America's bills now exceed its paycheck and gold just passed $4,400 so at least something's working · Daily Briefing

In 30 seconds: US interest costs and entitlements now exceed federal receipts, bond yields are rising to multi-year highs, and debate intensifies over whether Fed rate hikes under Warsh can contain long-end yields or will only worsen the fiscal trajectory. The Bank of Japan raised rates to a 31-year high but dovish forward guidance sent the yen lower, while separately Brad Setser details how China has been quietly shifting its Treasury and Agency holdings to foreign custodians to obscure its true exposure, and French bond spreads over Bunds hit 100bps for the first time since 2012. Crude and refined product prices have surged following the Iran war and disruptions to Hormuz shipping, with diesel hitting record highs, Russian refinery output collapsing, and France calling for a G7 meeting to consider releasing strategic reserves. Gold has surged past $4,000 and is targeting $5,000 as investors increasingly prefer it over long-dated Treasuries, with TLT down sharply versus gold over multiple timeframes amid rising deficits and currency debasement concerns.

The arithmetic is getting difficult to ignore. US national debt now stands at $40 trillion, having added $30 trillion since Obama was elected in 2008 and $10 trillion since Trump in 2016. US interest + Entitlements + VA as share of receipts: 105%. That number is worth sitting with. The government's legally non-negotiable obligations already exceed everything it collects. This year's deficit is the largest postwar deficit outside a recession or war. The bond market, as one economist puts it, has figured out that there's no plan to stop borrowing. The US 10-year Treasury yield has reached 5%, the US 30-year Treasury yield sits at 5.30%, and markets are pricing a 60% probability of October 28 Fed hike. The hike came at full employment, with jobs accelerating and inflation above target. It only took 25bps to change the narrative. Gold: $4,417.00. Over fifteen years, the debt has been managed by debasing the currency roughly 8% a year and rolling it forward. One economist argues that credibility is monetary policy's secret weapon: if a Fed chair convinces you inflation will be low, the expectation becomes reality. The question is whether anyone finds that convincing when the coupon bill already exceeds the tax base.

The Bank of Japan raised interest rates by 25 basis points to their highest level since 1995, and the yen fell anyway. Bank of Japan Governor Kazuo Ueda gave mixed signals about future interest-rate hikes, falling short of markets' hawkish expectations, and the currency extended its drop against the dollar. You hike to a 31-year high and the market sells your currency because you weren't hawkish enough. This is the central banking equivalent of getting a promotion and having your spouse ask why it wasn't bigger. The real story in China's sovereign debt holdings is happening where the raw data can't see it. The acceleration came after Russia's invasion of Ukraine, when the freezing of Russian reserves made the benefits of geographic diversification suddenly very concrete. France's 10-year bond yields reached 4.5%, an 18-year high. The deficit this year is running at 5.4% of GDP, above the 5% target, and the government has promised to reach 3% by 2029.

US diesel has reached $6.45, a record price according to AAA data, with refined products continuing to climb. The supply picture explains why: massive decline in Russian refinery oil processing since early 2024 as Ukraine stepped up its attacks, which has halted Russian diesel exports. When you lose Russian diesel barrels and refined products continue to climb, the market starts to look less like a market and more like an auction at a lifeboat convention. The physical crude market is flashing its own signals. Norwegian Johan Sverdrup crude is now offered at $33-$35 a barrel above Brent, a record premium. In early Sept that same grade carried a 60 cents a barrel premium. So the premium went from 0.6 dollars to roughly 34 dollars. Norwegian Johan Sverdrup crude $33-$35 a barrel above Brent vs Norwegian Johan Sverdrup crude 60 cents a barrel premium. Not everything is moving in one direction. Shanghai benchmark crude futures have fallen roughly $25 a barrel over the last three days. Positioning, meanwhile, is getting crowded. US diesel: $6.45.

Over the past year gold has gained roughly 20% while TLT has fallen 6.5%. Zoom out further and the divergence gets stark: TLT has dropped 80-85% relative to gold over the broader cycle. The logic, as one macro analyst frames it, is straightforward. The US cannot afford rates above a certain level, so the Treasury or Fed repeatedly inject dollar liquidity to manage yields. That liquidity manifests in gold repricing higher against both TLT and equities. When solar panels and a battery array can deliver a 7-12% real yield that grows over time, the long bond has some explaining to do.