Bonds as Top Investment — Full Breakdown & Transcript

[00:00] It might seem crazy to say, but the best investment over the next 8 to 10 years is what, in my opinion, we're going to talk about right now. First, it takes the opposite approach to this insanity that we are seeing now.

[00:15] This insanity we are seeing right now in the bond market is not sustainable. In my opinion, and it's also in the opinion of many others, that this is heavily being driven by issues that you have with the Middle East.

[00:29] T.S. Lombard just put together a big piece about how this is not some kind of crazy fiscal crisis that we're up against, but the reason we're seeing these insane bond yields is simply, in their opinion,

[00:42] oil prices and the economy is doing well and growing right now. Great. So as a result of oil prices rocketing, unsustainability in the Middle East, and obviously there's hope that an Iran deal is coming, which probably would indicate that we're at peak yield,

[00:57] what then becomes the best possible investment over the next 10 years? Well, bonds look very delicious at these levels, but it's difficult to call for a peak in bonds.

[01:09] There could always just be another tariff policy, there could always be another shock, until, of course, economic growth rolls over and then you end up in a deflationary-style depression. Which, before we talk about what the best investment could be over the next 10 years,

[01:24] it's always worth remembering, is inflation or deflation better? Generally, we think, well, deflation is prices coming down and inflation is prices going up, so obviously we want prices to come down.

[01:37] But when we have deflation, it's usually aligned with the economy being in a crisis, some form of recession or depression. Google it yourself. If you simply Google period of history with deflation,

[01:52] that's literally it. You don't even have to add any bias in there. You get Great Depression, prices fell 7%, driven by bank failures and credit contraction. The Long Depression of 1873, where prices dropped nearly 3% yearly.

[02:08] Then you have the post-World War I Depression of 20 and 21, prices falling about 18%. And then, of course, you have the Great Recession of 2007 to 2009, with a brief period of deflation.

[02:22] This is, by the way, why the Federal Reserve is encouraged to keep inflation at 2%. So anytime there's a sign that, and this sort of helps us get into,

[02:35] okay, so what's the Fed going to do, and how does that affect investments? Anytime the Federal Reserve thinks we are going or growing inflation below that magic 2% target, they try to run the money printer.

[02:49] They purposely run the money printer just like Ben Bernanke and Elizabeth Warren and Jerome Powell did between 2008 through QE1, QE2, and then QE infinity, because it props up inflation to that 2% target.

[03:03] Inflation, during the last 15 years before COVID, or more like 12-ish years before COVID, during that period, inflation was consistently running below trend. we didn't have an AI boom

[03:15] and we didn't have so we didn't have this inflationary impetus we didn't have a war in Russia, Ukraine we didn't have the war in Iran we didn't have tariffs we didn't have some of these major inflationary problems in oil shock, supply chain issues

[03:28] and tradeable moves or Red Sea or otherwise so we didn't have a lot of these inflationary factors certainly the AI investment boom has been very inflationary which is normal up front tends to be very inflationary but what ends up happening is

[03:41] when you don't have 2% inflation, the Federal Reserve says, well, we need to stop deflation from coming because if we roll into deflation, people might stop spending. And then that creates a self-fulfilling deflationary spiral.

[03:54] People stop spending. If people stop spending because they're saving, because prices will be lower next year, then the economy vortexes. Earnings come down. Companies, stock markets, mis-earnings. Stock market rolls over.

[04:07] Market rolls over. People lose their jobs. And then guess what? they're forced to spend even less. So generally, the suits at the Federal Reserve argue that inflation is a must to a small degree. Ideally, 2%. But you don't want deflation because that's

[04:24] even worse. So they have to play this beautiful little balancing act. And this is why the money printer gets run. The problem is, we now have a new boss in town. We have a new

[04:36] regime in town. We're going to talk about that right here. It's called the Warsh regime. Project 2025, which to some extent contributed to Donald Trump getting elected, basically

[04:51] led us to getting this installed person called Kevin Warsh. Kevin Warsh argued in 2008, in 2007, in 2009, while he was at the Federal Reserve, that the Fed, by printing money,

[05:05] was about to cause immeasurable inflation, and that what we should be doing in the middle of the 2007 and 2008 crisis, we should actually be raising interest rates, because that'll help prevent inflation from all the money printing.

[05:22] So this guy was, like, born to be anti-money printer, to where even while we're in the middle of a deflationary crisis, where, you know, ideally people want to get bailed out, and, you know, we could have a separate argument

[05:34] about whether or not we should just let everybody fail, right? Let's not be ardent in here. I just want to be clear. I'm not a shill for money printing or against money printing. I just want to see what do we have installed so we know how to invest.

[05:46] So, Kevin Warsh, super anti-money printing. There it is right here. Super anti-money printing. We know that. Why? Because he's super concerned about inflation. And so, in fairness, we have a lot of inflation to deal with right now.

[05:59] So right now, maybe he's the right guy for the job. Mr. Myron, who's also a Trumpian shill, wants to offset balance sheet tightening by having rates come down

[06:11] to accommodate the fact that we could run off the Fed's balance sheet. The Fed's balance sheet is part of this discussion as well. Fed's balance sheet, you can look at the total assets for the Federal Reserve right here, and you can see that the balance sheet has come down a lot since COVID

[06:26] from almost $9 trillion on the balance sheet, But it's actually started going up again from a low of about 6.5 up to about 6.7, 6.8 now.

[06:38] So we've kind of come up again a little bit. What's going on? This is what Kevin Warsh wants to go down. They do not want the Fed to have all this on their balance sheet. They want to see a lower reserve regime getting back to where we used to be, maybe before COVID or maybe even before that.

[06:55] I mean, in the early 2000s, Fed basically had less than a trillion dollar balance sheet. I mean, at some point it was zero. And if you go into the QE infinity era, you can see how the balance sheet really grew and expanded to about four and a half trillion dollars.

[07:11] But then it doubled during COVID, which is crazy. So now you have somebody like Fed, Warsh, who wants the balance sheet to get crushed. And so what he done is he now installed multiple different Caps Force members So historically he hates money printing but now he also has task force cronies I like to call them his cronies So I just listed most of their first

[07:35] names, just to make it simple, because I don't think you care that much about their names, you can look them up. But of the like 12 people on his task forces, these eight, they're probably

[07:47] closer to 16 people on the task force, so about half of them. The other half that I didn't mention on this list, by the way, they're super into new data for how we collect inflation data, how we collect jobs data. They don't really have an opinion on the balance sheet.

[08:01] They're like venture capital and tech bros, like Andreessen Horowitz, like these kind of folks are on there. And so then it's like, all right, they don't really have an opinion on the balance sheet. They're here to try to provide data or AI insights or tech or whatever. And so what I did

[08:16] is I put these names on here that had an opinion on the balance sheet, whether they wanted money printing or they didn't want money printing. And these people help us understand what kind of Fed Kevin Warsh is trying to run. We already have a hint from Myron, who's not on the

[08:29] task forces, but he is part of the Trump administration. We know Warsh was installed by Donald Trump. And then we have these folks right here. Mr. Thomas argues that deficits are bad, but not just fiscal deficits, money printing from the Federal Reserve. Greg literally published

[08:46] articles about how the Federal Reserve should use negative interest rates rather than money printing. So in other words, forget about going to zero with interest rates if there's ever a shock. We should just go negative and have negative rates, and that'll stimulate the economy.

[09:03] So you might wonder, like, how do you possibly have negative rates? Europe did. You just charge people for their savings. Imagine if every time you opened up your SoFi bank account, it said, hey, your, you know, $10,000 you have sitting in your bank account

[09:18] or $1,000 you have in your bank account that's not invested capital, whatever, you just got charged $2 or $20, depending on which of those you are, for having your money sitting there. And we're going to charge you again next year.

[09:30] You're like, ah, I may as well go invest it into a business, a stock, or something may as well go contribute to the economy. That's why people make an argument that negative rates could work. So you've got somebody who says money printing is bad, somebody who says that we should have negative rates,

[09:43] Then you have somebody who says QE is so bad for money printing, quantitative easing, it's so bad that you should just let loser companies die. You shouldn't bail them out. Just let them die.

[09:55] Let the economy go into deflation. Screw it. Send them to hell. Okay. This is all going to get to what I argue is the best investment. You've got this guy, Rye Heeran.

[10:08] I don't know how to pronounce his name, but anyway. QE makes banks addicted to reverse. and that's bad. Then you've got Karen, who wants to help them unwind the balance sheet, and she's an Obama-era fiscal specialist,

[10:23] sort of her name. Then you've got Mervyn Kane, one person I put their full name on just because they're actually well-known in the central banking community. They literally say that QE leads to dangerous addictions in the entire economy.

[10:35] Very bad. Then you've got this guy Peter, who's literally written dozens of papers on how bad quantitative easing is. and then you have a guy from the Brazilian central bank who instituted Fed credibility at the central bank of Brazil

[10:48] instituting inflation targeting and anti-money printing to build credibility. So these are all the people that have comments on the balance sheet and you can notice not a single person on the task forces

[11:01] says we should be expanding the balance sheet and we should print money. Not a single one of these people. Myron says we should have lower rates. You literally have a negative rates guy on there. none of them want to expand the balance sheet

[11:14] and they all align with Kevin Warris which makes sense because he picked these people and Trump picked this guy who is probably encouraged by Project 2025 to basically kill the Fed. Okay then.

[11:26] So, we don't know when there'll be some form of a crisis that the Federal Reserve has to respond to. But the typical MO for the Federal Reserve to respond to a crisis

[11:39] is you cut rates to zero and you run the money printer. In fact, Mike Wilson over at Morgan Stanley literally argues that the Fed typically is deemed to provide

[11:54] stable financial conditions, in other words, run the money printer, at the, quote, first sign of trouble. That is typically what the Fed does, and Mike Wilson takes the argument that that's what the Fed's going to do.

[12:07] But I disagree. I actually don't think the Fed is going to run the money printer at the first sign, because when you actually study what the Fed is setting up, they're not setting up for a money printing regime. They're setting up for negative interest rates.

[12:20] And negative interest rates call for a totally different kind of investment, and it is one that benefits from the lowest market rates.

[12:32] Now, how does that work? And I said market rates on purpose, not Fed rates. Looks like I screwed this up a little bit because it got erased. I was spending a little bit, but whatever. Okay, my hand right here. Get over it.

[12:44] If the Federal Reserve doesn't print money, which printing money causes inflation, we know that. And when the economy weakens, the Keynesian approach to economics is you print money, you support the low, right?

[12:58] Printing offsets deflation. Like, we would probably have years of deflation already if we didn't have money printing. But could that lead to a self-sustaining vortex of a declining economy and slower growth?

[13:10] Yeah, probably. You know, people don't take on debt in a deflationary regime because that debt becomes more expensive to pay off. Debt becomes less expensive to pay off in an inflationary regime. That's why you tend to see bubbles get inflated by debt.

[13:23] That's a big problem. So, if no money printing then, then people will probably rush to buy bonds because you're not actually introducing more bond supply,

[13:35] which means you're limiting the supply of bonds, which means you increase the price of bonds. And in a deflationary regime, those bonds actually become worth more over time.

[13:48] So right now, we're at these crazy highs in the bond market, and debt in a deflationary regime becomes, and when I say crazy highs, I mean yields are crazy high,

[14:01] which actually means that the value of bonds is ridiculously low. So there's an inverse relationship between bonds and yields. We already know that. But basically, when you hear yields are high, it means bonds have fallen in value a lot.

[14:15] Now, what's fascinating about that is it potentially sets up a low-leveraged future where if there is some form of catastrophe over the next 10 years, some form of recession or whatever,

[14:27] which I expect that there will be. There's always a recession at some point around the corner. We don't necessarily know exactly what it is, but we suspect one will be coming again just like there always has been historically.

[14:39] Well, what happens then? Well then, what you want to be in, first of all, is you want some rules of engagement here Number one in a low or deflationary regime where market rates are coming down and the Fed is not printing money You want If you or your child spent years growing up on social media and experienced serious mental health struggles

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[15:49] It's quick, easy, and you can recover a potential recovery of over $1,000. You want little to no debt.

[16:02] That is one of the first things we want to start with. In a deflationary regime, debt is bad. Debt becomes more expensive and harder to pay off.

[16:14] So, try debt now is probably a bad deal. I would be very cautious about taking on debt, you know, between now and the next crisis. So, I think little debt, paying off debt is a good idea.

[16:28] This is where I would actually argue that making an extra payment on your mortgage, even if you have a 3, 4, 5, 6, whatever percent mortgage rate, making that extra payment, you know, every few months or whatever, help reduce some of your debt, just gives you some more insulation.

[16:43] So little debt is a tool. The second thing that really benefits, and this is the hardest part, is bonds. But probably bonds that you're willing to hold to maturity or help a maturity bond.

[17:00] The reason I say this is if you go buy a 30-year bond right now and there's another shock between now and, you know, some future crisis, you might end up wanting to sell those at a loss.

[17:12] But if you hold bonds to maturity, it doesn't matter what the value of those bonds does between now and then. You'll get paid your yield between now and maturity. So let's say, for example, you go in and buy a two-year treasury bond,

[17:27] which you could go buy a treasury direct. Hashtag not sponsored. You can't get a government sponsorship for that. But if you go look at the two-year treasury on CNBC,

[17:40] you know, they always make it so hard for some reason to find it. Their search function is just trash. It never shows up when I type in two-year. But anyway, it's like 4.5%. So two-year treasury yield.

[17:52] Okay, there we go. Two-year treasury yield. Oh, it's even higher right now. It's remarkable. It's almost 5%. Look at that skyrocketing right now. You could literally lock in 4.94% right now on a two-year treasury that if you hold to maturity, it matters absolutely zero what the valuation of these bonds does on a day-to-day basis.

[18:16] You will end up getting your 5%, roughly, 4.9%. So call it, you know, you put $10,000 in, you get your $500. One year, two years, and then you get your money back. So you get $11,000 back, right?

[18:29] to outflow them. It's kind of cool. So, little debt, bonds, health, and maturity. The bonds are kind of boring. People don't love bonds sometimes, but this is starting to look like a really good deal,

[18:42] especially in an anti-money printing regime. This benefits massively from anti-money printing. You know what does not benefit from anti-money printing? Gold.

[18:55] This is literally the anti-gold Fed. I highly believe that. I do not think it is a coincidence that gold peaked when Kevin Walsh was chosen. Because the people who are paying attention realize that this is the anti-gold Fed,

[19:09] and that bonds are probably the big winners here over gold once we get through the inflationary crisis. Like oil, and we're getting a wrong deal, or whatever. Now, the last one is the hardest for people to get their hands on.

[19:23] But in my opinion, it's my favorite, because I can actually get good deals on this. and you can as well, a lot of times it's the hardest. It's real estate. The problem with real estate, though, is you must buy in low-billed areas.

[19:41] Best-case scenario, you're buying where, this is not to be political, it's just to be blunt, you buy real estate where super-liberal, left-leaning government and nimbyism

[19:54] makes it almost impossible for developers to build new homes. That artificially restricts supply of housing. When you restrict the supply of housing, prices stay insulated for longer.

[20:07] But the best deals, ideally, to get are deals that you can get that are below market value. So, for example, you buy a fixer-upper. Like, a $700,000 house hits the market. It's a fixer-upper. It needs $50,000, a paint carpet, and some cosmetic repairs, some vanities,

[20:22] maybe a kitchen counter or whatever, some plumbing fixtures and light fixtures or whatever. and it's in a $900,000 neighborhood. Now you're up $150,000 on equity. You've actually inflated your net worth more.

[20:35] You're not paying taxes on that gain in equity. And guess what benefits from anti-money printing? Real estate.

[20:47] Wait, Kevin, why? Why does real estate benefit from anti-money printing? This is the crazy thing that I think people don't recognize. but mortgage rates closely align with the 10-year treasury,

[21:01] which is like, you know, the highest levels that we've seen in a very long time. I mean, look at this. Now we're at 5.28. It's crazy. If it keeps going up, still don't have the long deal. In the short term, this looks crazy.

[21:14] But the higher these go, the higher mortgage rates go. If the Fed cuts rates to zero, fine. Maybe the 10-year goes down to 3.5%. Whatever. But if the Fed doesn't print money and there's a crisis,

[21:29] people are going to buy that 10-year treasury yield because they want that 3.5%. They say, that's a better deal. I'll take that 3.5%. So what happens when that 3.5% keeps getting bought?

[21:42] And people say, you know what? Kevin's right. We're going to go buy bonds. We're going to go buy bonds, bonds, bonds, bonds, bonds, bonds, bonds, bonds. The more people go buy that 10-year treasury because they're like, the Fed's not printing. Let's go buy bonds. The more people buy this, the more the 10-year yield actually goes down to levels that eventually end up even lower than we've ever seen before.

[22:04] Because people start going, oh, it's 2%. Whatever, man. Fed's not printing. There's no inflation. 2% is better than nothing, and it's risk-free. And they get bought down. They get bought down. They get bought down.

[22:16] At some point you will literally have savers that will say if I put my money into a savings account I got to pay I just make this number up negative a half percent per year in my savings account I rather go buy a one or 10 treasury bond yielding zero percent or yielding

[22:35] a quarter of a percent because that bond yielding zero or a quarter of a percent is actually either going to keep my money or make me money, whereas money in my savings account is going to leave me money. That's what happens when you get to a negative rate regime. So now you have essentially

[22:51] an infinite level of people buying the 10-year treasury. And that's how you end up with lower mortgage rates than you have ever seen in the history of this economy.

[23:03] So in other words, in the 250 years that the United States has been around, I think there is a likelihood that when the next crash comes, housing mortgage rates will be lower than what we've ever seen before.

[23:17] People have this mindset that are like, oh, I got a 2.7% fixed, you know, 30-year fixed-ring mortgage. Great, so did I. Great, awesome. They're going to be even lower in the future. Now, that sounds crazy.

[23:29] Like, oh, you could have a 1.7% mortgage? Yeah. It sounds like I'm from the loony bin. But if you look at Europe, it's exactly what happened in Europe. You had a low inflation regime. You had a low money printing regime.

[23:42] Why could Europe not print money? Because of the pigs. you had to have studied this during 2013 and 2014. I studied this in detail. 2014, 2013, you had this sovereign debt crisis.

[23:57] Portugal, Italy, Greece, and Spain. Massive debt loads. Austerity measures. Rather than stimulating to try to prop up these economies that were suffering, they were like, let it all fail, baby.

[24:09] So what happened? Market rates plummeted. So you had negative rates at one point before COVID. because you have this decade of basically deflation and austerity,

[24:21] lack of spending and trash is piling up in Athens. You may remember some of those images. Anyway, the point is, it's happened before. It happened in Europe. This exact playbook happened in Europe. Obviously, then COVID came and screwed things up a little bit.

[24:35] But this playbook happened in Europe. It's actually really remarkable because I think we have a Federal Reserve that is setting up for this exact playbook to happen again. And this is why. People are like, oh, Kevin, you know, like,

[24:49] you're a fan of buying the dampened stocks right now, whatever. That's true. I am, because I think we're going to get in a wrong deal, and I don't think the AI bubble is over yet.

[25:01] I think the AI bubble has risks, and we call them the canaries in the coal mine. The canaries are the labor market. And then, of course, anything that's related to the data center build-out. So whether that is Antelope that actually uses the data center build-out, or it's the fiscal or the balance sheet sustainability companies like CoreWeave or Nscale that's going to IPO, whatever.

[25:24] Some of these guys start rolling over, the whole circular financing thing rolls over, and you go into a recession or depression, which is really bad. but my belief is, and I've said this before, so sorry to sound redundant on it, but my belief

[25:39] is that if we're in a cycle, the AI cycle is, you know, maybe somewhere around here, this is sort of the AI cycle, so it's like, you know, call it 10 p.m. at the drunken party,

[25:51] okay, like the party's still just getting started, right, but we're definitely a lot more advanced, whereas you're probably in this zone depending on where you are

[26:03] for bonds and for real estate especially in Florida like in Florida honestly like Florida real estate you're probably still over here you're still falling

[26:15] it's pretty bad but this is an overbuilt market this is why I said underbuilt and that's hard for people to grasp because they're like but I don't want to invest in California fine I get it.

[26:28] It's actually one of the best places to invest in real estate. Coastal California real estate, where people want to live because the weather is amazing. So, coastal SoCal real estate. I mean, even up the coastal state is pretty good.

[26:42] And the building departments don't want to build. So, you literally have a built-in put option, thanks to the city. Like, you could literally call the city and go, thank you for being my free put option. and then they base your property taxes

[26:56] on what you bought the property for not on what the market value of the property is which means if you get a cheap deal on a fixed rougher you literally get a below market value property tax rate that you keep and that can barely go up

[27:08] it doesn't go up with the rate of inflation it's incredible unlike Hawaii where they reassess you every single year anyway so this is very interesting because if this party stops

[27:20] so either the labor market stops or the debt spending on AI stops, then interest rates are going to plummet. They'll plummet rates to zero. But then you'll get the bond and real estate cycle.

[27:33] I think this will happen within the next decade. I actually think it will happen by 2032, but I'm humble enough to say that I cannot tell you exactly when it's going to happen.

[27:45] This is why. I think the best setup right now is some stock exposure. I'm okay with that. I'm okay with some stock exposure because, hey man, this is awkward.

[27:57] There's still some money to be made here. Okay, we can still make some money, honey. But, you know, is it a good time to pay off some debt? Is it a good time to stop thinking about, you know, maybe while everybody else hates this,

[28:10] maybe this is where the next cycle is going to go because we have a Federal Reserve that basically tells us point blank bonds and real estate or going to be the preferred investment after this AI bubble.

[28:22] Not gold, not stocks, but the use-jax. Now, eventually, could they flip-flop because they realize they've created too many problems? Could they flip-flop and end up money printing again?

[28:36] Yes, they could. I'll take this one step further. You know what happens after they turn the money printer back on? As soon as they turn the money printer back on again, that's when you start looking into debt again.

[28:48] Not until then. It's crazy, but you don't look at debt until the money printer turns on. When the money printer turns on, that's when you buy stocks. That's when you level up again.

[29:01] Because, see, when they turn the money printer on again, that is when you expect inflation is going to start rising, and that helps make your debt cheaper to pay off again.

[29:14] But this is not a Fed that's anywhere close to that. We are at the opposite end of that. We're the Fed that's just starting to try to turn the balance sheet vacuum cleaner on again. So you've got to get through that whole cycle first.

[29:27] So, here's your playbook for the next day. Alright, that was long. If you liked that video, change this one out. I think you're going to love it. I don't even want to advertise these things to each other.

[29:39] I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations man, you have done so much. People love you, people look up to you. Kevin Passapath, FY19, and YouTube up, meet Kevin. Always great to get your take.