing that is missing right now in this whole So everybody's worried about these rising rates. So rates are normalizing is all that's happened. But we've gotten so complacent with ex, you know, low interest rate. You know, half percent interest rates, 1% interest rates aren't really good for the economy because again, if I'm a lender, why do I want to loan money to somebody for one 1% for 10 years? I mean, it just I'm underpacing inflation. My return on investment isn't great. Why would I want to do that? you know, we're at four four and a half% on, you know, different durations of bonds, whatever they are, and you know, we're all fretting about, oh my gosh, this is the end of the economy. No, actually that's a good thing because if I can loan money and again as an investor or just as a as a person, this is the first time in 20 years almost now that as a retiree I can take my retirement money and buy a 10-year Treasury in it and make four, four and a half% 5% on a Treasury bond with no risk. So for the first time I'm actually getting paid on that money. But if that interest rates becomes a threat to Japan's economic growth or if that interest rate becomes a threat to their financial stability. If it becomes a threat to the financial stability again we haven't even talked about the fact that the last time we were at 4 and a half% on US treasuries we had the Silicon Valley bank crisis here in the US. We haven't talked about the fact that interest rates at 4 a.5% are impairing collateral on the books of banks. At some point that interest rates, to your point, Mike, you know, that line in the sand where it is, we're not sure, but there's a line in the sand where that interest rate begins to impair the collateral on banks and the Fed steps in.

Well, it it also impairs the economy. Right. Right. Of course, the mortgage market is is once again going to more or less shut down the the real estate market because mortgage rates are back closer to the highs now, right? Corporations are are in the process of refying a lot of debt that's going to be refied from 2 to 3% up to 5, 6, 7%. Well, that's going to force them to cut costs somewhere else, whether that's employees or expansion or whatever it may be. So, you know, the difference between a GameStop, which GameStop shares can go to 40,000, it doesn't matter. It doesn't affect anything. Nvidia can go up. Nvidia affects a little bit. Bonds affect bonds are what drives the economy. So, when bond yields go up, the economy tends to weaken. And you know, this is just it is what it is. That is the fuel that drives the American economy and the global economy. So higher yields mean less growth means less inflation which ultimately means lower yields which then stimulate growth which means that economic activity then improves. And this is the cycle. This is the economic cycle where you get recessions and you get periods of good economic growth. And we are hitting that point where we now have, you know, the stimulus is wearing off, but now in addition to that, we also have the threat of or higher interest rates that will also impact the economy and ultimately force lower interest rates regardless of what the Fed does.

Well, and again, you know, for everybody kind of rooting for and there's it's it's interesting because, you know, in chat as well as in, you know, just kind of headlines, you know, people are rooting for these higher rates like, "Yeah, see, finally I told you, you know, these debts and deficits, it's going to cause a problem." You know, the the the thing you should realize is is that you re out of, you know, you can you can wish for a stock market crash and yeah, it it hurts when you have a stock market crash, people lose wealth. But when you have if you ever actually got the bond market crash that you're rooting for, you might as well just roll it up because you're not gonna it's your financial devastation. It's not going to be like you pointing other people going, "See, I was right. You know, the bond market crashed. I'm unscathed." No, it's going to wipe you out. So because debt is everything in the US. It's at every you know every aspect of the economy from corporations to to consumption to the to Mike said like the economy and you're not talking about mild recessions. If you have a bond market crash of of magnitude that a lot of you are hoping for you're talking about financial devastation. You think you think 2008 was bad. You should and and if you went through 2008, you should remember what 2008 was like. The job losses, the housing problems, the bank problems, all that that you went through, it would be magnitudes of that if you actually crashed the US bond market the way you're rooting for it, right? So, just be careful what you wish for.

All right, wraps up the show for the day. Mike, thanks so much. Um the article on the website this morning, daily market commentary talking about the fundamentals, bond narratives versus fundamentals. That's on the website now. Mike's article about the eternal crisis of the crashing dollar on the website as well. Go to the website realvestadvice.com. Get those articles now. Follow us on Substack, Lance Roberts, Twitter X, whatever you want to call it, Lance Roberts. All there for you. We post stuff.

Every day, to keep you up to date on the markets.

Have a great day. See you uh tomorrow. Is Rich Danny tomorrow? Danny tomorrow here for Friday.

Monday we're off for Memorial Day. See you on Tuesday. Have a great Memorial Day weekend.