22-Year High Yields. Record Diesel. McDonald's Gave Up on 2%.

The Peter Schiff Show Podcast

Peter Schiff analyzes the economic implications of surging Treasury yields and record-high diesel prices, warning of a looming debt crisis.

Key takeaways

• Diesel prices have hit record highs, reaching up to $10 per gallon in parts of California.
• The 30-year Treasury yield has reached a 22-year high, while the 10-year yield is at a 19-year high.

Main topics

• Treasury Yields and National Debt
• Inflationary Pressures

Notable quotes

Inflation is going to be with us, unfortunately, many more years at elevated levels.

Conclusion

The episode highlights systemic risks in US fiscal and monetary policy

Transcript preview

Speaker 1 (0:00) Diesel prices are at another all-time record high. They're now above six and a half dollars a gallon for diesel. And in fact, in some parts of the country, like California, they're up to 10 bucks. We got to be getting close to a point where we can't tap into the Strategic Petroleum Reserve anymore. And then prices are really going to skyrocket. When we eventually run out of oil from the Strategic Reserve, we're going to have a huge increase in the price of oil. And of course, what happens if we get a real emergency? the type of emergency that the strategic reserves were established to help us deal with, well, we don't have it, right? We've used up all of our reserve on a non-emergency. And then by the time we actually have an emergency, well, there's nothing left. Speaker 1 (0:52) Well, I just got back from my five-day trip to Panama City. We had our Shift Sovereign Plan B conference, and I'll talk a little bit more about my Panama trip and that conference later in today's podcast. But I want to get started today where I left off on the podcast I did a week ago. That was on the Wednesday just before I left. for Panama on Thursday. That was the day that the Fed raised interest rates by 25 basis points. And so I spent pretty much all of that podcast on the rate hike and on the press conference that followed. And I also mentioned a comment that Donald Trump had. But what I didn't discuss was another comment that he made later today as he was surrounded by reporters. who were pressing him to make a statement about the Fed defying him and raising interest rates. This happened probably either during the time that I was recording my podcast or after, but I found out about it the following day and obviously was too late to include it in the last podcast. So I want to start this podcast. by discussing it. 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I drink it every morning, and I think you should too. For a limited time, save 20 % on your first subscription order of AG1 NextGen or AG1 Pro at drinkag1.com slash shift. That's drinkag1.com slash shift. But I actually think... that this was the most significant admission or lie, one or the other, from that day. And what is really amazing to me is not what Trump said, but that there was very little reaction to it. The media didn't jump on it. I think it is a very significant comment because either Trump is flat out lying. And, you know, I know Trump tells a lot of lies, but this one is flagrant. if it's a lie, but if it's the truth, it's actually even worse. If Donald Trump wasn't lying, then it's an even bigger story and the media is completely missing it. So here's what happens. So Donald Trump, he's walking, I'll forget if he was at an airport or someplace and the reporters are all around him and they're like, Mr. President, what are your thoughts on this rate hike? I mean, Kevin Warsh, because after all, Trump appointed Warsh. specifically to cut rates. That's what he wanted. That's why he had to get rid of Powell, because Powell wasn't cutting rates. And he wanted to put a smarter guy who was smart enough to realize that rates should be lower. And so obviously, you know, he's going to be disappointed, but the media wants his reaction to this being stabbed in the back by his guy, right? And so his response was, Kevin's a good guy. He's a smart guy. But he has a very hostile board. He has a very political board. And so I told Kevin that he might as well vote with the board because it's not going to make a difference. He told him he might as well vote with the board. Well, if Trump actually told him that he may as well vote with the board to raise interest rates, that means that Kevin Warsh. came to the president before that decision was announced and discussed it with him, that Kevin Warsh had a meeting with Donald Trump and said, I hate to tell you this, sir, but the board wants to raise rates. I mean, I don't want to raise them. I'm with you. I want to cut rates. But everybody else on this damn board, they all want to raise rates. You know, I'm going to be outvoted. So I could vote to cut rates like we discussed and like you want me to. But the rest of the board, they're not going to go along with it. They all want to raise rates. And then Donald Trump basically gave him permission to vote with the board. Now, if this actually happened, if the chairman of the Federal Reserve ran his vote by the president first to get his permission, went to the president to let him know how everybody else was voting before he decided what to do. And then when Donald Trump said, hey, you might as well vote with the board, it's like Trump gave him a pass. Like he didn't want to defy the president. So he wanted his permission to vote with everybody else. This is what he said. I am not making this stuff up. Now, I think that he's just lying. That would be my guess. My guess would be this conversation never took place. It took place in Donald Trump's mind. The question is, is Donald Trump lying or is he really fantasizing? This fictitious conversation. Now, the only way to know, right, would be for somebody to ask Warsh. But during the press conference from last week, there were a couple of questions about the president and about, you know, what the president might have thought or what he might have said. And Warsh basically said, I'm not going to answer those questions. I'm not going to talk about the president or our conversations. Now, the president obviously. doesn't have any problem talking about his conversations that he has with Warsh. Warsh doesn't want to talk about the conversations from his perspective, but the president has no problem blabbing about what they discussed. I think that warrants a question. I think at the next press conference, somebody has to ask Kevin Warsh, President Trump claims that prior to the last decision on rates that you and he met. And that he gave you permission to vote with the board after you already told him how the board was going to vote. Is that true? Did this conversation actually take place? I think he needs to say because he needs to confirm whether the president is lying or not. But if the president is telling the truth, we also need to know that. Because if the president is telling the truth, then it is a revelation. that we have a Fed chairman who is taking his marching orders from Donald Trump, that he felt compelled to let Donald Trump know what the board's decision was before that decision was announced to the public and to get Trump's OK to vote along with everybody else. As if had Donald Trump not said that, Kevin Warsh would have been the lone dissent. Could you imagine that? You have a rate hike where all the governors vote to hike rates and the chairman votes to cut rates and everybody else mutinies the chair. And obviously that wasn't going to happen. So I don't think that this conversation took place. But if Trump claims that it happened, the media, unless they're going to say Trump is lying. And of course, I got no problem. I say he lies all the time because he does. But what about the Republicans? Are the Republicans going to call him out for this lie? Because if he's not lying and he's telling the truth, they got to call him out for that. They got to call out Warsh. I mean, this is a big news story if the president is telling the truth. It's only not a news story if he's lying. But again, that's not a good thing. I mean, I keep pointing out that the president is lying, but this is an excellent example. Of a lie that needs to be investigated. Anyway. The big news of today, though, is the continued rise in interest rates. And this is no surprise to my podcast audience. I have been talking about not only the rise in rates, but that the rise was going to continue. And it continued today. In fact, the worst part was the auction of the five-year U.S. Treasury, which went out at auction. At 5.03 percent, so above 5 percent, that is the highest yield on a five year treasury in just over 20 years. In fact, if you look at the yield curve now, all the maturities made new highs today. The 30 year bond went up to 5.41. That is a 22 year high for the 30 year. The 10-year hit a new 19-year high at 5.12. You know, one thing that's interesting is that the yield curve has flattened between the 10 and the 30. I think that's going to reverse because a couple of months ago, the spread was about 50 basis points. Now it's just under 30 basis points. I think the spread should be going the other way. I think. that yields should be even higher for a 30-year because you're taking 20 extra years of inflation risk. I would not want to loan money to the government for 30 years and just get 29 basis points more than if I can get my money back in 10 years. Because if rates really spike, the loss that you're going to have on a 30-year treasury. is going to be a lot greater than the loss that you'd suffer on a 10-year treasury because you've got to suffer those losses for 20 extra years. So the present value is going to reflect that. So I think that right now, actually, a good trade would be to short the 30-year and buy the 10-year because I think that that spread is going to widen at least back to about 50 basis points, if not 60 or 70 basis points. But anyway, the two-year treasury. is now just above 4.9, I think 4.91. So we're almost at 5 % for the two-year. Now, the three month and the six month, they're still lower. The three month is 4.12 and the six month is 4.33 and the one year is 4.43. But I think if we get a couple of more rate hikes and the markets are expecting more rate hikes, but by next year, the entire yield curve from three months out to 30 years could have a five handle or higher. In fact. By the time the one year is at 5%, the 30 year is probably going to be well north of 6%, maybe even 7%. In fact, speaking of 7%, mortgage rates are now already above 7 % and rising. But think about 5%, because 5 % is not that high of a rate. But if the U.S. government has to pay 5 % on the national debt, on the whole national debt, Because as these bonds are maturing, they need to be rolled over. If the average cost on the $40 trillion national debt is 5%, you're talking $2 trillion a year in annual interest payments. That's 35 % of current tax revenue. Now, that's also more than we pay for Social Security, by several hundred billion. So if we had to pay 5 % on a $40 trillion national debt, and of course, by sometime next year, if rates are 5%, the national debt will be $42 trillion or $43 trillion. So the number is going to be even worse. But just looking at $40 trillion, 5 % at $2 trillion, that alone makes interest on the national debt the biggest line item in the budget, more expensive than Social Security. and 35 % of tax revenue. That is a disaster waiting to happen. And the worst news is it's not going to stop there because the national debt is going to continue to compound because we're adding $3 trillion plus of debt each year. But as interest rates rise, that is going to exert a lot of downward pressure on the economy and undermine. Tax revenue, tax revenue that would otherwise be needed not only to make, you know, pay the bills, but to pay the interest on the national debt. Now, I don't know when the markets are going to wake up to the reality. I think it's still a matter of disbelief. I think stock market investors are looking at these yields and they still just assume that this has got to be near the top. I mean, we can't go much higher than this. At some point, they're going to have to capitulate not only to the fact that rates aren't going down, but that they're going to keep going up. And I keep hearing the same arguments. I've mentioned this on the podcast before, where people are dismissing the bond yields rising based on the fact that we had these high yields 19 years ago and the stock market was able to go up. You know, not really, because it crashed in 2008 in large part because yields had been rising. So it's not like, you know, everything was fine 19 years ago because it was right before the 2008 financial crisis. But they point to the fact that the economy was able to withstand these yields and the stock market. And so