World War III

World War III

Democrats are advancing another spending proposal to Biden’s desk. The total: $3 trillion.

We just passed a $1.9 trillion spending bill a few weeks ago.

If this passes in its current form, that would be a total of $4.9 trillion in three months.

All of World War II spending, in today’s dollars, comes out to $4 trillion.

We are going to be spending more than we did for all of World War II—where we built planes, tanks, aircraft carriers, and military bases—in the span of a few months.

Are we at war or something?

Nope, we’re just handing out checks.

I’ll restrain my cynicism for a minute. Infrastructure spending is supposed to be part of the new spending package. But we’re terrible about infrastructure in this country. The porkulus of 2009 succeeded only in paving the same roads over and over again.

Even Japan, which enjoys a debt-to-GDP ratio of about 240%, got a bunch of bridges and tunnels out of it. All this money—all of it—will go to waste.

We are here to sort out the financial implications. And they are staggering.

The Bond Market Has Indigestion

The bond market is getting a bit of indigestion. You might remember that disastrous 7-year note auction from a few weeks ago. There was a big tail, but more importantly, the bid-to-cover was alarmingly low.

This was followed up by a 20-year bond auction that went off a little better, so concerns about the government’s ability to fund itself subsided in the short term.

We are dumping massive amounts of supply on the bond market. The Fed is buying some of it, but not enough. Foreign buyers have stepped back.

Who is going to buy all these bonds?

If this passes, I expect auctions to get very ugly in the coming months. A failed auction is not out of the realm of possibility.

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To be perfectly transparent, I cried wolf about bond auctions back in 2009‒2010. We were running deficits close to $2 trillion, and I wondered aloud how all the supply was going to be absorbed. But it was. We were in an almost-depression, and the stock market was such a mess that demand for Treasuries went through the roof.

This time is different… for a lot of reasons. Throw in the face that, unlike last time, real yields are negative, inflation is bubbling higher, and the least-attractive asset on the board is a US Treasury note.

Having said that, when yields get high enough, the attractiveness of bonds will increase, and there will be buyers at a price. Where that is, we don’t know. Rates might have to go much higher for that to happen.

And that’s why we have to talk about yield curve control now.


I really don’t want to talk about this. It is just disgusting.

The history of this is that the Fed did yield curve control for a long period of time in the ‘30s and ‘40s. That was not an especially happy period in history. So there is precedent for it.

In case you’re not up on this, YCC is when the Fed stands ready to buy an unlimited amount of bonds (with printed money) at a certain level of interest rates.

You can see where this is going. If the Fed is the marginal buyer of bonds, and it's willing to buy unlimited quantities, then the government can spend an unlimited amount of money.

This is in our future.

I’m comfortable saying that the 40-year period of disinflation and lower yields is over. We are now headed the other direction.

Those who feared a deflationary black hole like what happened in Japan in the 1990s will have to contend with the opposite problem—inflation spiraling higher. The supercycle is over, and a new supercycle has begun.

What To Do

There are a few specific things you can do to benefit from higher inflation:

  1. Bet on higher rates, either directly or indirectly. Sophisticated investors can play in bond futures and options, less sophisticated players can mess around with TLT, and even less sophisticated players can invest in companies geared to higher rates, like insurance companies.
  1. Own hard assets. I fear that I don’t own enough. Metals, materials, energy, agriculture, it doesn’t matter. We’ve had a pretty big move already in commodities, but this is only the beginning. We have had an immediate and profound shift in inflationary psychology, and financial assets will underperform hard assets going forward.
  1. Look for value to work. One interesting thing about the stock market these days is that the broad indices are pretty quiet, but there is a lot of volatility underneath the surface, as the growth/value factors churn on a daily basis. This is reminiscent of what was happening at the top of the dot-com bubble in 2000—you had the “old economy” stocks and the “new economy” stocks. Last time we had this kind of factor dispersion, things didn’t work out so well.
  1. Wait for gold to work. It will, eventually.

The days when we were worried about the deficit were among the best days in our history. I have nostalgia for them.

We’ve gotten dumber over the years, which should be obvious. And with ridiculous—and potentially unlimited deficit spending—and YCC, there will be no turning back.

Jared Dillian


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