Analysts at trading and financial services firm Presto said the U.S. elections could trigger a “Minsky moment” bond market crash, with implications for other assets like bitcoin.
Presto analysts Peter Chung and Min Jung made the warning following Paul Tudor Jones’ interview with CNBC on Tuesday, in which the renowned investor said he was bullish on bitcoin, gold, commodities and Nasdaq stocks amid the risk.
“With the US debt-to-GDP ratio rising from 40% to 100% in the last 25 years and likely to reach 124% to 200% in the next 10 to 30 years, the U.S. election could trigger ‘a Minsky moment’ where bond market wakes up to the problem and demands much higher compensation for funding the deficit (i.e. a bond market crash),” the analysts wrote in a report.
The risk of a bond market crash is heightened by both Republican candidate Donald Trump and Democrat Kamala Harris’ promises of “fiscal extravagance” and rising government debt levels, Chung and Jung argued. Inflating their way out of the problem is the only solution, they said, echoing Jones’ view that “all roads lead to inflation.”
During the CNBC interview, Jones, an American billionaire hedge fund manager and philanthropist known for his successful prediction of the 1987 stock market crash, also said he would own “zero fixed-income,” meaning no allocation to fixed-income securities, such as bonds, in an investment portfolio.
“The playbook to get out of this is that you inflate your way out … you run interest rates below inflation and nominal growth rates above inflation, and that’s how you reduce your debt to GDP,” Jones said, adding that the Federal Reserve should continue to cut interest rates. “Historically, the way every civilization has gotten out is they’ve inflated away their debts.”
Jones’ view is noteworthy as it may be behind the recent rise in Treasury yields (indicating that investors are demanding higher returns to hold U.S. government debt) and the credit default swap rate on sovereign risk (the cost of insuring against a potential default), the Presto analysts said.
Chung and Jung argued that the BITCOIN Act of 2024, currently awaiting Congressional approval, could help stabilize the U.S. debt and potentially the global financial system. The lack of focus on the debt issue from either presidential candidate, however, suggests it's not a top priority for most voters, they added.
Bitcoin is trading for $66,368 at publication time, according to The Block's Bitcoin Price Page, down around 10% from an all-time high of nearly $74,000 set in March but still up 57% year-to-date.
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