PodcastAdam Taggart | Thoughtful Money®Stephanie Pomboy

Stephanie Pomboy: Rising Bond Yields Are EVERYONE'S Problem

The discussion links geopolitical uncertainty, fiscal borrowing, and rising long-term yields, arguing that forces such as oil prices, reshoring, and potential Japanese Treasury sales are largely beyond the Federal Reserve's direct control. It also questions the durability of AI and equity earnings, citing mark-to-market gains, deferred depreciation, rising credit costs, and real-world constraints on the AI buildout. The speakers expect a difficult reckoning with leverage, malinvestment, and pension shortfalls, while favoring scarce commodities and other hard assets if inflation, deficits, and central-bank balance-sheet expansion intensify.

Interest RatesFixed IncomeFiscal PolicyGovernment DebtArtificial IntelligenceTechnology Stocks

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Key Takeaways

The AI investment boom is producing earnings that may overstate underlying profitability: Amazon's Anthropic stake reportedly rose from an $8 billion investment to a valuation above $75 billion, but that gain is paper income, while data-center depreciation has not fully reached earnings. At the same time, hyperscalers are issuing more expensive debt and many have negative free cash flow.

AI infrastructure expansion faces both financial and physical constraints. Hyperscalers are competing for increasingly costly capital alongside roughly $10 trillion of federal borrowing needs, while permitted land, water, capacitors, memory chips, and public support may limit the buildout even when financing is available.

The federal government's roughly $10 trillion debt rollover is intensifying competition with private borrowers, and T-bill issuance remains part of the strategy despite Scott Bessent's initial opposition. The resulting funding pressure makes it difficult for policymakers to reduce borrowing costs.

Long-term Treasury yields face upward pressure from rising oil prices, inflationary reshoring, and possible Japanese Treasury sales—forces largely outside the Federal Reserve's direct control. The speakers also point to the Fed's balance sheet, which had expanded by more than $200 billion since December, as its main potential source of market support.

The administration's run-it-hot strategy is intended to use strong growth and capital spending to improve the fiscal picture, but the speakers say the deficit is not shrinking and additional munitions spending would expand fiscal pressure. They therefore expect faster growth and capex could bring forward a cleansing of malinvestment, bad debts, excessive leverage, and inflated valuations.

GEO-POLITICS

Iran Whipsaw — Markets have been whipsawed by contradictory headlines about a potential Iran deal, alternating between expectations of an agreement and military escalation. Stephanie suggests investors may need to wait for a finalized agreement before acting on the headlines.

“It's crazy to watch the market pingpong back and forth on the headlines that we've reached a deal with Iran. No, we're going to bomb them to hell…”—

TECHNOLOGY

AI Investment Gains — Reported earnings at Google and Amazon may be overstated by mark-to-market gains on Anthropic investments. Amazon's position was described as rising from an initial $8 billion investment to a valuation above $75 billion, but those gains are paper income rather than realized operating cash.

“Take Amazon for example…”—

AI Depreciation — AI companies' current profits may appear stronger because depreciation on data centers and other AI infrastructure has not yet fully reached earnings. Stephanie says investors need to factor that future depreciation into long-term earnings prospects.

“Fred is you know pointing out the tremendous depreciation wave that lies ahead for you know all these AI investments, data centers, etc…”—

Hyperscaler Credit Stress — Hyperscalers are issuing more debt at higher costs as overinvestment concerns widen borrowing spreads. Free cash flow has turned negative for many of these companies, while credit-market stress has not yet become a broad equity-market concern.

“These hyperscalers are also issuing debt like crazy and that debt increasing is becoming increasingly expensive because the spreads on this hyperscaler borrowing are starting to widen out around you…”—

ECONOMY

Debt Competition — Private-sector borrowing has matched federal-government borrowing so far this year, intensifying competition for capital. With the federal government needing to roll roughly $10 trillion of debt, policymakers face difficulty reducing borrowing costs.

“What you find is that the private sector has borrowed thus far this year the same amount as the federal government which is just mindboggling when you think about the…”—

Yield Pressures — Stephanie identifies rising oil prices, inflationary reshoring, and potential Japanese Treasury sales as forces that can push long-term Treasury yields higher. These forces are largely outside the Federal Reserve's direct control.

“We've got, the potential for continuing rising oil prices, which you think is more likely than not. That again creates inflationary pressures, generally drives yields up as well…”—

Fed Long-End Limits — The speakers argue that the Federal Reserve has limited control over long-term yields because federal-funds-rate changes have sometimes been followed by moves in the opposite direction at the long end. They say the Fed's balance sheet, which had expanded by more than $200 billion since December, is its main potential source of market support.

“I've said for a long time, forget about the Fed funds rate…”—

MARKETS

July Turbulence — July was unusually turbulent: the NASDAQ had its worst month in 25 years, the bond-market move was the largest July spike since 2005, and oil posted its biggest July price spike in more than 30 years. Equities had nevertheless returned close to record highs by the time of the discussion.

“It was the worst or the highest bond spike in July since 2005 and it was the highest oil price spike in July in over 30 years.”—

Overstated Earnings — Strong reported profits have supported equities, but the speakers argue that earnings strength is overstated. A study cited first-quarter S&P earnings growth of about 20%, with roughly 12% attributed to mark-to-market accounting.

“Someone did a study on the first quarter earnings and suggested I think first quarter S&P earnings were something around 20% growth yearon-year and his analysis showed that you know…”—

FORECASTS

Higher Oil — Although oil was around $76 at the time, the speakers said the lack of a signed Iran agreement left open a return above $85. Stephanie expects oil and broader commodity prices to trend higher over the longer term.

“We don't have a signed agreement and there's nothing to say that a week from now we won't have oil prices back over $85 a barrel.”—

Deglobalization Rates — Stephanie expects deglobalization to reverse part of the decades-long decline in interest rates. A more multipolar world with less reliance on the dollar and U.S. Treasuries could cause rates to drift gradually higher.

“So will delization I think beget the reverse where rates will slowly just ever so you know each year move higher and higher keep creeping up. Yeah…”—

Hard-Asset Outperformance — Provided economic demand does not slow too sharply, the speakers expect scarce commodities and other hard assets to outperform financial assets. Higher inflation and interest rates would draw more liquidity into financing the real economy, while stocks and bonds can be issued in expanding quantities.

“As provided that the economy doesn't slow too much, the economic demand for inputs will continue, right?…”—

– Recuperation progress & Wilhelmina’s recovery

Stephanie describes her knee injury and recovery, while Adam and Stephanie discuss Wilhelmina’s successful ACL surgery and their hopes for returning to hiking.

– Adam’s Glacier National Park trip & 25th anniversary

Adam recounts his Glacier National Park vacation, celebrating his 25th wedding anniversary and birthday amid spectacular mountain scenery and smoky conditions.

– Funny “celebrity recognition” story in the park

Adam tells how a chance encounter with someone who recognized him transformed his fellow travelers’ perception of him from ordinary YouTuber to celebrity.

– July’s extreme market moves (NASDAQ, bonds, oil)

July brought an unusually severe combination of NASDAQ weakness, rising Treasury yields, and an oil-price surge, creating multiple market headwinds.

– Market ping-ponging on Iran headlines & strong earnings offset

Markets repeatedly reacted to contradictory Iran headlines, while strong reported corporate earnings gave equity bulls an offset despite algorithmic trading and geopolitical uncertainty.

– Framing the three big issues: stocks, oil, rates

Adam frames the discussion around stock-market optimism, oil’s long-term direction, and the persistent rise in bond yields.

– Fred Hickey’s view on AI earnings quality

Fred Hickey argues that headline AI-company earnings overstate sustainable profitability because mark-to-market gains and understated depreciation distort valuations.

– Mark-to-market gains distorting profits (Amazon/Anthropic example)

Google and Amazon’s Anthropic investments generated enormous paper gains that inflated earnings without providing cash to fund operations, capital spending, or debt service.

– Hyperscalers turning free-cash-flow negative & rising debt costs

Hyperscalers are spending heavily, issuing increasingly expensive debt, and turning free-cash-flow negative, undermining the idea that major S&P companies remain flush with cash.

– How much of S&P earnings growth is just accounting

Mark-to-market accounting may explain much of reported S&P earnings growth, meaning underlying corporate profitability could be roughly half as strong as headline figures suggest.

– Downside risk if AI valuations reverse

If AI valuations reverse, companies such as Amazon and Google could suffer both operational damage and large accounting losses on their technology investments.

– AI CapEx funding risks & capital constraints

Credit markets already show concern through wider spreads and higher default-insurance costs, even as equity investors continue pushing major indexes toward records.

– Corporate issuance now matching federal borrowing needs

The AI buildout faces practical constraints involving land, permits, water, power equipment, chips, public support, and ultimately the availability of financing.

– Share buybacks fading – companies become net equity issuers

Corporate borrowers are competing with the federal government for scarce funding as hyperscalers add debt to a market already facing enormous Treasury refinancing needs.

– Long-end Treasury sell-off & Bank of Japan intervention

Private-sector borrowing has approached federal issuance, creating an unprecedented flood of bonds and intensifying competition for investor capital.

– Why higher-for-longer rates are here to stay

Companies have stopped supporting equities through massive buybacks and are becoming net stock issuers, removing a major long-standing tailwind for the market.

– Fed’s limited ability to control long-term yields

The Treasury market is absorbing a vast supply of government and corporate debt, while investors can increasingly demand better yields and selectivity.

– Quiet balance-sheet expansion despite official rhetoric

Long-term Treasury yields have risen sharply, and Bank of Japan efforts to support the yen may add pressure by selling dollar assets and Treasury holdings.

– Secular deglobalization pushing rates higher over time

Higher-for-longer rates appear entrenched because AI-related borrowing, oil prices, inflation, and Japanese Treasury sales are forces the Federal Reserve cannot directly control.

– Higher inflation/interest rates siphoning liquidity from financial assets

The Fed has limited influence over long-term yields through the policy rate and may ultimately need balance-sheet expansion to stabilize markets burdened by extreme leverage.

– Why hard assets & commodities should outperform

Despite official resistance to renewed quantitative easing, the Federal Reserve balance sheet has already expanded significantly since the latest non-QE program began.

– Next recession deficits & $4 trillion pension underfunding

Deglobalization and reshoring are secular forces that could reverse decades of falling interest rates by reducing demand for dollars and Treasuries while raising production costs.

– Private equity/credit risks & high likelihood of pension bailouts

Higher inflation and borrowing costs consume more of the economy’s marginal liquidity, leaving less available to support stocks, bonds, and other financial assets.

– Social fairness concerns & potential public blowback

Stephanie and Adam argue that investors may need to return to fundamental analysis as easy-money gains fade and companies face structurally higher labor, capital, and input costs.

– Can we still grow our way out (with significant pain)?

Scarce commodities, energy, copper, and other hard assets should benefit from rising economic input demand and the inability to create physical resources through financial issuance.

– The need for a cleansing of excesses before healthier growth

A future recession could expand the federal deficit dramatically and force central-bank balance-sheet growth, increasing competition for scarce hard assets and supporting commodity outperformance.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

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