Calm Before The Storm?

The Credit Strategist - July 2025

The United States is going to experience $2+ trillion annual budget deficits as far as the eye can see. The Trump Administration is pursuing a high octane agenda to grow America out of the deficit in contrast to the Biden Administration that pursued an anti-growth agenda based on redistributing income and suffocating growth under burdensome regulations and other restrictions. Both agendas were forced to pay for their agendas with debt because the government suffers from a severe revenue shortfall, leaving President Trump’s much more promising approach at risk (while President Biden’s never had a chance of succeeding). If significantly higher economic growth doesn’t materialize quickly, however, the bond market could revolt and demand significantly higher yields to finance the U.S. government. In a recent interview, leading bond investor Jeff Gundlach suggested that a rate of about 6% on 10-year Treasuries as a tipping point (at the time the 10-year yield was around 4.5%). As long as government keeps pumping out money to support the economy, however, markets may be able to handle even higher rates but we’ll have to wait and see.[1] For the moment, however, markets are sanguine as yields trend downward and the Fed prepared to lower rates later this year.

Equity investors exhibit zero concern about debt and deficits while Wall Street works overtime to stuff the economy with every conceivable form of debt even as increasing volumes of that debt fall delinquent or default. The S&P 500 trades at a P/E multiple of almost 30x while the Nasdaq trades at an even higher multiple of 40x, levels only reached before periods of sharp and painful declines.[2] American companies are buying back their own stock at a near-record $4 billion a day – once again demonstrating their proclivity to buy high despite claims of disciplined capital management. The U.S. dollar traded down about 10% year-to-date as the least-dirty-shirt in the fiat currency club without causing any concern among investors at home or abroad, something on which to keep an eye (along with the price of gold which should be bought). While I am usually the first to warn about overextended markets, I don’t see anything in the immediate future (three months) likely to stop this train. But while all is calm for the moment, we should that Hyman Minsky taught us that stability breeds instability. Signs of market speculation are everywhere in the loosest regulatory environment in memory. The longer things remain quiet, the more we will see risk rise in ways that will eventually turn out badly.

In many respects, the markets are driven higher by fears that didn’t materialize – at least not yet. Tariffs haven’t derailed corporate profits or increased inflation or economic growth - yet. Most forecasters are still calling for earnings to slow (to under 8%), inflation to rise (to 3% or so), and GDP growth to fall (to 1.5%) in the second half of the year. Markets seem unpersuaded by those forecasts. War between Israel and Iran didn’t spread into a regional conflagration that spiked oil prices. War in Ukraine hasn’t spread into Europe – and markets don’t expect it to after the exhibition of American military power in Iran. The American empire hasn’t fallen under President Trump – in fact, in many ways America’s international standing has risen significantly with a successful attack on Iran’s nuclear facilities and a productive NATO summit where the president reaffirmed support for the alliance. Markets welcome these developments which enhance geopolitical and global financial stability (hence lower oil prices and interest rates). And to repeat what was said above, nobody seems much bothered about debt and deficits in the short run as the Big Beautiful Bill moves toward passage (despite the possibility it may prove a political Trojan horse for Republicans).