There is a species of error which is not exactly a lie, and not exactly a mistake, but something else: it is a true statement placed in the wrong story. A man may tell you, quite correctly, that the water in the kettle is boiling, and yet lead you badly astray if he wants you to conclude from this that the house is on fire. The fact is sound, but the inference is nonsense. And I believe most of what passes for financial analysis is exactly this kind of error – a handful of mostly true numbers, arranged to tell a story that does not, on closer inspection, hold water at all.
Since last October, Treasury yields have risen markedly across the board, causing lending rates across the economy to rise as well. The two-year note is up some eighty-three basis points. The five-year, eighty. The ten-year, sixty-nine. The thirty-year, sixty-three. Now, if you know nothing else about bonds, you will still sense that something is being told to you here, and the popular telling goes roughly as follows: rates are rising because inflation is coming back, the printing presses have done their damage at last, and the bill has arrived. It is a familiar story, which means it has the added virtue of being the story everyone already expected to hear. This is usually a sign that it deserves a second look rather than a first nod.
Here is where I want to play the part of the tiresome friend who insists on checking the receipts. Look closely at which yields have risen the most. It is the short end – the two-year – that has moved fastest, faster than the thirty-year. This means the yield curve, far from steepening in the manner you would expect if the market were bracing for a long inflationary storm, is actually flattening. Short-term rates are catching up to long-term ones. Now I ask you: if the country genuinely feared a runaway rise in prices for years to come, would not the long bonds – the ones that must sit and suffer through decades of that inflation – be punished worst of all? They are not. It is the near end of the curve doing the running, which is a rather different animal, and belongs to a rather different story. A story much more about Federal Reserve policy interference, near-term oil, and their impact on near-term prices.
And if that were not enough to give us pause, consider the market's own instrument for measuring inflation fear directly – the Treasury breakeven rate, which strips out the guesswork and simply asks what investors are willing to pay for inflation protection. That figure sits at about two percent, in roughly the same range it has for the last twenty years. Amidst the media storm over rising oil and higher inflation, this market-based measure of inflation expectations is as calm as a garden pond on a windless evening. Meanwhile gold is down sixteen percent and silver down thirty-eight percent since the onset of the war in February, precisely when inflation was supposed to be picking up. These are not the metals you would expect to be sliding if the whole world had suddenly decided that paper money was about to become worthless.
So, we are left with a puzzle that would pique the interest of a good detective: yields are rising, but not for the reason everyone assumes, and the usual witnesses – break-evens, gold, silver – all refuse to confirm the popular account. What, then, is actually going on?
I think the honest answer is more boring than the popular one, though duller stories are so often truer. Three things, taken together, explain a great deal. First, last Fall the Federal Reserve delivered some seventy-five basis points of rate cuts, ended its program of balance-sheet shrinkage, and by the autumn of 2025 had begun outright expansion again – a set of policy moves that naturally push short-term rates down and provide room for financial market participants to push long-term rates higher, quite apart from anything happening to the price of bread or petrol. Second, an onset of the “war-ish” conflict with Iran in March sent oil prices doubling, and this – understandably, if a little lazily – gave the inflation narrative a fresh coat of paint and a seat at the dinner table, even though a war-driven oil spike is a different creature from a genuine, broad-based inflation of the sort that erodes a currency's worth over years. And third – this is the one I find most telling – a strengthening dollar has been quietly forcing foreign governments to sell their holdings of U.S. Treasuries in order to defend their own currencies. Just recently, Japan and Korea did precisely this. A government selling bonds to prop up its currency is not making a prophecy about American inflation; it is bailing water out of its own boat. If anything, it proves the importance of the dollar and its continuing centrality for global finance. But the effect on the Treasury market looks, from a distance, exactly like the “dollar is doomed” narrative we’ve grown accustomed to. And unfortunately, distance is where most commentary is written from.
Here I want to pause and say something that may sound strange coming from a man discussing bond yields, but which I believe with some conviction: the story a fact seems to be telling and the story it is actually telling are often not the same story, and the whole art of understanding anything – a poem, a person, a market – lies in resisting the first, easier reading long enough to arrive at the second, truer one.
Now, what of the road ahead? Here the case for the boring story becomes, I think, rather compelling. The oil market has moved into severe backwardation – a technical phrase for a very ordinary and human thing, namely that people are not so eager to buy oil for delivery next year as they are for delivery today. That is not the behavior of a market bracing for scarcity; it is the behavior of a market that expects prices to be lower, not higher, twelve months hence. If oil does ease, it will feed directly back into the inflation figures that so alarmed everyone in the first place and open the door for interest rates to come down rather much faster than they were before this conflict began.
There is a further piece of the puzzle in the newest Fed Chair, Kevin Warsh, who has signaled his intention to let volatility return to short-term interest rates outside of a genuine financial crisis — to stop, in other words, steering the small boat quite so tightly by hand. Imagine a kayak on a river. For decades, the Fed has sat on one end of the kayak, holding its paddle below the surface of the water, dragging the back end down and lifting the front off the surface. This has had the effect of correcting every little wobble through forward guidance and constant intervention, so that the boat glides along with an almost unnatural smoothness at the back of the kayak as the front bobs above the ripples of the river. What the new Chair proposes is to lift the paddle out of the water. Buoyancy will naturally lift the back of the boat as the front falls back towards the water. The boat will rock more on the surface, temporarily rising above the water on the back and perhaps dipping below the surface on the front. But a curious thing happens to a kayak when the paddler stops fighting every ripple: the whole boat, deep down, settles more naturally into the current. The long-term rates, freed from the tension of constant short-term correction, can relax downward. More surface noise, less underlying strain. It is not chaos being invited in; it is simply the river being allowed to be a river again. It is allowing the price of money – interest rates – to actually reflect market dynamics and not Federal Reserve jawboning or policy. This will, undoubtedly, result in higher volatility in short-term interest rates, and much lower volatility in long-term interest rates. Lower volatility in long-term interest rates will lead to more buying, and thus lower long-term rates.
Turn now to Bitcoin, gold, and silver together, and a common thread appears. Both their prices and their volatilities – which is to say, the potential energy, the coiled liquidity, sitting latent in each of these markets – are falling in tandem. That is worth sitting with. When people fear inflation, they do not usually flee to an asset and simultaneously drain the tension out of it; fear and stillness do not typically travel together. What we are watching, I suspect, is not a market bracing for the debasement of money or sustainably higher prices, but one in which the true threat lies in the opposite direction entirely – not inflation, but disinflation, or even outright deflation. That is a fear which behaves very differently, and asks very different things of us, than the fear everyone has been busy preparing for.
If that is right, and I am very confident that it is, then here is where the story becomes, I think, genuinely important for how one lives rather than merely how one invests. As the extraordinary interventions of the last several years finally exhaust themselves, money does what water always does when the dam is opened it seeks its own level. It will flow toward safety. And this, paradoxically, means a stronger dollar even as rates ease, because the world's capital is drawn back toward the currency and the country it has always, in the end, trusted most. A stronger dollar and easing rates together do something specific: they begin to move economic growth away from the abstractions of high finance and back toward what I can only call Main Street – the housing market, the small business, the local trade, the ordinary transactions of ordinary people trying to build something with their hands and their savings.
And this brings us to the technology giants, who have grown fat and tall on the cheapest money the world has ever known. The Federal Reserve, under Jerome Powell, kept the Fed Funds rate well below the actual inflation rate in 2021-2022, allowing for “real rates” to remain negative. This allowed those tech giants to feed at the trough of free money for far too long. Moving forward, however, the trajectory appears to be in the opposite direction: Warsh, accordingly, may keep the Fed Funds rate above the real inflation rate for longer, meaning “real rates” are rising and may continue to for quite some time. This is not what mega-cap tech stocks need or want. It’s much more difficult to sell the idea of building massive data centers that are unprofitable, when investors demand a real return on their loans.
A stronger dollar, and a world in which capital no longer needs to hide in speculative growth stories because real, tangible growth is available again in housing and small enterprise – this is a hard season for companies whose entire architecture assumes that money will always be nearly free. As liquidity tightens around them even while the real economy warms up, we should expect capital to migrate out of the towering, abstract valuations of technology, and into the more modest, more rooted businesses of the actual, physical world – defensives, real estate, the unglamorous firms that make and mend and sell.
The scale of what might unwind here is almost certain, but might seem to some to be unfathomable. The Nasdaq presently sits near forty-two trillion dollars, propped upon an economy — the American GDP — of roughly thirty-two trillion. At the very peak of the dot-com bubble, by contrast, the Nasdaq stood at some six or seven trillion dollars against a GDP of about ten trillion, right before it fell 83%. The S&P 500, being a mix of all sectors (including defensives), did better: only falling about 45%. In 2000, the Nasdaq was around 60% the size of the economy; today, it is 150%. However you wish to arrange those ratios, the comparison is not a comfortable one, and I do not think it wise to look away from it merely because it is unwelcome.
I began by warning against true facts wearing the wrong story like a borrowed coat. Let me end by suggesting what I take the right story to be, so far as I can tell it. It is not a story of runaway inflation, of a currency in flight, of a nation's finances coming apart at the seams – however much that story clatters about in the newspapers and the popular imagination. It is a quieter and, I think, a more hopeful tale: of a central bank slowly lifting its paddle out of the water; of a currency strengthening even as rates ease; of capital drifting, as capital always eventually does, away from the tallest towers and back down toward the ground floor – toward houses, toward small trades, toward the real and tangible business of ordinary life. Whether that drift proves gentle or sharp (I believe the former leads to the latter), I cannot say, and I would distrust anyone who claimed to know for certain. But I am fairly convinced of the direction, and directions, in my experience, matter rather more than we are usually inclined to think.