The Bond Market Is Flashing Red

Mr. Market's TACO craving... Time is running out on the tariff 'pause'... The 'good' news about inflation... The bond market is flashing red... Porter Stansberry: This is not the time to get complacent...

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The 'TACO' trade is alive and well...

The U.S. stock indexes were up again today... giving us more proof that investors are no longer worried about tariffs – at least not since President Donald Trump's post-Liberation Day "pause" on "reciprocal" tariffs on April 9, when the U.S. benchmark S&P 500 Index was flirting with "official" bear market territory (down 20% from a previous high).

As my (Corey McLaughlin) colleague Dan Ferris wrote on Friday...

Folks have bought the dip with both hands, pushing the S&P 500 to within just 4% of a new all-time high.

Markets are propelled in part by a new acronym: TACO, which stands for "Trump Always Chickens Out." It refers to the way Trump backed off on tariffs when he saw the bond market reacting to his policies on April 8. Most recently, Trump put a new 50% tariff on the European Union, then delayed it two days later.

The implication is that Trump won't really punish markets with tariffs... The idea is that he'll talk big but won't follow through, so every tariff-related decline is just another buyable dip.

Dan likens TACO to TINA, or "There Is No Alternative" to U.S. stocks. That line of thinking has distorted markets – with folks mindlessly buying stocks with no regard for valuation or fundamentals.

But as we'll explain today, there are several reasons why TACO traders may soon be disappointed. Starting with...

The tariff clock is ticking...

The market might be convinced that the "worst" is over, but so far there has only been one trade deal with the U.K. and another separate "pause" and framework agreement with China, which is on faulty ground.

Trump's broad "90-day pause" is set to expire on July 8. The window for trade negotiations with China to avoid exceedingly high tariff rates is a bit longer – 90 days from May 14 – but talks between the U.S. and China have reportedly stalled since representatives from both sides met in Switzerland last month.

Trump is reportedly going to talk on the phone with Chinese President Xi Jinping "very soon" to try to unlock something between the two largest economies in the world. As for what that might be, we go back to what we wrote on May 12, immediately after the framework deal was made...

At a press conference this morning, before heading to the Middle East on Air Force One, Trump talked up China "opening up" trade to the U.S. He said that both sides can be winners, while lamenting that neither of the trade deals he negotiated with China during his first term have fulfilled what he imagined.

The devil is in the details, of course. Certain AI-chip trade restrictions and potential rare earth-minerals deals are part of those details.

In the meantime, shipping traffic into U.S. ports on the West Coast continues to be distorted, with business owners fearing everything from shortages to surpluses (on further deal details), and congestion could raise shipping rates... and lead to inflation, even if high tariffs don't.

We don't have a crystal ball, but the more days that go by without Mr. Market's TACO craving being satisfied, the more the market environment will ripen for volatility in the weeks ahead.

Here's the 'good' news...

The "official" pace of inflation is the closest it has been to the Federal Reserve's 2% goal in four years.

On Friday, the latest personal consumption expenditures ("PCE") index measured 2.1% year-over-year growth and 0.1% in April.

"Core" PCE – which excludes food and energy prices because the Fed prefers to use to strip out "volatility" – was higher at 2.5%, but that's also the lowest it has been since March 2021. Core PCE also showed month-over-month growth of only 0.1%.

Lately, the Fed has been waiting at least three months to see a "trend" before making a policy decision. So if we see a few more months of this, the central bank might lower interest rates again.

On Thursday, Trump met with Fed Chair Jerome Powell at the White House, where Trump told Powell he was "making a mistake" for not lowering interest rates already. Powell said that Fed policy would depend "entirely on economic data."

Federal-funds futures traders are betting that the earliest we could see a rate cut is at the Fed's September meeting. But they're not convinced, putting a 55% likelihood on it, according to the CME Group's FedWatch Tool.

The last time the Fed began a brief rate-cutting cycle was in September 2024, when the PCE Index was at 2.1%. Jobs data was showing weakness, with unemployment rising at a pace consistent with prior recessions.

But back then, the Fed started with a 50-basis-point rate cut, which shot up longer-term bond yields as inflation concerns emerged.

The central bank has been gun-shy about lowering rates ever since. And lately, bond yields (and inflation expectations) have been rising again – for another reason we've been writing about lately...

The new spending plan in Washington...

I won't rehash all the details of what we've already written, but the "big, beautiful" tax and spending bill sitting in Congress right now is projected to add $3.8 trillion to the federal deficit over the next decade, according to the Congressional Budget Office.

It's so "big" that even Elon Musk criticized it last week on his way out of heading up the Department of Government Efficiency ("DOGE"), which has come up short of its goal to cut spending by $1 trillion (downgraded from $2 trillion).

The only way the new tax and spending bill, as currently written, will pass the Senate is if Congress also agrees to raise the debt ceiling by about $4 trillion.

It's the same old story, even with tariffs and the pace of inflation coming down (for now). The U.S. debt increased by about $4.5 billion today. This is how much the U.S. added to its federal debt, on average, every day over the past year. Meanwhile, the U.S. budget deficit for the last fiscal year was $1.8 trillion. Uncle Sam is drowning in liabilities.

Putting it all together...

In some ways, it might be reassuring that the more things change, the more they stay the same. After all, stocks are back near all-time highs after the April panic. But don't be lulled into complacency...

Debt is piling up... There are still very real worries about high(er) inflation... We're seeing major unresolved geopolitical risks... And now we're hearing about volatility related to the U.S. Treasury market, the foundation of the global financial system, with increasing frequency. As I wrote in our May 19 edition...

The dollar's dwindling value (going on decades since the currency went off the gold standard) is coming more to the forefront of the economic market discussion today. It feels almost like it's becoming more routine, which is concerning and doesn't scream economic "stability."

The level of debt owed by the U.S. government is so large it's mind-numbing to most people. And it can be dangerous for your portfolio if you're not prepared for what could come next.

Supposedly "risk free" Treasury bonds – the bedrock of most retirement funds and portfolios – fell nearly 20% in value since September alone. In short, the bond market is flashing red. As we wrote last week, this is one of the reasons why we advocate for alternatives to Treasury bonds...

The more debt Uncle Sam racks up, the more Treasurys the government needs to issue, and the less valuable they become.

It's why we... question the effectiveness of the conventional "60/40" stock-bond portfolio... encourage folks to own "hard assets" like gold to safeguard wealth in the long run... and recommend shares of high-quality businesses that will make the most of their cash flows.

This isn't like the low or near-zero-interest-rate world we saw in the decade or so between the great financial crisis and the pandemic, when inflation was not top of mind and adding to the national debt wasn't as costly as it is now.

The 10-year Treasury yield is near 4.5% today. And every time interest rates rise (and bond prices fall) these days, a twinge of panic enters the market. Last year, it happened with the yen "carry trade." In April, it was chalked up to growth concerns, tariffs, and hedge funds unwinding leveraged trades.

The signal is unmistakable...

Bonds tumbling in value... Gold soaring by more than 60% since the start of 2024... DOGE doing relatively little to cut government spending... Moody's becoming the third major ratings agency to downgrade U.S. credit...

The combination of these things has one of the brightest investing minds we know – our company's founder, Porter Stansberry – warning that we're NOT in a normal economic situation... and today's financial system is reaching its breaking point, with the bond market flashing red.

If you've followed Porter's work over the years, you know it pays to listen.

Porter called the bottom, nearly to the day, of the COVID-19 market panic in March 2020, and said the major U.S. stock indexes would hit new all-time highs again by the end of the year – which they did.

But he may be most famous for predicting that the world's largest mortgage brokers, government-backed Fannie Mae and Freddie Mac, were going to zero in May 2008. He also predicted General Motors' bankruptcy in January 2007.

He says this prediction is bigger than both of those. In short, one of America's biggest institutions is about to go broke, and millions of Americans are unprepared for what happens next.

On June 5, Porter is sharing the details about this warning. He'll explain why, even though stocks have rallied since Trump's tariff pause, this isn't the time to get complacent about your investments.

Porter says "buy and hold" won't save your portfolio this time around. But there's a simple step you can take to prepare right now – and it doesn't involve gold, cryptocurrencies, or options.

Porter will explain more in his free special update this Thursday. He just asks that you register in advance for it here.

New 52-week highs (as of 5/30/25): Alpha Architect 1-3 Month Box Fund (BOXX), CME Group (CME), Cintas (CTAS), Enel (ENLAY), VanEck Junior Gold Miners Fund (GDXJ), Intercontinental Exchange (ICE), iShares U.S. Aerospace & Defense Fund (ITA), New Gold (NGD), Republic Services (RSG), Spotify Technology (SPOT), Veeva Systems (VEEV), Wheaton Precious Metals (WPM), and W.R. Berkley (WRB).

In today's mailbag, feedback on Dan Ferris' latest Friday essay and his take on the market's reaction to Trump policy... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"In regard to Andy Kessler's views on 'real legislation instead of executive orders', as related by Dan, it appears that his use of executive orders instead of legislation exposes Trump's LACK of power to get his program passed by Congress. Just my 2 cents' worth." – Subscriber Steve C.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
June 2, 2025