What Bonds, Oil & Gold Are Telling Us | Michael Lebowitz

Credit spreads (the yield premium corporate bonds pay over Treasury bonds) are currently extremely tight at the 2nd percentile of their 20-year range, indicating market complacency and very strong sentiment, but they have not spiked and liquidity remains good, so this is a warning sign to monitor rather than a current crisis indicator.

“Triple B bonds get paid about 1% more for a triple B bond than you do a US Treasury...over the last 20 years...you could see it's in the bottom 2%. So, yes, they've they've that that spread has risen a little, but it it pales in comparison to its range over the last 20 years.”

Real interest rates (rates minus inflation expectations) have spiked to over 2% for the first time since 2008 and a couple minor instances, which creates an unfavorable environment for gold because the Fed is correctly pursuing restrictive policy to combat inflation.

“Real rates are rising, and historically, there's a good correlation between real rates, so rates above the rate of inflation...Inverse correlation, and gold prices...When they They're They're kind of pushing restrictive policy. Policy, no matter what anyone else says, is extremely restrictive right now. Real rates are over 2%. They really haven't You know, if you look at that graph, you got to go back to 2008 and a couple minor instances.”

If oil were to reach $150 per barrel, it would likely drive down stocks, raise bond yields further, create temporary inflation spikes, and cause meaningful GDP contraction, but the ultimate market impact would depend critically on how oil reached $150 and whether it would be temporary or sustained.

“Stocks go down, bond yields probably go higher, could go higher. Uh inflation gets temporarily out of whack, GDP probably falls decently. Um I I think what will matter is not if it's at 150, how and why it gets to 150. What are the causes?”

Lebowitz uses MACD, momentum indicators, and moving averages to measure the rate of change (second derivative) in credit spreads rather than relying on point-in-time levels.

“Yeah, I mean, you can look at you can apply MACD and momentum and all this stuff we use, moving averages. Is you know, which moving averages? And I'm sure people do it. But you know, just looking at the the graphs at the bottom provides some context.”

Even if gold has moved significantly from its lows (e.g., from $5,000 peak to $4,000), there may be multiple motivations for investors to add at the $4,000 level (those who missed the decline, technicians seeing stability), creating a mix of technical and fundamental drivers for price movement.

“There were a lot of people that bought it at 4,500, 5,000. Now, we're like, 'Wow, 4,000. I should add here.' Yeah, this is a good point. It looks stable. I'm going to add. So, you just have a lot of technical uh uh factors to consider as well.”

Kevin Warsh as Fed Chair is currently 'doing the right things' by maintaining restrictive real rates (over 2%) and inflation-hawk policy, similar to Draghi's 'whatever it takes' stance but inverted toward restrictive ends; however, history suggests that when real policy gets tested by market stress ('punched in the face'), Fed chairs often revert to accommodative QE and stimulus.

“Warsh is saying all the right things right now, but like Mike Tyson said, once you get punched in the face, everything changes. Uh So, we'll see what happens when Warsh gets punched in the face, whether he can really be this this good cap uh Fed chairman that he kind of puts himself up to be potentially, or he goes back to QE and doing a lot of stupid things that the central bankers have done for the last 30, 40 years.”

Oil is now functioning as 'the new Fed funds rate' that prices everything and is outside central banker control, unlike fiat currency creation; you cannot print additional barrels of oil, so oil price discovery reflects genuine supply-demand constraints and geopolitical realities that monetary policy cannot override.

“The price of oil is now the new Fed funds rate. And you know, it was basically the thing that that sort of priced everything else uh around the world and it was out of central bankers control. Right? You can't can't magically print up more barrels of oil.”

The market appears to be complacent about oil prices staying in a range-bound equilibrium where whenever oil gets too high, Iran and the US come to the negotiating table, and whenever it gets too low, both parties feel empowered to escalate—creating a self-correcting mechanism that should cap oil prices and keep yields contained until this equilibrium breaks.

“when the price of oil gets too high, Iran and the US come to the table. When it gets too low, they feel empowered. So, they feel empowered to kind of ask more of the other party to to escalate actions. So, we're back towards that upper end of the range again.”

AI companies currently lack a coherent economic model for monetizing AI services due to open-ended token-based pricing structures, making it difficult for corporate customers to predict costs and plan budgets, which is hindering adoption and productivity gains.

“Name another project that a company gets into where they say, 'Yeah, it's just open-ended. Spend whatever you need to spend.' Right? That's not how it works.”

The relationship between GLD (gold ETF), GDX (large-cap gold miners), and GDXJ (small-cap gold miners) can be understood as a 'whip' where GLD moves first and most, then GDX follows with greater movement, and GDXJ at the tip moves latest but furthest, analogous to how momentum propagates through a whip.

“I just think there's a little bit of complacency... Michael, can you see my screen here... you can see uh WTI and Brent are bright green here, up 2 and 1/2%, same thing with gold and silver... the precious metals complex of the whip, which is um the gold price once it moves, you know, it moves um it moves a certain distance, but it moves first. And then GDX follows that, but it it follows on a greater um covers more ground. Then, of course, you go further up the the um the whip and then it's GDXJ is sort of the top half of the whip and then I think that I I call silver the the little tip of the whip, which moves later, but it moves faster and further.”

Chamath Palihapitiya, a major AI champion, reported that his company's token costs are doubling every 45 days while productivity gains are only around 5%, forcing him to rationalize token usage, and he expects other firms will have to do the same, which could shift the industry toward open-source models.

“token cost has been going up so much that he had asked his CTO recently what's happening with our our token costs and the CTO said, well, they're doubling about every 45 days. And Chamath was like, wow, that that's not good. Well, okay, how are my productivity gains? And the CTO was like, maybe 5%. So, Chamath is just like, you know, all right, I'm I'm I my costs are exploding and I'm not getting really that much for it.”

The correlation between crude oil prices and 5-year bond yields is currently over 50%, the highest it has been except for a brief moment in March 2020 when oil was trading negative and bond yields were plummeting, indicating oil is the primary driver of near-term bond price action rather than inflation or economic factors.

“A blue line that's very volatile and it whips around between typically plus 35 and minus 15 correlation. Sometimes there's a decent correlation with yields and oil prices. A lot of times it's kind of negligible hovering near zero. Right now it's over 50%. That's the highest it's been except for a very brief moment during March of 2020 when oil was trading negative and bond yields were plummeting.”

Gold and silver experienced a blow-off top / mania peak in January 2024 driven by momentum rather than fundamentals, and subsequent declines are attributable to three factors: (1) froth/fever breaking from excess, (2) war forcing net gold-buying countries to sell gold reserves to afford higher oil prices, and (3) Fed Chair Warsh signaling inflation-hawk policy that keeps real rates elevated.

“there's been kind of um several shoes that have dropped since the the zenith of the blow-off top uh earlier this year. One was just the mania the fever broke, right? So the froth needed to be um removed from from the pricing. And that's a big reason why the price of the precious metals have sold off as much as they have. Um secondly, the war broke out and oil prices, you know, shot higher and a lot of countries who had been net buyers of gold um had to start selling some of that gold to afford that higher-priced oil.”

5-year inflation expectations, as measured by TIPS breakeven rates, have actually declined from 2.46% at the start of the Iranian conflict to 2.28%, while 5-year bond yields have risen from 3.62% to 4.30%, creating a divergence where real yields (rates minus inflation) have risen nearly 1% despite declining inflation expectations.

“5-year inflation expectations. They started when this conflict started at basically 2.46 on the left side. They're now 2.28. Inflation expectations have actually declined. They they rose, but then they've have net net declined since the conflict began. So, if you're using 50 years of historical correlations and data, you would say bond yields which started 3.62, I I would take the under that they should be 3.50-ish, 3.60. Some something slightly less than 3.62. Maybe there's a little bit of a premium for war and, you know, other issues. But they're at 4.30.”

Open-source and free/low-cost AI alternatives (e.g., Chinese Qwen model, open-source offerings) could dramatically increase adoption rates and productivity gain visibility compared to closed-source token-priced models if security and regulatory issues can be resolved.

“if it can become a free or near free you know, low cost uh AI, the productivity benefits blossom much sooner than if it's this very warped, weird uh token method.”

Adam Taggart holds physical precious metals as a long-term savings vehicle and wealth preservation tool against fiat currency debasement, using it as a one-way valve where money goes in but is not expected to come out unless for major life events, while separately using paper/ETF gold for tactical speculation on price movements.

“I look at my um I look at my physical metal holdings as like a one-way valve. I put money I put stuff in. Don't really take stuff out...gold, precious metals, but particularly gold is my defense against that [fiat currency decline]...to me this is just sort of building up a long-term wealth that I will do something with later on in my life...Or it's part of my legacy. You know, it's something to pass on to future generations.”

Core CPI has declined to 2.6% and PCE is expected to fall from 4.1% to 3.7% with core falling to 3.2-3.3%, suggesting that as long as oil prices don't spike further, disinflation trend will likely continue, which could eventually help reduce the 'premium' in longer-term bond yields.

“Core CPI is 2.6%. PCE coming out, I think it's in 2 weeks towards the very end of this month, is supposed to fall from 4.1 to 3.7 with the core going to I think 3.2 or 3.3. So, you know, as long as oil doesn't really jump from here, gasoline doesn't really jump, some of that trend will hopefully be intact which may help take that premium out of the year out of longer-term bond yields.”

A K-shaped economy is evident both in consumption (top 10-15% consume driven by stock gains, bottom 80%+ weakens) and in GDP growth (top-line GDP ~1% without AI spending; AI capex is the primary driver of current growth), indicating fragile growth concentrated in asset-holder spending and corporate capex.

“We have AI. AI spending, AI investment is driving GDP. Without it, GDP is sub 1%. The consumer in aggregate is weakening. I say in aggregate because we have K-shaped consumption. The top 10, 15% are consuming, right? That they're driven, higher stock prices, spend more, house prices are still doing well.”

Lebowitz would take the 'under' on bond yields by year-end, predicting they will be lower than current levels, with the major caveat that the Iranian situation does not escalate out of control.

“Are you It sounds like you're thinking um and maybe I'm reading this the wrong way, but it sounds like you're thinking you'll take the under on what um bond yields will be by the end of the year. Yes. Yes. Again, with the huge caveat that Iran doesn't explode.”

The current market can be characterized as 'complacently optimistic'—appearing stable on the surface while significant underlying forces are moving turbulently beneath, similar to a duck on water.

“I feel like it is complacent in that the price of oil will kind of stay range-bound. The Iranian conflict will stay range-bound between escalation and de-escalation but not exploding one way. Um and with it the market seems to just be very stable at the surface. Very different underneath but stable at the surface.”

The relationship between oil prices and bond yields should hold, so if one can determine where oil prices are heading, one can predict where bond yields are heading.

“And my answer to where bonds going, I go, 'If you tell me where the price of oil is going, I'll tell you where the price of bonds are going.'”