Our True Enemy Has Yet to Reveal Himself
May 5, 2025·63 comments
In 2008, Wall Street watched recession signals while hidden systemic risk gathered beneath the surface. Today the pattern repeats: recessions, jobs, tariffs dominate the conversation while the real threat sits in plain sight unseen. The full faith and credit of the United States has become negotiable. When a president treats national debt as leverage rather than obligation, markets will eventually stop believing it's risk-free. The question is what happens when they do.
- The Treasury market briefly broke in April. A one-week spike pushed 30-year rates to nearly 5 percent, something that shouldn't happen when global growth is slowing if investors still trust American debt. The administration's immediate tariff retreat showed how fragile the moment was.
- The same thing happened in 2008 with mortgages. Everyone talked about subprime being contained while delinquencies were already spreading through prime loans and every geography like a virus. The "crisis narrative" and the "actual crisis" were describing different problems.
- The UK's Liz Truss tried an unfunded tax cut in 2022 and gilt rates spiked 100 basis points in three days. The Bank of England had to bail out pension funds. But rates didn't normalize until the policy was abandoned and she resigned.
- The people who see this most clearly work inside institutions that would be destroyed by it. Acting on that knowledge is career suicide. So the system is structurally prevented from protecting itself.
- Trump is unlikely to back down like Truss did. Another market break could force the Fed into yield curve control, buying Treasuries to prop them up. That's the Weimar playbook with no clear ending.
Subscribe Today to Read More
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Comments
Thanks for writing from the voice of experience. It is hard to put the pieces together without the clarity outlined in this note.
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
J. Paul Getty
.
One of the messengers is considered by the markets to be the “adult in the room”, “voice of reason”, or pick your metaphor. Scott Bessent has plenty of bona fides as a markets guy. The issue is that when he speaks now he is carrying the water of a political message, and counting on the credibility earned over the career that predated his public service in the Trump administration. So far, the reception in financial market circles is unblemished. But, I find there is a glib element to his confidence that I cannot shake. It rhymes with Bernanke’s misguided assurance that US housing prices could not fall and that subprime was contained. What else can these operatives say but the script they are given?
Another terrific article. I did not think I could be more bearish long duration UST but this piece did it, Ben! Fun story, in the spring 2007 I was at a Citi MD’s conference in an Orlando resort hotel. The keynote speaker for night 1’s ‘gala dinner’, Tom Maheras, was moved to night 2. As he grabbed the microphone to address the crowd, he apologized for being a day late but assured us that it was in our best interest as “I was busy buying a new mortgage originator - let me rephrase - I was STEALING it!”. A shiver descended my spine. I resigned from Citi 2 months later to join another firm.
One point to add to this gem of a note. During the week of April 7th -11th, at the height of the volatility in the U.S. treasury market, commentary was focused on the possible unwind of the treasury basis trade. That is, the levered trade in which hedge funds attempt to capture the small differences in price between treasury futures and the cheapest-to-deliver treasury bonds underlying those futures contracts. Speculation surrounding the treasury basis trade being the source of bond market volatility was likely based on the Covid experience, when, at the height of that crisis, an unwinding of the basis trade did appear to contribute to treasury market chaos.
But here’s the thing, the data don’t seem to support the thesis that an unwind of the basis trade was a meaningful source of volatility and selling pressure in the treasury market during early April. Might it be a contributor? Certainly. But here’s what I find telling: Wall St. and the White House NEEDED the narrative surrounding the bond market puke to focus on the basis trade. If the source of the selling in U.S. treasuries could be explained by some over-levered clowns, then the problem is contained. Sound familiar? Unwind the basis trades and we all move on. Even more importantly, if the source of the volatility was the basis trade, the Fed has the tools to address the problem relatively easily. Specifically, provide some liquidity and maybe a little coercion to help the market clear. Again, we all move on. BUT, what if the source of the selling and volatility in the U.S. treasury market isn’t offsides positioning among a few levered funds attempting to pick up nickels in front of the steamroller, but structural positioning—amassed over the better part of two decades as foreign buyers accumulated treasury bonds—that needs unwound? Well then, as argued in Ben’s note, the Fed’s gonna need a bigger boat, or bazooka, and it’s called YCC and the implications are nauseating.
Been thinking about Bessent’s Milken Institution speech all day. I have to believe, that nothing gets put in a Treasury Secretary speech accidentally, So when I heard him say “US markets are anti-fragile”, thought that’s an interesting choice of words. Here’s a screenshot of the last paragraph of the speech and link to the full note from this morning:
https://content.govdelivery.com/accounts/USTREAS/bulletins/3defd81
And a screenshot from the description of Nassim Taleb’s book Antifragile. It’s all just very weird, maybe I’m overthinking here…
I do not think you are overthinking this! The Antifragile description also struck me as I listened to the speech and I meant to rewind it to let all of the words used sink in. I also thought it was eerie to quote Buffett about never betting against America the morning after Buffett hung up his cleats and said I’m done! Each of these individually maybe doesn’t move the needle for me, but all of 'em mashed up with unstoppable made the whole thing feel GLIB.
P.S, We should all be tracking Taleb’s Twitter/X account. He is infamous for dressing down those who use his ideas/theories if they contradict his opinion by an inch. So, I did a quick search and…
Ha, that’s pretty funny to see Taleb was on it from right after the speech.
I still wonder if Bessent really believes in tariffs? I believe Trump believes he will win the game of chicken, still not convinced that Bessent does which is the reason he keeps mentioning offramps. He clearly knows markets need to hear that, maybe anti-fragile is rationalizing our tweeter-in-chiefs emotional swings.
Powell has his hands tied, Trump will surely roast him Wednesday afternoon… What does the 10yr do after Powell’s announcement? I don’t know, still feels early to me and that’s always my biggest mistake, putting on the trade way too early.
Excellent article, and some very eerie paralells. Here in Scotland I had just emerged from sitting exams that would allow me to invest for UK clients in early 2008 - baptism by fire.
The article
The article does leave me with some questions. Not criticisms, I’m too confused by everything going on at the moment to provide anything as sophisticated as a criticism… but what is stopping you from seeing what is happening from “simply” being the next phase of “fiscal dominance” ? Trump, volatile as he is, did not singlehandedly create the exploding deficit with its associated record high debt service costs, and demand for USTs/USD has reflected the paradox of fiscal dominance for a while now.
Under fiscal dominance, the easy-peasy solution of higher interest rates to signal credit worthiness is off the table, as is QT. That’s the whole point, under fiscal dominance - monetary policies are subordinate. Which I agree is not good…not good at all, but the US is not the only nation in this pickle.
If Trump manage to kick-start the process of highly-indebted nations’ needing to deal with situation of fiscal dominance in a debt-based monetary system (any number of mental imagery comes to mind, chickens coming home to roost, having to lie in the beds we made etc. etc.) would that not be simple the starting signal for a major global treasury market row of dominos?
Because as Johnson so requently opines, every other nation engaged in debt based monetary systems are currently running not one by two “carry trades” one in their own currency and one in USD. Should the USD weaken, because FX is a zero sum game, each of these other nations will experience their local “carry trade” going against them.
Is this perhaps what Bessent meant by the US being antifragile? Not anti-fragile in the sense that it can avoid the chaos, but in the sense that once the inevitable chaos settles - the US will emerge stronger on a relative basis?
In March 2024, I wrote the following on a different post:
Whether intentional or not, Trump is currently managing to take some attention away from the underlying problem. He might personally believe that he can “fix” everything with his usual playbook of negotiation games, but does any of this really matter? If the destination has been set and all we are doing is arguing about how fast or slow we will get there then it seems time is peerhaps better spent talking about how to protect ourselves from currency debasement?
That is personally my main concern. And I think that the weirdly optimistic equity markets are signalling similar concerns. Why “de-risk” (in a traditional sense), if the solution is just ever more liquidity? In a world where gold and equities are moving upwards in tandem it is the only thing that makes sense to me.
And if this is in fact what will happen then scarcity might again start to mean something.
Em
Continue the discussion at the Epsilon Theory Forum...