U.S.-Iran War Escalation, Midterm Elections, Bond-Market Wipeout and U.S. Inequality

By Victor Sperandeo with the Curmudgeon

Disclaimer: The opinions expressed herein, especially about the Fed, are solely those of Victor Sperandeo.

Iran Annihilation Threat & Impact on the U.S. Mid Term Elections:

The greatest existentialist risk to mankind is using nuclear weapons in current wars. President Donald Trump's threat to "annihilate" Iran, in a speech at the United Nations General Assembly last week, raises fears of extreme escalation of the U.S. - Iran war. This is causing the entire world to be at risk. Here's what Trump said at the U.N.:

“I have a big decision to make. Will a deal be made with Iran that lets them rebuild and create a far greater country than it ever was before, maybe one of the greatest in the Middle East or even the world? Or do I annihilate the Islamic Republic and do it quickly, never giving them a chance to kill and destroy people and countries again? Do I drive them into hell with no chance of survival and no hope of future greatness or generations?”

That statement is certainly not friendly to the GOP for the coming mid-term elections, especially with food, gas and diesel prices so high and increasing every few days!

After the November 3^r^d U.S. mid-term elections, the majority in the House and Senate will likely go to the Democratic Party (which Victor says is controlled by the Democratic Socialists of America -- DSA). Trump will still have GOP majorities in the House and Senate till January 3, 2027. After that, a Democratic Congress could constrain his agenda through legislation, oversight, appropriations, and confirmation powers, although executive authority would remain substantial, especially via Executive Orders.

àVictor opines that many GOP members of Congress will be gone by January 3, 2027. He can’t think of anything to make the GOP lose more seats than what they have already done, and what they are not doing, e.g. speaking out against the Iran war and controlling government spending.

Hyperscaler AI Build Out Borrowing Fueling Higher Long Term Interest Rates:

The Wall Street Journal [paywall] reported this week that robust U.S. economic momentum and an unprecedented wave of corporate bond issuance driven by massive artificial intelligence (AI) infrastructure buildouts are fueling the major selloff in U.S. government debt.

This relentless AI built-out led economic expansion has pushed the 10-year Treasury yield to 5.2%, reaching levels not seen in nearly 20 years (much more below) and defying recent Federal Reserve interest rate hikes which are intended to lower inflation.

Goldman Sachs forecasts that the five largest U.S. hyperscalers (Amazon, Microsoft, Google, Meta, and Oracle) are expected to borrow $250 billion in 2026. That's helping to push all long-term bond yields (government, corporate, municipal, etc.) higher.

In a September 25th blog post "The Bond Market Just Sent AI Investors a Storm Warning," Mark Malik, CIO of Siebert Financial wrote:

"Long-term rates keep climbing, and AI infrastructure projects are discovering what that means. When billions are borrowed, even small delays can become extraordinarily expensive."

"The AI infrastructure boom is colliding with a very different capital environment. Projects conceived when money was cheaper now having to survive expensive financing, power shortages, permitting problems, and construction delays simultaneously."

-->Victor believes that the full array of unwelcome news will overwhelm the AI CAPEX spending of the five largest hyperscalers and lead to an economic slowdown.

Bond Market Crash NOT Caused by Inflation:

Victor believes the FED is crushing the debt markets by their words and actions. The 2-year Treasury note front runs the Fed's threatened rate hikes. The 2-year note is at 4.87% as of Sept 25th, which implies the Fed Funds rate will rise to a range of 4.75% -5.00% by the end of 2027, as forecast by the CME Fed Watch Tool.

This debt market crash is not driven by inflation; which Victor believes is used as an excuse for the Fed to hike rates. The CPI core index is at 2.4% (the lowest in five years), and the Truflation index, which is the best in the business of inflation indexes is at 2.49%.

After Fed chairman Kevin Warsh's Sept. 16th press conference, highly respected Economist David Rosenberg wrote (emphasis added):

"Warsh’s entire justification (for hiking rates) is seemingly about second-round effects, but where is the evidence of any broadening out of inflation after six months of this U.S.-Iran conflict? Not in wages, not in inflation expectations, and not in the areas of the CPI that are estimated without the need for hedonic service-sector adjustments. So, by what mechanism does he think those effects would happen? Alas, the weak press gallery didn’t have the courage to ask the Fed Chairman that question."

The debt markets, the Curmudgeon and Victor believed Warsh would lower the Fed’s balance sheet and thereby the money supply, according to over five speeches he made. That would boost debt prices, while interest rates would decline gradually. However, that hasn't happened as the Fed’s balance sheet has increased slightly since May 22nd when Warsh took office. That’s depicted in this chart:

Source: The Federal Reserve Board.

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Conundrum: We are astonished that the White House and the Fed remain silent on the bond/note major crash/wipeout with ALL intermediate and long term (government, corporate, municipal) bond yields at multi- decade highs. For example, an auction of 7-year notes this past week had the highest yield for the tenor since April 1993. The current 10-year T-note and 30-year T-bond yields (at 5.20% to 5.23% and 5.44% to 5.49%, respectively) are the highest in over 20 years! Here are three takeaways:

àThe huge increase in rates, across the entire Treasury yield curve, will result in much higher: U.S. debt service costs, government budget deficits, and national debt (now over $40 trillion).

à That means an increased supply of U.S. Treasuries will need to be auctioned, putting further pressure on debt prices. This creates the risk of an adverse debt dynamic or debt-interest spiral/feedback loop:

àHigher yields raise U.S. federal government interest costs (which are already greater than U.S. defense spending). If budget deficits are not otherwise reduced, the Treasury Dept. must borrow more via debt auctions. Greater expected supply of Treasuries requires higher yields to clear the market and those higher yields then further increase interest costs.

Importantly, the 30-year fixed mortgage rate has surged past the 7% threshold, ranging from 7.03% to 7.49% depending on the index and lender data used. This is a huge obstacle for homebuyers who are already faced with exorbitant real estate prices. That will further depress the housing market.

Victor: Raising short term rates into an ongoing oil shortage/price spike hurts average working people the most. This is why the debt markets decline in price, and the public becomes poor, which leads to revolution in many cases.

The Reality and Cause of U.S. Inequality:

Over the past several years, U.S. corporate profits have risen sharply—disproportionately benefiting shareholders and other wealth holders—while real wage growth for many workers have lagged, eroding the purchasing power of the typical household. That’s contributed to a huge increase in inequality as shown in these two charts:

According to the Wall Street Journal [paywall], “Labor’s share of gross domestic income (conceptually similar to GDP) sank to 51%, the lowest since records began in 1947. Profits’ share climbed to 12.1%, the highest since 1950.”

While the wealth of rich investors has increased substantially, every day consumers remain in a sour mood. The final September University of Michigan Consumer Sentiment index was reported at 48.1 – the lowest level in four months and a -15% decline this year. Views of current and year-ahead expected personal finances both weakened by about 10% this month, with concerns over high prices continuing to climb as inflation expectations jumped from 4.0% to 4.6%.

What Entity is Responsible for U.S. Inequality?

Victor believes the Fed is the primary cause of wealth and income inequality in the U.S. They favor owners of stocks and sucker punch savers, i.e., debt holders. They attack people who need credit in favor of equity (the strong/rich) stockholders who do not (other than using margin to buy more equities). History offers many examples in which widening inequality and political exclusion contributed to the decline of democratic institutions. Will this be the fate of the U.S.?

Victor maintains that the Fed is affecting a great deal more than interest rates. They are enabling and changing the free political structure to a “Corporative State.”

Quotes from Three Foundational Philosophers on Inequality:

Many great philosophers have written extensively on inequality. Here are a few choice quotes from three of them:

1. While the exact phrasing "inequality was what ends republics" is a modern paraphrase, Aristotle (384 BC - 322 BC) explicitly wrote:

· "Poverty is the parent of revolution and crime."

· "Inequality is everywhere at the bottom of faction... it is the passion for equality which is the rise of faction."

· He also warned that when a society lacks a strong middle class and the gap between the rich and the poor becomes too extreme, "troubles arise, and the state soon comes to an end."

2. Aristotle’s teacher, Plato (427 BC – 347 BC), shared a similar view in his famous work "The Republic." Plato's warning in his dialogue Laws is that extreme inequality isn't just unfair but inevitably leads to civil strife which was “the greatest of all plagues." Plato witnessed the fall of Athenian democracy in the late fifth century BC.

3. A related quote on poverty from Plutarch (46 CE-120 CE):

“Poverty is never dishonorable in itself, but only when it is a mark of sloth, intemperance, extravagance, or thoughtlessness. When, on the other hand, it is the handmaid of a sober, industrious, righteous, and brave man… it is the sign of a lofty spirit that harbors no mean thoughts.”

Explanation: This complements inequality remarks by distinguishing between poverty caused by personal failings and poverty that is a result of systemic INTENDED imbalance — the latter being the more dangerous for the state. Plutarch’s insight remains relevant in debates about economic fairness, social mobility, and political trust. His warning aligns with modern research showing that large wealth gaps can erode public confidence in institutions, fuel resentment, and destabilize democracies.

Plutarch’s insight remains relevant in debates about economic fairness, social mobility, and political trust. His warning aligns with modern research showing that large wealth gaps can erode public confidence in institutions, fuel resentment, and destabilize democracies.

Victor's Conclusions:

1. The S&P 500 volume is very low [1.] which implies no sellers. Most investors believe in the strong U.S. economy resulting from the AI buildouts. They are in for a rude awakening, which will cause a recession and a P/E multiple collapse leading to a bear market in U.S. stocks.

Note 1. As of the most recent market close on September 25^th, the S&P 500 index (^GSPC) recorded a current daily volume of 4.499 billion shares, which is roughly 11% below its 52-week average daily volume of 5.048 billion shares.

2. Raising short-term rates into an oil shortage is more than an error. It is a momentous BLUNDER: A blunder is a careless, clumsy, or stupid mistake typically caused by ignorance, confusion, or a lack of attention. Raising rates WILL NOT END THE DIESEL/GASOLINE SHORTAGE!

3. The GOP will surely lose their majority in the November elections, which will significantly weaken Trump's power starting in 2027. A Democratic majority in Congress, will be reluctant to support his agenda, especially the war with Iran and his tariff/trade policies.

End Quotes from Plutarch:

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics” This quote is a timeless reminder that equality of opportunity and balance in wealth distribution are essential to the health of any political community.

“The abuse of buying and selling votes crept in and money and began to play an important part in determining elections. Later, this process of corruption spread to the law and courts. And then to the army, and finally the Republic was subjected to the rule of emperors.”

And his most famous quote:

“The mind is not a vessel to be filled, but a fire to be kindled.”

Plutarch (c. 46–120 CE) was a prominent Greek Middle Platonist philosopher, historian, biographer, and priest at the Temple of Apollo in Delphi.

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Wishing you go od health, 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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