Lights On in D.C., Warning Lights in Markets

By the Curmudgeon with Victor Sperandeo

U.S. Economic and Market Week in Review:

The U.S. Federal Government reopened this week following a 43-day shutdown – the longest in modern U.S. history. We will finally start to see Federal economic data come in as the agencies responsible for each report (BEA, BLS, Department of the Treasury, Census Bureau, etc.) compile and release them. Those agencies provide objective, nonpartisan data that is crucial for policymakers, businesses, and the public to understand and make decisions regarding the nation's economic health. It’s possible that some releases may be delayed or skipped all together as the agencies work to get back on schedule.

The National Federation of Independent Business (NFIB) Small Business Optimism Index ticked down from 98.8 to 98.2 as owners reported worsening earnings and pointed to signs of labor market weakness.

U.S. equity markets grew more volatile this week as selling pressure increased on AI stocks. Despite daily fluctuations, the Dow Jones Industrial Average (DJIA) and the S&P 500 finished the week ending November 14, 2025, with weekly gains, while the Nasdaq Composite ended the week with a slight loss. On Wednesday, November 12^th, the DJIA set a new all-time intra-day high of 48,431.57 and a new all-time closing high of 48,254.82. The index also closed above the 48,000 level for the first time on that day.

Turbulence and risk will likely continue to increase in the coming weeks as markets come to terms with a slew of incoming Federal data.

Margin debt jumped 5% in the latest FINRA release – lifting margin debt as a percentage of nominal GDP to a new all-time record high in October (see chart below). In addition to warning of dangerous leverage in today’s market, this tells us that investor speculation is at a historic extreme. Margin debt is known as “hot money” as the funds will head for the exit quickly at the earliest sign of trouble or when margin calls hit and leveraged positions must be sold. In a downturn they could gather speed and momentum – likely causing the downward path to accelerate.

10 Year U.S. T-Note Yield vs. Fed Funds Rate:

Conventional wisdom suggests that a fixed income investor should lengthen maturities after a Fed rate cut to lock in higher yields and benefit from potential price appreciation as rates fall further. Well, that advice hasn’t worked out too well recently.

Since Sept 18, 2024, the Fed has lowered the Fed Funds rate by 150 bps via four rate cuts, while the 10-year U.S. yield has gone from 3.642% on Sept 17, 2024 (one day prior to the first Fed rate cut) to 4.15% on November 14^th. That's an INCREASE of 0.508% or 14% in the 10-year yield vs. a DECREASE of 1.5% in short term rates!

Those who lengthened U.S. fixed income maturities on or after Sept 18th have an unrealized LOSS in their investments since then. In essence, there was no rush to extend maturities and barring a serious recession, we don’t see that changing soon.

There are three main reasons for this which we’ve noted in several previous Curmudgeon/Sperandeo blog posts:

1. Increase in term premium due to a supply/demand imbalance in new U.S. Treasury debt. Due to huge budget deficits, deficits, the Treasury must issue a high volume of new debt to finance its operations. This increased supply of Treasuries has put downward pressure on bond prices and upward pressure on yields, as higher returns are needed to attract sufficient demand from investors.

2. Inflation has remained persistently above the Fed’s 2% target, hovering around 3%. Bond investors require a higher return (yield) on long-term bonds to offset the risk of future inflation eroding the value of the fixed payments. The market perception is that the Fed might tolerate higher inflation (we think it’s abandoned its 2% target) or may not be able to cut rates as quickly as previously assumed.

3. The Economic Policy Research (CEPR) reports that foreign-official dollar reserves custodied at the Federal Reserve declined by around US$ 113 billion since the September 18, 2024, meeting of the Federal Open Market Committee. That figure covers U.S. dollar reserves custodied at the Fed, which is a related but not identical concept to purchases of U.S. Treasury bonds and notes by foreign central banks.

As of July 2025, the largest foreign central bank holdings of U.S. Treasuries are: Japan (1151.4B), UK (899.3B), China (730.7B). China, in particular, has been consistently cutting its holdings of U.S. Treasuries over recent periods.

Bond Supply to Increase Substantially in 2026:

The supply/demand imbalance will only get worse next year.

l The U.S. Treasury is expected to auction approximately $1.5 trillion in net new notes and bonds (coupon securities) in calendar year 2026. The Treasury announces specific auction amounts quarterly, with the next update expected in early February 2026. The Treasury is projected to rely heavily on increasing the issuance of short-term Treasury bills (T-bills) to meet its financing needs and manage its cash balance, rather than increasing longer-term debt sales which are seen as less cost-effective at current high rates. Net T-bill issuance is expected to increase significantly in 2026.

l J.P. Morgan credit strategists project investment-grade corporate-bond borrowing to rise to a record $1.81 trillion in 2026, topping the previous peak of $1.76 trillion in 2020, Bloomberg reported. Tech companies are seen boosting borrowings to $252 billion, 61% over what they've raised so far this year.

l The furious push by hyper-scalers to build out AI data centers will need about $1.5 trillion of investment-grade bonds over the next five years and extensive funding from every other corner of the market, according to an analysis by JP Morgan Chase. “The question is not ‘which market will finance the AI-boom? Rather, the question is how will financings be structured to access every capital market?” according to the bank strategists.

l Warning signs that investor exuberance about AI data centers may be approaching irrational levels have been flashing brighter in recent weeks. More than half of data industry executives are worried about future industry distress in a recent poll, and others on Wall Street have expressed concern about the complex private debt instruments hyper-scalers are using to keep AI funding off their balance sheets.

Moody’s 2026 Negative Credit Outlook:

The global sovereign outlook for 2026 is negative (see Exhibit 2.). While AI and reforms can lead to positive credit developments, the overall balance is weighed down by short-term policymaking, debt affordability pressures, and subdued growth coupled with high debt burdens.

The ongoing overhaul of global trade, driven in particular by changes in U.S. trade policy, has created significant uncertainty (see Exhibit 3.). The announcement of U.S. tariffs in 2025 came with frequent shifts in their levels, scope and implementation timeline. We expect economic activity in 2026 to reflect changes in trade flows and investment dynamics that are still constrained by this environment.

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Victor’s Comments:

November was a rare month as most asset classes experienced price declines. The only exceptions were a few select commodities, currencies, and the three Dow Jones averages.

· Heating Oil, and Natural Gas along with the RBOB Gasoline futures rose. The first two rose due to the cold weather, and the RBOB is based on the crack spread (the difference between the price of crude oil and the refined products made from it, like gasoline and diesel fuel). Coffee, Oats, Corn, Silver, and Gold also advanced.

· In currencies the Swiss Franc, Brazilian Real, Mexican Peso, and Euro were plus. But all these were up in a minor way. Contrast that with Bitcoin futures, which were down by -13.9% - the largest decline of any tradeable asset class this month to date.

· 3-month Treasury Bill rates saw a slight increase of 6 basis points, which is highly unusual since the Fed has been cutting- not raising rates, as noted above by the Curmudgeon.

· The previously lagging Dow Jones Transports were up (perhaps discounting the end of the federal government shutdown) as was the AMEX index. The DJIA was +1% while the Dow Jones Utilities were up a small fraction.

The upcoming departure of Atlanta Fed President Raphael Bostic, who is set to retire in February 2026, represents a significant change in the Federal Reserve's composition. Mr. Bostic has been noted for consistently aligning his votes with Chair Jerome Powell's policy stance. However, Bostic is not currently a voting member of the FOMC.

Looking ahead to post-May 2026, when Chair Powell's current term will expire, the configuration of the Federal Reserve Board of Governors may shift considerably. While Powell could conceivably remain a Fed Governor and potentially be re-nominated for the Chairmanship under specific procedural rules, that is highly unlikely.

Further complexity arises from ongoing legal challenges that may redefine the balance of power and presidential authority over independent agency appointments. Potential Supreme Court rulings in January could determine the extent of the executive branch's power to dismiss seated Fed Governors, such as Lisa Cook who President Trump wants to fire. The outcomes of these legal precedents, alongside the judicial review of certain executive actions concerning tariffs, will be closely monitored for their profound implications on the Fed's independence and overall market stability.

I predict Ms. Cook will go, but Trump is likely to lose (9-0 in the Supreme Court) on TARIFFS which he has blatantly misused. What he does is not Constitutional (the Curmudgeon agrees 100%).

Victor’s Market Outlook:

The equity markets are topping, while the debt markets seem to be poised to rally. The U.S. economy is very weak and without lower rates, the NASDAQ 100 will decline by at least 10%. I am long the 5-year T-note futures, while holding spot Gold and Silver as investments.

End Quote - A Warning from John Adams:

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.”

John Adams was an early advocate of American independence from Great Britain, a major figure in the Continental Congress (1774–77), the author of the Massachusetts constitution (1780), a signer of the Treaty of Paris (1783), the first American ambassador to the Court of St. James (1785–88), and the first vice president (1789–97) and second president (1797–1801) of the United States.

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Wishing you good health, peace of mind, success and good luck. Till next time…

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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