Summary of Key Points
Recently, the U.S. Treasury Department attempted to lower interest rates by repurchasing long-term U.S. bonds. Although this action provided a brief respite, interest rates soon rebounded, triggering a global reshuffle of assets: gold prices reached a four-month high, while tech stocks experienced a catastrophic sell-off, and the U.S. dollar index fell to a three-month low. The underlying issue lies in the structural problems of U.S. debt—a $40 trillion deficit, the competition for funds from AI companies issuing bonds, and overseas buyers' reluctance to purchase these bonds. Government intervention can only temporarily prevent a collapse but cannot address the root causes. A potential solution may lie in AI breakthroughs that boost productivity; the dollar could become the scapegoat for the consequences of these interventions, while gold is likely to emerge as the biggest winner due to concerns about fiscal credibility.
I. Why Can't the U.S. Government Curb Its Debt? — Interventions That Address Symptoms, Not the Root Causes
The Treasury Department's measures (increasing long-term bond repurchases and using nearly one trillion dollars from TGA funds) are seen by the market as mere superficial efforts:
- Insufficient Scale: Quarterly repurchases of tens of billions of dollars are insignificant compared to the $40 trillion in outstanding U.S. debt, akin to using a cup of water to put out a fire.
- Failure to Address the Root Causes: Rising U.S. bond yields are not accidental; they result from three simultaneous factors: inflation (geopolitical conflicts and El Niño driving up prices), maturity (AI companies competing for funds and the Federal Reserve's declining credibility), and fiscal risks (interest payments exceeding $900 billion).
- An Unbreakable Cycle: Borrowing leads to increased interest payments, which in turn expand the deficit, leading to more borrowing. Coupled with overseas central banks' reluctance to buy U.S. bonds and AI companies and governments competing for savings, the upward pressure on long-term interest rates remains unrelieved.
Therefore, interventions can only provide a temporary respite before interest rates rebound.
II. Why Are Tech Stocks Falling Despite Lower Interest Rates? — The Sensitivity of Long-Term Bonds and the Competition for Funds
Logically, tech stocks should rise when interest rates fall, but this time the opposite happened:
- Long-Term Bond Risks: The value of tech stocks is largely based on future earnings over 5-10 years. Even if interest rates drop temporarily, if they remain high in the long term, the future value of these stocks is discounted. For example, $100 in 10 years may only be worth $61 at a 5% interest rate, meaning the higher the rate, the less valuable the stock today.
- Competition for Funds from AI Bonds: AI companies have issued a record amount of bonds this year, and by 2026, their bond supply could exceed the net supply of U.S. government bonds. These long-term bonds are competing with U.S. government bonds for funds, leading to a mismatch in market liquidity and reducing demand for tech stocks.
- Doubts About Commercialization: Although AI is investing heavily, there is no clear evidence of a significant increase in productivity (the Solow Paradox). Investors' confidence in tech stocks' future earnings is declining, as seen in NVIDIA's seven-day consecutive losses and the sharp decline in storage chip stocks.
III. Why Has the Dollar Become a “Pressure Valve”? — The Cost of Intervention Transferred to the Exchange Rate
Wall Street's main concern is not that interventions are ineffective but that they are costly:
- Pressure Shift: Since the U.S. government cannot allow U.S. bond prices to fall, the fiscal pressure is transferred to the exchange rate, causing the dollar index to drop to a three-month low.
- Erosion of Credibility: Frequent U.S. interventions in the bond market, without resolving the deficit and AI bond issues, have weakened confidence in the dollar. Deutsche Bank describes this as “soft financial repression”—the government manipulating market prices, damaging the dollar's status as a global reserve currency.
IV. Why Is Gold the Biggest Winner? — “Hard Currency” in Times of Fiscal Credibility Concerns
Traditionally, gold and interest rates move in opposite directions, but this time they have both risen. The logic has changed:
- Credit Substitution: With the U.S. debt exceeding $40 trillion, there are fears that the U.S. may not be able to repay it. Gold, as a “hard currency with no credit risk,” has become a preferred safe-haven.
- Positive Views from Institutions: Institutions like Goldman Sachs and UBS have raised their gold price targets, with Citibank predicting a price increase to $5,000-6,000 per ounce within a year, driving gold prices to a four-month high (a cumulative rise of over 15%).
- Deviation from Normal Patterns: Recent increases in gold prices, U.S. bond yields, and oil prices indicate that the market is moving beyond the traditional logic of buying gold during interest rate cuts and is re-evaluating the U.S. government's fiscal credibility.
V. Three Possible Paths to a Solution—Which One Is the Most Feasible?
Guangfa Securities identifies three potential directions, only one of which seems realistic:
1. Fiscal Discipline: Reducing the deficit and debt issuance—difficult, given the significant disagreements between the U.S. political parties.
2. AI Breakthroughs: Enhancing productivity through AI to drive economic growth—this is the most realistic solution and the fundamental reason the U.S. is investing heavily in AI.
3. Global Capital Flow: Encouraging overseas investors to buy U.S. assets—difficult, as countries are reducing their holdings of U.S. bonds during the era of anti-globalization.
Therefore, whether AI can shift from being a money-consuming sector to a profit-generating one is key to resolving the current crisis.
Finally, the stance of the Federal Reserve Chair at the Jackson Hole Conference will determine the direction of these interventions. For individual investors, the traditional asset allocation of 60% stocks and 40% bonds may need to be adjusted, with a greater emphasis on gold, energy, and high-quality corporate bonds to hedge against fiscal risks and inflation.