← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
The Economic Maginot Line: Why Markets Everywhere Are Flashing Warning Signs Right Now & How You Can Protect Your Wallet | Tom's Deepdive
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it done the market is giving off a series of alarm bells and no one is paying attention. On May 13, the US treasury auctioned 30 year bonds at a yield higher than 5% for the first time since 2007, and just six days later, the yield climbed even higher. Bank of America's top strategist calls a 5% yield the Maginot line, named after the supposedly impenetrable wall France built to keep Germany from invading during World War II. And we all know how well that worked out. Now the financial version has just been totally trounced and and B of A is saying the door to doom has opened. The statement is hyperbolic, but possibly all too accurate. And the hits just keep on coming. Japan's 30 year bond also hit its highest yield in history. The UK's 30 year bond is at the highest since 1998 and Germany's 10 year bond is at a 15 year high. A bond blip in one country wouldn't be the end of the world, but this many blips happening everywhere all at once? This is becoming very hard to ignore. Every previous time we've lived through a version of this story where one country is breaking, the others have been stable. So capital has always had somewhere safe to run, but not this time. And the stock market hasn't priced in any of this distress. The S and P, despite what's going on, just hit fresh record highs. The bond market is screaming, but the stock market is partying and they cannot both be right in three blunt and brutal parts. I'm going to show you why the bond market is screaming, why the Fed is trapped why the stock market is dangerously detached from reality and, and what's likely to happen next. So welcome to part one. The economic Maginot Line was just breached. Between September of 2024 and December of 2025, the Federal Reserve cut interest rates six separate times. That's 175 basis points in total. And during that exact same window, the 30 year treasury yield did the opposite of of what it was supposed to do. It rose by nearly a full percentage point in the previous seven Fed cutting cycles going back to the 1980s. Long term, treasury yields were lower 100% of the time within months of the first cut. Not even most of the time. Every single time. This is the first cycle in over 40 years where that pattern is broken. The whole point of having a Fed in the first place is that they can manipulate the economy. There are massive downsides to having a Fed, but at least they can stabilize a fragile economy like the one we're in now. To have a Fed with all of its inflation, but not be able to steer the economy when it gets into trouble like we are now is horrendous. So when the Federal Reserve cuts rates but the long term borrowing doesn't get any cheaper, you've got a real problem. Cutting interest rates to lower the rate of borrowing is the entire mechanism that has defined how central banking has worked for the last century. Let's look at how this all is supposed to work. Because the inverse relationship between the price of a bond and its yield can confuse people. So many, many people may not understand what's happening right now. The price you can sell a bond at and the yields it delivers to the owner actually move in opposite directions. For simple math, just imagine the US Government wants to raise some money. So they create an IOU known as a bond. They put it up for sale for $100 and agree to pay whoever owns it $5 of interest per year for lending them that money. That's the 5% yield. But these bonds can be sold on a secondary market after the initial purchase if the original buyer doesn't want to keep owning the bond. For what? If the demand for the bond is strong, buyers bid the price up, let's say to $125. And that same $5 payout from the government now works out to be just 4% based on the new purchase price. And if demand is weak and buyers will only pay, say $80 for a bond that was originally purchased for $100, the yield jumps up to 6.25% based on, based on that new buyer's purchase of $80. So when you see headlines about yields spiking, what those headlines actually mean is that if the US government wanted to issue new debt right now, in this environment, they would be forced to increase the amount of interest that they pay to entice people to lend them money. That's what's happening right now. And it's not just happening in the us. The exact same pattern is playing out across nearly every other major central bank on Earth. The UK's 30 year gilt is at the highest yield since 1998. Japan's 30 year is at an all time record going back to 1999. Germany's 10 year is at a 15 year high. And national bank of Canada strategists just reported that average G7 yields collectively have hit a 17 year high at the end of April. Unfortunately, the strain is not just being felt by the us, it is rapidly becoming systemic. Now, obviously, I hope that the B of A using the door to doom rhetoric ends up proving to be more clickbait than reality. But bank of America's chief strategist is aggressively trying to get us all to look at three moments in modern history where when bond yields ripped higher, they did so right before a major crash. You have Japan in 1989, right before the Nikkei collapsed and started what became known as the lost decades. The US in 1999 right before the dot com bust, and China in 2007 right before their market collapsed. Three crashes preceded by identical fingerprints in the bond market. And they're identical to what we're seeing right now, with the important caveat that historically this doesn't play out across several systemically important economies at once. So not only are we seeing the fingerprints that have traditionally preceded a big crash, we're seeing it happening virtually everywhere at the same time. It's usually just one. And that leaves investors the ability to move somewhere else to stay safe. Now, the bad news is, while this is happening, the Fed is trapped, losing its ability to help steer the economy. Cutting interest rates right now won't pull the yields back down. It would actually make the problem worse because bond buyers are already telling the market that they do not trust that they will get adequate long term returns on their risk at the current rates. And cheaper money if they cut just means even lower returns on the risk that they're taking and that inflation would run even hotter if they did cut the rates. All of that would only serve to make already less attractive bonds even less attractive. So they're trapped. The question becomes, how did The Fed end up in this trap because it has a cause. And that cause is our second alarm bell. Welcome to part two, the Inflation Trap. It's closing. Two months ago, before the strike on Iran, U.S. inflation had actually eased all the way back down to 2.4%. The Fed was headed to easy street, things were looking good, and the bond market was even starting to relax. But not anymore. On May 12, the Bureau of Labor Statistics reported that the consumer price index has already hit 3.8% year over year for April. That's the highest recording since May of 23. So in just two months, inflation has jumped a full 1.4 percentage points. And to make matters worse, producers prices, the increase in price that businesses experience that caused them to raise prices for consumers, hit 6% year over year. That's the fastest increase since the end of 2022. Now when PPI goes up, consumer prices are going to go up. So people should expect to be paying even higher prices in the next three to six months. Meaning inflation is not done accelerating. Which by the way will only serve to compound the bad news, because for the first time in three years, the average American is now losing ground in real terms. Wages, adjusted for inflation, have turned negative. Workers take home pay, again, adjusted for inflation, fell 0.3% over the last year and 0.5% in April alone. So in addition to the fact that the bond market is insisting on higher rates because they are growing more concerned about the stability of the US economy, the Fed can't even cut rates to try and stimulate the economy because inflation has come roaring back and it's already eclipsed wage growth. The cause is not exactly a mystery though. Energy prices alone are up 17.9% year over year. Whatever could be the cause, Gasoline is up 28.4%, oil is sitting above $105 a barrel at the time of this recording. And the Strait of Hormuz, through which roughly 20% of the world's oil passes, is still not fully operational because of the war. This is like the 1979 Volcker problem all over again. That caused all kinds of economic distress. This is oil driven inflation that will permeate virtually every area of the economy. Except this time the US is sitting on top of a debt pile. That makes Volcker's response, which was to jack up rates to 20%. It's totally impossible now. There's no way you could do it given our debt. So the Fed once again is locked. They are boxed all the way in. They can't raise rates to try and kill the inflation because the interest payments on the national debt would break the treasury. And they can't cut rates to save the bond market because cutting rates with inflation re accelerating would crush the dollar and make inflation even worse. They're in a trap. That's what I've been warning about for over a year and the market is finally starting to wake up to it. Right now, Fed funds futures are pricing in a roughly 50% probability that the Fed's next move is a rate of hike, not a rate cut by December. But this is just part of the story. The inflation, the trapped Fed, the oil shock, the squeeze, paychecks, all of that should be hammering stocks. They should be coming down, but they're reacting to none of it. They are pretending it's not happening. And that brings us to the loudest alarm bell of them all. Taking a short break, but there's more Impact theory after sleep Stay tuned.
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If you work in university maintenance, Grainger considers you an MVP because your playbook ensures your arena is always ready for tip off. And Grainger is your trusted partner, offering the products you need all in one place, from H Vac and plumbing supplies to lighting and more. And all delivered with plenty of time left on the clock. So your team always gets the win. Call 1-800-GRAINGER visit grainger.com or just stop by Grainger for the ones who get it done.
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When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery so you can keep your facility stocked, safe and running smoothly. Call 1-800-GRAINGER Click grainger.com or just stop by Grainger for the ones who get it done.
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All right, thanks for sticking with us. Let's jump right back in. Welcome to Part three. The stock market has become completely irrational. While the bond market is screaming bloody murder and signaling massive distress, the stock market is at a fresh all time high. That is insane because the math behind this rally has gotten genuinely stupid. We are pricing in an ahistoric value explosion extraordinaire that would have to come so fast that it Beats the bankruptcy that is looming in the background because of the massive infrastructure build out that we are doing to get AI data centers up. And it looks less and less likely by the day that the revenue is going to hit before the bankruptcies. The Philadelphia Semiconductor Index. The SOX is currently trading 62% above its 200 day moving average. To put that in plain English, semiconductor stocks have rocketed so far above their average price over the last 10 months that the gap is now the widest it has ever been in the history of the index. Additionally, the Shiller Cape ratio just crossed 40. If you don't know this one, you're going to want to understand this. This is a blaring alarm. We have only ever crossed 40 to 1 in the CAPE index twice in the 150 year history of the market. Guess the dates. 1929. I hope that's a familiar date. And 1999. Two of the biggest crashes we have ever seen. The first one ended in an 89% drawdown and the Great Depression. The second ended in a 78% Nasdaq collapse that saw an entire lost decade for equities. There's no third example with a happy ending because there is no third example at all. Until now. What CAPE at 40 actually means in plain terms, investors are paying $40 for every $1 of average inflation adjusted earnings the S&P 500 has actually produced. These are actuals over the last decade. The long run average is around 17. Every serious study of Cape as a forward indicator says the same thing. At these levels, the implied 10 year return for the S and P is somewhere between zero and negative. You're not being compensated to own stocks. Possibly. If these numbers hold, you're likely being charged to own them. You're likely to lose money. Bank of America's chief strategist is not comparing this to the dot com bubble anymore. He's comparing it to the Mississippi bubble of 1720. This was the speculative mania that ended up wiping out the entire French economy. But wait, it gets worse. The magnificent seven tech stocks now make up roughly 30% of the entire US stock market. The entire rally is balanced on the back of seven companies. It's basically all just AI. All of the growth isn't just riding on the back of a few companies. It's riding on the back of one single technological bet. A bet that is entirely dependent on the kind of staggering infrastructure buildout that has caused massive wipeouts historically. I'm talking bankruptcies as far as the eye can see. It happened with the railroads in the UK and again with the railroads in the us it happened again with the telecoms when they built out the Internet. When you have these massive infrastructure outlays that require massive growth in revenues to follow, if the revenue doesn't follow fast enough, it doesn't mean the technology is bad. But it does mean a lot of people are going to go bankrupt and the next generation of owners are going to be the ones that, that reap the benefits. That is what we're staring at right now. If AI revenues do not start growing exponentially and fast, the whole market implodes. Smart money can see this coming. Hedge funds just dumped tech exposure at the second fastest pace in a decade. Michael Burry, the guy who called the 2008 housing crash and inspired the movie the Big Short, has loaded up on put options betting against semiconductors. And meanwhile, retail investors are pouring money into tech ETFs at a record pace. This is the exact pattern we saw in 2000. Institutions selling at the top and retail buying the dream. One side of the market is going to be wrong and be left holding the bag. And the bond market is telling us in no uncertain terms that the wrong side of this is the stock market. Rising long term yields, a collapsing safe haven premium in every major market and 50% odds of a Fed rate hike are not the signals of an economy that supports record high stock prices. They are the signals of an economy in serious trouble. When the safe 30 year treasury pays you 5% guaranteed by the US government, every investor on earth is going to be asking the same question. Why am I taking the risk of owning stocks in exchange for similar or worse returns? When that happens, capital starts to leave risky stocks and chase the guaranteed return, which pulls down the entire stock market. And on top of that, every company that has to refinance its debt, which is basically all of them, is now going to be paying dramatically more in interest. That eats directly into the profits that justify their current stock price. Rising long term yields mechanically lowers what every stock on the market is actually worth. So where does this leave us? You've got three alarm bells ringing off the hook all at once in nearly every major economy on earth. For the first time in modern financial history, the Fed has lost control of the long end of the curve. Inflation is back and accelerating and the stock market is pricing in a fantasy that the bond market has already said they don't trust. Odds are high that this ends with fireworks, one way or the other. But there are two paths before us. Path number one, yields come quickly back down the Strait of Hormuz opens back up. Everybody breathes a collective sigh of relief. People react positively just to the news. Or I suppose the Fed could cut aggressively, but if they did that, if they cut while inflation is accelerating, it's just going to crush the dollar, which will drive oil and food prices and even higher. That would make the inflation problem even worse and eventually would crush the stock market anyway. So, barring a swift turnaround with the straight of horror moves that causes a sense of euphoria that carries us so far into the future that AI can catch up, you're looking at fireworks. Path 2 bond yields stay where they are or go even higher. Capital keeps leaving stocks for the guaranteed 5% on the government bonds. Corporate refinancing costs eat into earnings. The AI infrastructure bet that's holding up 30% of the S and P starts to wobble, causing stocks to slam back down to earth in a sharp correction once again, fireworks. There's no clear third path minus the fireworks. The everything keeps going up forever outcome that the stock market apparently is currently pricing in requires the bond market to be wrong about the future and for the 41 cape ratio to suddenly be fine as well. Though it has been a nightmare when it's happened before, I'm telling you, without an AI miracle that's highly unlikely in modern financial history, the bond market is almost never the side that turns out to be wrong. This is the kind of moment that creates fortunes, there's no doubt. But you've got to be somebody who sees what's coming and understanding what this means, because for most people, this is going to create carnage. Now, while I certainly hope we get the miracle, I think everyone should have a plan for handling the scenario most in line with historical trends. Something is likely to break, so be ready, guys. Stay sober, watch the data, and do not be the last person at the party. We are getting all the alarm bells we're going to get and if you don't have the emotional sobriety and the strategy to weather the storm that is coming, you will be in trouble. All right, that's it for today's episode. If you got value out of this, it would mean the world to me. If you would go give us a five star rating. It helps more than you know. All right, thank you and until next time, my friends, be legendary. Take care. Peace Now. Audible gives you audiobooks, podcasts, Audible originals and more all in one place. Whether you want to dive into a series, listen to a popular bestseller, or check out the latest episode of a great new podcast, Audible has you covered. 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maintenance, Grainger considers you an MVP because your playbook ensures your arena is always ready for tip off. And Grainger is your trusted partner, offering the products you need all in one place, from H Vac and plumbing supplies to lighting and more. And all delivered with plenty of time left on the clock, so your team always gets the win. Call 1-800-granger. Visit grainger.com or just stop by Granger for the ones who get it done.