August 2026

Written By Jason Slowbe

IN THIS ISSUE

  1. The Midterm Put

ONE MORE THING...

  • Dot-Com bubble vs AI bubble

  • The Trump Trade

The Midterm Put

From The Big Short:

"In the late ’70s, banking wasn't a job you went into to make large sums of money.  It was a f*ing snooze.  Filled with losers!  Like selling insurance or accounting.  And if banking was boring... then the bond department at the bank was straight-up comatose.  We all know about bonds.  You give 'em to your snot-nosed kid when he turns 15.  Maybe when he's 30 he makes a hundred bucks. Boring!"

Although the subprime crisis changed that view, bonds investing is still largely thought of as “inside baseball” among the general population.  

But the bond market matters!  A lot!!  

Many investors, myself included, are now managing risk in an environment of historically rich asset valuations: 

  • The Shiller PE Ratio, also known as the Cyclically Adjusted Price-to-Earnings ratio comparing stock prices to corporate inflation-adjusted earnings averaged over 10 years, is now at about 41.  The historical average since 1946 (end of World War 2) has been 20.6, and since 1990 has been 27.5.  

  • The “Buffett Indicator”, which is the Total Market Value divided by GDP and which Warren Buffett claims is “the best single measure of where valuations stand”, is now at 240%, near an all-time record and indicating that stock prices have grown at a rate far exceeding the country’s Gross Domestic Product.  The historical average since 1990 has been 130%.

Bonds pay interest rates, and Warren Buffett has described interest rates as the ultimate anchor of asset valuations. 

In 2013:

“Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe.”

In 2016:

“Interest rates are like gravity in valuations. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that's a huge gravitational pull on values.”

So when bond yields increase, investors take notice.  

This month presented investors with a warning shot across the bow in perhaps one of the first major indicators of distress from the U.S. government’s disruptive policy changes over the past year and a half.  The U.S. government bond market experienced rising yields on long-dated bonds in particular, with the 30-year Treasury yield hitting a 19-year high of 5.33% in August.  

Why are bond yields spiking?  

Conventional wisdom points most directly to higher demand among investors for corporate bonds to build out AI data centers, demand of course that diverts investment dollars away from government bonds.  

There’s the rapidly expanding $40 trillion federal debt and increasingly challenging relationships with foreign countries who hold U.S. government bonds, both of which reduce demand and command higher yields among bond investors.  

There’s the impact on government debt financing, which President Trump has spoken widely about as he advocates for lower rates in part to reduce the large interest expense we pay on our rapidly expanding federal debt that has now passed $40 trillion.  

How do high yields impact investors and the economy more broadly?

There’s the declining risk premium of stocks relative to bonds.  As JPMorgan’s James Sullivan recently opined, "It's a little bit like paying your mortgage with your credit card", and bond yields are now higher than the earnings yield on the S&P 500, making asset-allocation decisions significantly more complex going forward.

There is the fairly direct impact of bond yields on consumer interest rates.  What we all pay for long term loans like home mortgages, sure, but also a ripple effect on shorter duration loans like vehicles and business financing.  

The President knows that high inflation has doomed multiple Presidents before him, not least of which his predecessor President Biden whom Trump hammered on inflation as a central part of his reelection bid.  It should not be lost on anyone, then, that the President’s signature policies of tariffs, war with Iran, and labor and immigration restrictions are juicing inflation and worrying many Republicans running for reelection in November.  

Raising interest rates can help tame inflation by dampening economic activity, including hiring which imperils the President’s self-described standing as the “greatest jobs President in history”.  I have wondered for a while now… when President Trump advocates for lower interest rates, whether he really wants the ensuing higher inflation from those lower rates.

In either case, what are leaders to do?  

This month Secretary Scott Bessent announced that the Treasury is doubling the weekly rate of its bond buyback operations from $2 billion to $4 billion from September 9th through… wait… checking my calendar… November 4th.  

November 4th.  One day after the midterm elections.  

It is impossible to ignore the timing on this.  Could this move not be more about politics than sound financial policy?  

  • By buying back long-dated bonds and issuing short-term Treasury bills to finance them, the administration appears eager to project action on long-term interest rates in the run-up to the elections while temporarily shielding mortgage and borrowing costs from further spikes.  

  • And, Scott Bessent previously criticized Janet Yellen for her virtually identical bond market intervention (Scott Bessent Once Warned Against This Kind of Treasury Activism | Investing.com).  

Transcending politics, financial engineering like this risks unintended consequences, conflicts with the Federal Reserve’s ongoing battle to tame inflation, and creates a moral hazard via a put option that rewards risk-takers by artificially capping downside moves in yields.

Bessent is a smart guy, Trump is a savvy politician, and they both know the value of simple messaging.  I have no doubt that privately they know there will be harmful side effects for taking this action.  But what they project publicly will not demonstrate those understandings.  

Thinking in Likelyhoods, one way to more objectively evaluate news is to consider the incentives of newsmakers and commentators.  Particularly in politics, where “power tends to corrupt and absolute power corrupts absolutely”, and where individual incentives can differ from what is in the public interest, we can make more informed judgments and interpret news more rigorously by evaluating the incentives of the newsmakers.

Certainly, politicians wanting to bolster their case heading into an election is natural, nothing new here.  Although the doubling of buybacks to $4 billion per week will increase demand and lower rates to some degree, even $4 billion per week is very small compared to the size of the $4.5-5.5 trillion long-dated U.S. Treasury bond market.  

Perhaps the U.S. Treasury wants to signal to bond market participants that they are committed to lowering long term bond yields, but minimize the amount of capital they deploy?  To leverage their impact while reducing some potentially harmful side effects?  That seems to be a logical incentive to explain the Treasury’s actions in light of the prevailing economic environment in which they are acting.

Speaking of incentives, then, this approach to analysis might also help us make greater sense of Stanley Drunkenmiller’s very public rebuke of the Treasury’s actions, particularly given his prior mentorship of Scott Bessent at Soros Fund Management.  

This month Druckenmiller published a highly critical op-ed in the Wall Street Journal titled "Let the Bond Market Speak" where he publicly took Bessent to task.  Druckenmiller warned that Bessent’s intervention merely blunts the message from the bond market as “the only fiscal disciplinarian the U.S. has left” and that "governments defending prices against fundamentals always lose".

All of that may be true.  Or maybe not.  But from an incentives standpoint, perhaps Drunkenmiller may be responding this way because he lost money from Bessent’s intervention and has a very real financial incentive to sway the bond market back his way?

So, whether Treasury buybacks are sound monetary mechanics or shrewd political strategy, clearly the administration is signaling it will not let bond market volatility jeopardize the economic narrative heading into November.  

Pundits like to coin terms like the “Greenspan put”, the “Bernanke Put”, the “Yellen Put”, the “Powell Put” and now the “Bessent Put”.  I don’t see it that way - their actions are less about the particular individual in those positions and more about the broader incentives and environment in which they all operate.  

So let’s more accurately call Bessent’s intervention the “Midterm Put", induced by the timing of the election cycle when leaders want to ease yields and cushion portfolios precisely when their political stakes are highest.  But as history reminds us, market manipulation only defers the reckoning, and investors must weigh the potential short-term stability against the long-term financial reality.


ONE MORE THING…

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Jason Slowbe
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July 2026