U.S. debt "can't be maintained" anymore, and the U.S. stock market has started to fall. What should Wosh do?

Author: Long Yue, Wall Street Insights

After taking over the Federal Reserve, Waugh may have just assumed the hottest position in the global financial world right now.

According to an analysis article published by Fringe Finance on May 17, Waugh was officially confirmed as the new Chair of the Federal Reserve last week with what was described as the most partisan-divided vote in history. Facing him is a macro environment full of leaks on all sides: accelerating inflation, surging oil prices, turbulence in the bond market, and stock-market valuations hanging high.

Right on the Friday when he was about to take over (May 15), the market offered a preview.

The S&P 500 fell 1.24% that day, and the Nasdaq dropped 1.54%. But Fringe Finance pointed out that the real “main character” of the day was not the stock market, but the bond market—when the yield on the U.S. 30-year Treasury broke above 5.1%, bond investors were digesting last week’s hotter inflation data, along with the reality that “interest rates may stay high longer than Wall Street expects.”

The bond market is the real source of risk

A 5% drop in the stock market may lead financial media to shout “buy the dip,” but the bond market is different.

The analysis indicates that when Treasury yields rise rapidly, financial conditions tighten in tandem: mortgage rates remain stubbornly high, corporate financing costs increase, refinancing pressures in commercial real estate intensify, and the federal government’s own interest expenses start to swell as well.

This is not an isolated bout of market volatility. It will spread from the bond market to every corner—first-time homebuyers, corporate finance officers, private equity funds, and even the U.S. Department of the Treasury will all feel the pressure at the same time.

Consumers are already on the edge of cracks

Meanwhile, the financial situation of U.S. consumers is deteriorating.

Data shows that U.S. auto-loan default rates are approaching the levels seen during the 2008 financial crisis, and credit-card default rates are also hovering near the crisis highs. As inflation continues to erode consumers’ real wages, consumers are becoming increasingly reliant on high-interest debt to maintain everyday spending.

Inflation data is also not encouraging: CPI remains at 3.8%, PPI is as high as 6%, and oil prices have already broken above $100.

Fringe Finance directly pointed to the crux of the problem: in this environment, the Federal Reserve has no room to “simply cut rates” or restart quantitative easing—doing so would only pour another bucket of gasoline on inflation that is already running hot.

Waugh’s dilemma: a head-on clash between ideology and reality

This is exactly where Waugh finds his situation most awkward.

For years, he has publicly argued that the Fed has intervened too deeply in financial markets, and that it should accelerate the reduction of its $6.7 trillion balance sheet, stop acting as a “permanent backstop” for markets, and return to traditional monetary policy tools.

The article’s assessment was blunt: “It sounds very lofty, very self-disciplined, and like ‘the market should stand on its own.’ But now, the market is testing whether he truly means what he says.”

Fringe Finance pointed out that it’s easy to give speeches about “moral hazard” when stocks are surging and volatility is low. But when the bond market starts “throwing furniture,” long-end yields keep climbing, and every corner of the economy is under simultaneous pressure, that’s a different story.

Three paths, and none of them are easy

Waugh has three options in front of him, and each comes with a price:

Let yields continue rising—the market faces broader repricing, default rates rise, the housing market weakens, and credit pressure spills over into the real economy.

Aggressively cut rates or restart bond purchases—inflation is already overheated, and this would be no different from pouring fuel on the fire.

Stand pat and wait to see—the bond market might make the decision for him.

Fringe Finance cited the case of former UK Prime Minister Liz Truss to remind readers that the speed at which bond investors can make policymakers “bow” can be faster than people would find it surprising.

Stock market valuations: another bomb hanging overhead

Meanwhile, U.S. stock valuations do not reflect the risks mentioned above.

The Shiller P/E ratio is currently about 42, placing it in an extremely overvalued range. The premise for this valuation to hold is that inflation cools rapidly, interest rates fall, corporate earnings remain strong, and liquidity is abundant—in other words, “almost everything needs to go in the right direction, yet many things are, unfortunately, moving toward the wrong direction right now.”

The article concludes: “This is not a soft landing; it’s a stress test disguised as a promotion. While everyone is watching Nvidia’s 4% drop on a certain day, Waugh should be focused squarely on the U.S. Treasury market—because that’s where his real troubles are truly beginning.”