U.S. Treasuries: From Yang to Yin

“The world consists of Yin and Yang, and understanding this is crucial for anyone seeking to navigate life’s complexities.”

Life is complicated. It seems that just when we think we’ve figured something out, the game changes. In Marketland, this usually starts with recency bias: a form of cognitive reasoning that favors recent events over historic ones. When this bias goes on long enough without being challenged, or checked, it turns into complacency. Fortunately, I started taking martial arts classes when I was a young teenager. My training gave me a unique ability to look at things from many angles. I went on to get my black belt and to teach self defense all over the world. My last job was at Kalamazoo College, where I taught a course for credit.

Too much yang in the world has distorted the reality of markets. While smart yang types have done very well over the past fifty years or so, the game is changing, and fast! Many of these types are confident in their skills to navigate markets as they’ve been doing for the past fifty years or so, and they don’t see anything different. A laptop, a beer, and a cozy chic couch is all they need to surf the next big wave in markets. They can’t wait for a crash, so they can use their cash to buy equities again and ride another wave to paradise. I used to be yang, but over the last ten years or so, I’ve become more yin. And I think the whole world is now moving in this direction.

Last week, I wrote about enantiodromia, cycles, extremes, and what that looks like for the good old USA and Russia in the future. This week, I’m talkin about yang-yin investing, and how my yintuition, as well as my meditation and research, is guiding me about the future. On September, 1981, the US 10 Year Treasury Bond Note Yield reached an all-time high of 15.82 percent. Back then, smart investors knew it was never going to be higher and bought as many bonds as they could. Their investment grew 10x! Don’t you wish you had been more curious about treasuries in the 80s and benefited from the free ride?

No worries, you are curious now—evident by the fact that you are reading my blog—and this curiosity will give you an advantage over those who prefer to live in willful ignorance. How is yang becoming yin and how is the natural law of enantiodromia turning everything upside down? On March 9, 2020, the US 10 Year Treasury Bond Note Yield reached an all-time low of .318 percent. This marked an extreme, opposite from what happened in 1981, and logically it was a time to sell treasuries. But what happened? The government trumped natural economic law and bought them. Below is a chart of treasuries held by the Fed, starting straight up from the low.

Since the beginning of 2022, the Fed has been selling treasuries. But who is buying? According to the Congressional Research Service’s report Foreign Holdings of Federal Debt, there has been a trend reversal that picked up speed at the end of 2019. Foreign holdings as a share of total publicly held debt are shrinking, but the debt itself is growing, almost exponentially now. Still, though, the dollar has continued strong and U.S. treasuries resume their post as the safest investment in the world. What makes this recency bias, however, is that treasuries (for the first time in nearly half a century) are now more volatile than gold.

While foreign holdings of debt held by the public are trending down, and the Federal Reserve holdings are trending down, the debt has continued up, as you’ll see in the chart below. So once again, who is buying? Somebody is buying the national debt, and somebody is buying the growing deficits. They’re not concerned about the government defaulting on its $34.6T in debt, and they’re not concerned about inflation, apparently. They must not see any chance of a sovereign debt crisis or an international monetary reset, either, even though all the signs are there. Complacency?

Since 2020, the national debt has increased by $11.5 trillion, from $23.2T to $34.7T. Treasuries are backed by the full faith and credit of the United States, and they have been considered the safest investment available, but that doesn’t mean investors are immune from losses. Just last year, Fitch Downgraded the United States’ long-term ratings to AA+ from AAA. Their reasons? Erosion of governance, rising general government deficits, general government debt to rise, medium-term fiscal challenges unaddressed, and economy to slip into recession.

Last September, the Committee for a Responsible Federal Budget published, Q&A: Gross Debt Versus Debt Held by the Public. Aha! Finally, we see who is buying. It is the American people who will be holding the bag when “faith and credit” as collateral backing for treasuries is dethroned by the new world monetary system that’s emerging. If not directly, then indirectly via their pension funds and retirement accounts. It’s probably not a bad idea to trade some of your “faith and credit” in the government for gold (no counterparty risk), as the rest of the world is doing. Do as they do, not as they say.

Most of us have experience with economic yang. Yang is about doing. It’s the Industrial Revolution, defined by progress and growth. Yin is about being. It is nature, balance, and harmony. The Research Institute for Creating New Paradigms based on Eastern and Western Wisdom described yin as energy flowing inward (fulfilled, enriched, enlightened), and yang as energy flowing outward (growth, expansion)…”There is a proverb in Japanese that goes ‘In kiwamareba you ni tenji, yo kiwamareba in ni tenzu’ (After reaching the maximum state of yin the cycle reverses, and after reaching the maximum state of yang, the cycle reverses again). After something goes to one extreme, it reverses.” I believe that treasuries are reversing.

One of the most thought-provoking papers I have ever read about investing was written by Chris Cole from Artemis Capital Management, The Allegory of the Hawk and Serpent: How to grow and protect wealth for 100 years. While we’ve heard all of our lives that a balanced investment portfolio holds a 60% stake in stocks and a 40% stake in bonds, this is wrong when you’re looking at a timespan of 100 years, or long-term monetary cycles. If you want your wealth to pass through generation after generation, this is an excellent unique piece of work to add to your reading list. It parallels the idea of yin yang in the natural world. Short on time? There’s an interview…

Chris Cole said some intriguing things about real estate in this interview. First, it’s a leveraged secular growth asset. During the Great Depression, stocks dropped 86% and so did real estate. Also, as interest rates dropped, real estate performed much like the treasury bond. Decreasing rates made buying homes more affordable, and every time rates went down, the principle value went up. So effectively you can expect the same result from real estate as bonds in any market.

Ultimately, I think of that song by The Byrds: Turn! Turn! Turn! While the population is operating on recency bias, and general complacency, we are on the verge of some major changes, and these changes represent tremendous opportunity for those who are savvy. I have learned some things from Ray Dalio, who is the co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, since 1985. In his video, Economics 101: How the Economic Machine Works, he explained the difference between short-term and long-term debt cycles. Investors are still operating around the short-term, and have never seen the end of a long-term cycle, which is here.

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