Oct

6

A quote from myself from the 2007 Spec Party on Vic's Central Park Rose Garden talk which I remember vividly. "Chairman espoused his theory of the markets as the mechanism that mediates between government and the the populace…that causes not only the obvious capital allocation but buffers the power of government to protect the needs of the populace through price and capital demands. It is a novel theory which I have never heard discussed anywhere else. The market itself is the mechanism that effects large scale social and political change through changes in incentives, attitudes and demand, and is more than merely shuffling money. Understanding the markets as a social and political driver can lead to long term trading strategies and keep the trader on the right course."

As Bonds hit multidecade lows, I ask (rhetorically) who is more powerful, the market or the government? What does it portend?

James Gavrity writes:

That question raises more questions than it answers. I could answer with a long macro analysis, but the answer to these two sub-questions will give us the answer to the original.

I ask myself: which one is more fearful of the other? And which one tries to exert control and influence over the other? The one that's more fearful and tries to exert the most control is typically the least powerful.

James Carville famously hung a sign in the Little Rock campaign war room during the 1992 election that read: "The economy, stupid."

Who tries to control the price of fuel and eggs? Who takes credit for a booming market? In my view, the market is the most powerful force, whether you live in a democracy or not. Quoting James Carville, "The economy, stupid"—this is what has the power to change governments of all types.

Jeff Watson is unambivalent:

Markets are bigger than governments, hands down.

Larry Williams comments:

Great point. When everyone is a millionaire thanks to the stock market Bernie Sanders pitch falls on deaf ears—just one example of this theory.

William Huggins writes:

while its clear that markets are quite powerful, its important to remember that the sorts of markets we are talking about (capital markets) can only really thrive when there are enforcement mechanisms and dispute resolution - both of which are often supplied by the "force monopolists" of the state. this pattern extends into the bronze age (see: Assur)

imo, states and markets have a symbiotic relationship. either could exist in isolation but would be much poorer and weaker than they are today. in that context, i'm inclined to consider whether one of the two symbiants might try to "devour" the other for its own survival - it would certainly spell the end of a beautiful marriage.

James Gavrity responds:

IMO. As a trader and businessman, I am no expert here; this is just my perspective from where I sit. The market is the boss in that relationship. The Market is the King Maker And Wealth Creator.
The government is the tail attempting to wag the dog, The theory at hand the way I see it doesn't view the market as a quote board; it's the ultimate check on the politicians. The government pushes fiat and mandates, but the market reflects what people are actually doing with their money. When D.C. overspends, overregulates, or debases the dollar, the market acts as a shock absorber. It reprices risk and pulls the leash on the government before ideological policies can completely wipe out the public's economic foundation.

Price discovery doesn't lie. If they print money to fund a political agenda without creating real value, the market violently reprices hard assets and demands a premium to hold Treasuries. It’s not just shuffling cash around; it’s capital voting against political arrogance. It forces a behavioral shift by making it too expensive for the government to keep running its game, which ultimately protects the public from total ruin.

To your question: the market wins, hands down. Central banks can manipulate and suppress rates like the QE we've dealt with for over a decade but that's just building a dam. The market is the water. The government might write the rules, give away free stuff and tax our Income, but the market enforces the economic physics. Eventually, the dam breaks and gravity takes over.

With the long bond hitting multi-decade lows, the market is effectively ripping up the sovereign blank check. If you look at this through the macro cycles, it points to a few massive structural shifts:

The Bond Vigilantes Are Back: The market is stepping in to enforce the fiscal discipline the politicians refuse to legislate. As debt service eats the national budget alive, the government is going to be backed into a corner—austerity, higher taxes, or financial repression—regardless of who is in office. The market is forcing their hand.

Flight to Hard Assets: The era of zero-interest-rate easy money is dead. The mechanism is actively rotating capital out of paper promises and fiat debt, and moving it into commodities, precious metals, and real production. It’s a classic defensive posture against debasement.

Social and Political Friction: Cheap debt has numbed the public to government incompetence for a long time. Turn off that spigot, and the real cost of these policies hits home. When the public actually feels that economic pain, it drives massive shifts in societal attitudes and intense political turnover.

When you watch the tape through this lens, it means looking past the daily noise and short-term setups to see the tectonic plates shifting. When the bond market moves like this, it’s not just another trade. Understanding the market as a social and political driver keeps us on the right side of the trend long-term.

Carder Dimitroff offers:

I generally agree that markets, rather than governments, can be kingmakers. But not all markets are equally independent of the state. Sovereigns establish and enforce the legal order within which markets function, and they control access to territory, airspace, waters, natural resources, strategic infrastructure, and military procurement. Some markets would scarcely exist without that framework; others operate only by license and under close state supervision. When a government judges that national security or another core interest is at stake, firms in those markets must adapt, exit, or risk losing access to the market itself. In that sense, the king may not choose every winner—but it can still decide who remains in the game.

James Gavrity again:

Agreed my thoughts were focused on the 10,000-foot view. Yes they can pick a choose winners and losers. When a government judges that national security or another core interest is at stake, firms in those markets must adapt, exit, or risk losing access to the market itself. In that sense, the government may not choose every winner—but it can still decide who remains in the game. Like Intel and others, from the bigger, broader picture, there is a sequence of order to this. The hubris of the state always brings it to a Marie Antoinette moment: "Let them eat cake." Ultimately, the markets will bring the government and those consensus elites exactly that fate, regardless of how many kings they make along the way. That quote was not her actual words. "Let them eat cake." was a political myth popularized to fit a narrative. Historically her actual last words were an apology to her executioner after accidentally stepping on his foot on the scaffold: "Pardon me, sir. I did not do it on purpose." When the steak and lobster are gone, a new king will be crowned.

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