On My Radar - Trump, Powell, and Japan — CMG Private Wealth Group

July 18, 2025
By Steve Blumenthal

“The timing of the new Fed chair is less significant than the influence he will have on his committee. If he can sway the committee’s thinking over time, bond markets will increasingly go curve positive, the dollar will weaken, and inflation will likely move to a 3% center.

Some aspects of this are stock market positive others are not, but the uncertainty on Fed policy, tariffs, and the influence of AI will be significant. I for one am moving defensively — more cash, buying value with 4-5% dividend yields.”

— Bill Gross, PIMCO founder, renowned and decorated bond manager, 1975-2019

There’s no shortage of important material to cover this week—the headline: President Trump’s threat to fire Federal Reserve Chair Jerome Powell.

At the heart of the drama is the cost of debt. The President wants lower interest rates. Treasury Secretary Scott Bessent wants lower interest rates. Frankly, we all do. But the hard truth is that our chronic debt problem stands in the way.

Why the urgency for lower rates? Because they help reduce the government's exploding interest payments, which are now a mounting threat to fiscal stability.

Here’s the backdrop:
In 2025, approximately $9.2 trillion of U.S. government debt is expected to mature, requiring refinancing. That’s about 25% of the total $36.2 trillion federal debt outstanding. Roughly $6.5 trillion matured in the first half of the year, and an additional $2.7 trillion is scheduled to mature in the second half.

Looking ahead to 2026, another $7.6 trillion is set to mature. This rolling wall of short-term debt, largely a result of the Treasury’s preference for Treasury bills, means the U.S. must constantly refinance at whatever the current market rate happens to be. If that rate is high, so too is the government's interest bill.

Over the past 12 months, interest payments have climbed to approximately $1.2 trillion, or $3.3 billion per day. That now accounts for nearly 24% of all tax revenue collected—about $5 trillion. Imagine paying almost a quarter of your income to service your credit card interest, before housing, food, or anything else. Source: CBO

The OBBBA (Our Big Beautiful Borrowing Act, as it’s been dubbed) raises the debt ceiling by another $5 trillion. If we issue new debt at 4%, that would be an additional $200 billion in annual interest expense. Now we’re paying 28% of government income to cover interest.

If inflation returns, or persists, and rates climb to 5%, and if we’re rolling over $40 trillion in debt at that level, interest payments jump to $2 trillion per year. That’s 40% of total tax revenue. This is the stress Trump is responding to. It’s the classic late-stage debt cycle dynamic, and we’re living it in real time.

I’m not saying he’s right. I’m saying: our job is to read the room. Step back from the noise. The real solution isn’t more borrowing, it’s some form of restructuring. We likely need a blend of asset-backed debt stabilization, spending discipline, and yes, higher taxes. Kicking the can further down the road only leads to a bigger reckoning. And our legislators are experts at kicking the can.

Do you remember that dugout chant from Little League?

We are slowly putting pressure on the pitcher and the catcher…
We are slowly putting pressure on the pitcher and the catcher…
We are slowly putting pressure on the pitcher and the catcher…
Pressure! Pressure! Pressure!

That’s exactly what it feels like in Washington right now. Watching President Trump blame President Biden for Powell’s appointment, when Trump himself appointed Powell in 2017, is a striking sign of that pressure. Maybe it’s exhaustion, or maybe it’s political deflection. Either way, it doesn’t inspire confidence.

We’re still in the early innings. A new Fed Chair could be appointed, one who is potentially more aligned with the White House's policy goals. We may even see some form of interest rate control - something resembling Japan’s yield curve control. I’ll touch on that further in the Japan section below.

Bottom line:
We borrowed too much. We owe too much. And the long-term debt accumulation cycle is approaching its endgame phase. As my friend John Mauldin puts it, some form of “great reset” lies ahead. Treasury Secretary Scott Bessent calls it a “global grand reordering.” I still suspect that moment will come in 2027–2028, but, as always, timing is uncertain.

One thing is clear: Our job is to watch the chessboard and prepare accordingly.

I hope I’m wrong. I fear I’m right. Politicians, on both the left and the right, seem unwilling to embrace restraint. My base case remains: persistent inflation and slow growth—in a word, stagflation.

As the legendary “Bond King,” Bill Gross indicated, there are things you and I can do in terms of growing our wealth. His warning to investors, “Wake up!” You can learn more about Bill Gross here.

Watch the 10-year and 30-year Treasury yields. The Fed can influence the short end, but the market will determine the long end.

The 30-year Treasury yield is back above 5% (indicated by the red line in the chart). What you see in the chart is the yield history. Up is bad for bonds, down is good.

Pressure on the pitcher, pressure on the catcher.

Next is a look at the longer-term trend line. The bond bull market ended in 2022 (note the breakout above the blue line to higher interest rates).

It won’t be a straight line, it’s never a straight line. Trade them, yes. Own them? Not for me.

The following chart illustrates the potential gain or loss for each 1% increase or decrease in interest rates. Green is good, red is bad.

Grab that coffee and find your favorite chair. We’ll examine a rules-based approach to setting interest rates, which suggests the Fed Funds rate should be higher, not lower. And, we’ll visit Japan, as they are a few steps ahead of us in this end of the debt cycle drama. They have been controlling their interest rates and purchasing their own bonds for a long time. Interest rates are now rising. Inflation is the problem.

On My Radar: Trump, Powell, and Japan

The Taylor Rule
Japan - The End of Yield Suppression
Trade Signals: Update - July 17, 2025
Personal Note: Soccer and Youth Leadership

OMR is for informational and educational purposes only. No consideration is given to your specific investment needs, objectives, or tolerances.
Please see the Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion and educational purposes only.

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The Taylor Rule

Since there is venom in the air, I thought I’d briefly share some information on the Taylor Rule (h/t to Mauldin Economics). It serves as an economic guideline for central banks, such as the Federal Reserve, to set interest rates in response to prevailing economic conditions. I’m not sure if they give it much consideration but I like it.

Proposed by economist John B. Taylor in 1993, it provides a formula to adjust the nominal interest rate in response to changes in inflation and economic output.

The rule aims to stabilize the economy by balancing price stability (low inflation) and economic growth (closing the output gap).

Bloomberg’s @JohnArthur wrote, "Applying the Taylor Rule now would require the Fed to raise rates."

Source: Daily Chartbook

I asked Grok3 to provide a summary of the rule (put on your geek glasses or simply skip to the end - Practical Use).

The Taylor Rule Formula

The basic form of the Taylor Rule is: i = r + π + 0.5(π - π) + 0.5(y - y*)**

Where:

i: Nominal interest rate (the target federal funds rate in the U.S.)
r*: Equilibrium real interest rate (assumed to be the long-run neutral rate, often around 2%)
π: Current inflation rate
π*: Target inflation rate (e.g., 2% for many central banks)
y: Actual output (usually measured as the logarithm of real GDP)
y*: Potential output (the economy’s full-capacity output)
(π - π)*: Inflation gap (difference between actual and target inflation)
(y - y)*: Output gap (difference between actual and potential output)

The coefficients (0.5) reflect the weight given to deviations in inflation and output. These can vary depending on the central bank’s priorities.

How It Works

If inflation is above the target (π > π)*, the rule suggests raising interest rates to cool the economy and reduce inflationary pressure.
If output is below potential (y < y)*, the rule suggests lowering interest rates to stimulate economic activity.
If both gaps are zero, the nominal interest rate should equal the equilibrium real rate plus the target inflation rate.

Example

Suppose:

Equilibrium real rate (r*) = 2%
Target inflation (π*) = 2%
Current inflation (π) = 3%
Output gap (y - y*) = -1% (economy is 1% below potential)

Plugging into the formula: i = 2 + 3 + 0.5(3 - 2) + 0.5(-1) i = 2 + 3 + 0.5(1) - 0.5 = 5The Taylor Rule suggests setting the nominal interest rate to 5%.

Key Assumptions

The economy has a stable long-run real interest rate.
Central banks prioritize both inflation and output stability.
The coefficients (0.5) are based on empirical estimates but can be adjusted.

Limitations

Data Uncertainty: Accurate measures of the output gap or equilibrium real rate are hard to estimate in real time.
Simplification: The rule doesn’t account for all economic factors, like financial crises or supply shocks.
Zero Lower Bound: The rule may suggest negative interest rates, which can be impractical unless negative rates are implemented.
Policy Discretion: Central banks often deviate from the rule-based approach, relying on judgment or additional factors, such as financial stability.

Practical Use

While not followed mechanically, the Taylor Rule serves as a benchmark for monetary policy. For example, the Federal Reserve may compare its federal funds rate to the Taylor Rule’s prescription to assess whether policy is too tight or loose. Since the 2008 financial crisis, deviations from the rule have become common due to unconventional policies, such as quantitative easing.

See CMG Disclosures at the bottom of this page.

Japan - The End of Yield Suppression

The Bank of Japan (BOJ) has exerted significant influence over its bond market, particularly through its monetary policy tools, but it has not "taken over" the market in the sense of complete control. Below, I’ll address interest rate control and ownership of outstanding government bonds.

Interest Rate Control in Japan’s Bond Market

The BOJ has historically influenced interest rates in the Japanese Government Bond (JGB) market through policies like Yield Curve Control (YCC) and large-scale bond purchases, though it has been moving away from these tools in recent years.

Yield Curve Control (YCC): Until October 2023, the BOJ maintained YCC, targeting the 10-year JGB yield at around 0%, with a tolerance band (initially ±0.25%, later widened). This policy effectively capped long-term interest rates to keep borrowing costs low and stimulate the economy. The BOJ achieved this by purchasing JGBs as needed to maintain the target yield.
Post-YCC Transition: In 2023, the BOJ began phasing out YCC, allowing greater market-driven flexibility in bond yields. By July 2025, the BOJ had shifted to a more conventional monetary policy, focusing on short-term interest rates (currently at 0.5%) and gradually reducing bond purchases. This has led to rising JGB yields, with the 10-year yield reaching 1.56% on July 17, 2025, the highest since 2008, driven by market forces and fiscal concerns.
Current Influence: While the BOJ no longer tightly controls the 10-year yield, it still influences the bond market through its policy rate and selective bond purchases to prevent abrupt yield spikes. For instance, the government has considered buying back low-yielding super-long JGBs to stabilize the market. The BOJ’s Deputy Governor has indicated potential rate hikes (e.g., to 1.25%) if economic conditions improve, suggesting a continued but reduced role in influencing yields.
Market Dynamics: Recent bond market volatility, with 30-year and 40-year JGB yields hitting record highs (3.14% and 3.6%, respectively, in May 2025), reflects waning demand and concerns over Japan’s fiscal health. The BOJ’s reduced bond purchases and global market pressures (e.g., U.S. tariff policies) have allowed yields to rise, indicating that market forces are increasingly driving interest rates.

In summary, the BOJ no longer exerts direct control over long-term interest rates as it did under YCC, but it retains significant influence through its policy rate and strategic interventions. The bond market is transitioning toward greater market-driven pricing, though the BOJ’s actions still mitigate extreme volatility.Ownership of Outstanding Government BondsThe BOJ holds a substantial portion of Japan’s outstanding government bonds, reflecting its decade-long quantitative easing (QE) program.

Conclusion

The BOJ does not fully control the JGB market, but it significantly influences interest rates through its policy rate and bond purchases. However, its grip has loosened since abandoning the YCC in 2023. It owns roughly 46–52% of outstanding JGBs, down from a peak of ~60%, as it reduces QE. Source: TradingEconomics

Higher inflation and the high cost of oil were the primary triggers.

Inflation and higher interest rates are always the match that lights the fuse. The amount of leverage in the system determines the extent of destruction that occurs when the bomb detonates.

One last important note on market complexity.

The End of Yield Suppression: Japan Awakens, America Anchors, China Unravels, Source: Endgame Macro

“Japan is no longer the quiet outlier in global macro, its long dormant bond market is waking up with force. With 30 year and 40 year JGBs yielding over 3% for the first time in decades and the 10 year nearing levels not seen since 2008, the era of suppressed Japanese yields is ending. For decades, ultra low rates drove Japanese capital outward and into U.S. Treasuries, European bonds, and global risk assets. But now, a new gravitational center is forming at home. Domestic institutions no longer need to reach abroad for yield. The implications are seismic: a foundational pillar of the global carry trade is fracturing. This shift collides directly with the policy strategies of the U.S. and China. In the U.S., Powell is deliberately holding the front end of the curve high, even amid cooling inflation, weaponizing real rates as a tool of global monetary dominance. The long end, however, has remained surprisingly stable. Why? Because foreign buyers, especially from Japan and China have anchored demand. But if Japanese investors rotate capital back home, that anchor weakens, just as U.S. deficits surge and Treasury issuance climbs toward unsustainable levels. Without that foreign bid, the U.S. risks losing control over the back end of its curve.

Meanwhile, China faces the mirror image problem: domestic deflation, broken credit channels, and demographic decline are pushing Beijing to stimulate. But they can’t ease aggressively without risking capital flight. With Japan and the U.S. both offering rising nominal yields and global confidence in yuan assets slipping due to political risk and liquidity constraints, Chinese capital is increasingly looking for exits. Unless Beijing either reimposes strict controls or engineers a stealth devaluation, outflows may intensify. What we’re witnessing is a rare moment of three way divergence among the world’s most systemically important economies.

Japan is pulling capital home, the U.S. is pulling global capital in through high real rates, and China is trying to stop capital from leaking out. These aren’t isolated events, they are mutually reinforcing shifts that expose the fragility of the post 2008 financial architecture. The yield suppression regime that underpinned globalization is breaking. The question now isn’t whether it fractures further but what replaces it when the capital tides reverse and the next equilibrium is forced into existence.”

SB Here - A great global grand reordering lies ahead…

Trade Signals: Update - July 17, 2025

“Stay on top of the current market trends with Trade Signals.”

“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”

– Charlie Munger

Market Commentary:

The Market Commentary section summarizes notable changes in the core key indicators: Investor sentiment, market breadth, stocks, treasury yields, the dollar, and gold. The Dashboard of Indicators provides a detailed view of all Trade Signals indicators.

One quick side note this week: I was asked how I think about Investor Sentiment. Essentially, it is a bit more art than science. What I look for are extreme readings in terms of excessive optimism and excessive pessimism, but this approach differs in bull markets and bear markets.

In bull markets, I believe it takes near-peak historical levels of optimism to signal a correction. In bear markets, any move into the extreme optimism zone is enough to suggest a trade.
The same logic applies to extreme pessimism. In bull markets, any move into the extreme pessimism zone is enough to suggest a trade. In bear markets, I believe it takes near-peak historical levels of pessimism to signal a rally.
Refer to the investor sentiment section below for charts.

Notable Changes This Week:

The Weekly MACD for the S&P 500 Index remains bullish. The Daily MACD turned bearish, indicating initial weakness.
The Weekly MACD for the 10-year Treasury Yield turned bearish, signaling higher interest rates.
The Weekly MACD for Gold remains bearish.

Key Macro Indicators - Investor Sentiment, Market Breadth, The S&P 500 Index (Stocks), The 10-year Treasury Yield (Bonds), and the Dollar:

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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.

Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only.

Personal Note: Soccer and Youth Leadership

361 Soccer Leadership Camp took its maiden voyage this past week. Long-time readers know I’m crazy about my wife, Susan (Coach Sue). This year, she finally decided to run a soccer camp. There is no shortage of soccer camps, but what Susan recognized is the need to use sports as a vehicle for teaching early leadership concepts. A simple focus: 1) Lead yourself well 2) Follow others well 3) Lead others well. An opportunity for 5th-9th graders to experience those qualities, all while playing soccer with meaningful discussions in a player-led environment

Teachers and coaches are modestly paid for the work they do. The good ones build rapport, have high standards, and coach with dignity and respect for their students and players. You’ll see no screaming and swearing at players around here. Emotional control and respect for opponents and referees should be modeled. Isn’t this a better way to teach our youth about building strong character? The impact they make sends ripples far beyond the classroom or playing field, carried forward in the hearts and journeys of everyone they’ve touched.

And then……….. Saquon Barkley!

A sweltering day, the session nearly over, and word was quietly spreading that Saquon was training on the adjacent football field. The coaches and counselors (juniors and seniors) were eager to get a look at the Eagles legend. After his session was finished, he graciously took pictures with them and even signed a sacred Messi jersey, front and back.

You couldn’t have planned this day better. Talk about an athlete who is the epitome of the above leadership qualities!

Saquon and Coach Sue

If you don’t know Saquon, you’d be a fan. He is kind, selfless, hardworking, and, of course, extremely talented. Someone who leads himself well.

He was the NFL Offensive Player of the Year in 2024 and selected First-Team All-Pro. And, he earned the Best NFL Player, Best Play (for a reverse hurdle), and team accolades ESPY awards.

In the final game of the 2024 season, Saquon needed just 95 rushing yards to break Eric Dickerson’s all-time single-season rushing record of 2,105 yards. He exploded early with a 62-yard touchdown run, but late in the fourth quarter, the Eagles, ahead in the game, rotated in backups to preserve him for the playoffs. Barkley finished with 2,005 yards, falling heartbreakingly short, but solidifying one of the greatest rushing seasons in NFL history.

When Coach Nick Sirianni told Saquon Barkley he was sitting the rest of the game to stay fresh for the playoffs, Barkley reportedly smiled, shook his head, and said: “Coach, I’d rather chase a ring than a record.”

And a ring it was! That….. is leadership in action.

Some days are just filled with serendipity!

With kind regards,

Steve

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Stephen B. Blumenthal
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CMG Capital Management Group, Inc.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management. Author of Forbes Book: On My Radar, Navigating Stock Market Cycles.

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On My Radar - Trump, Powell, and Japan

July 18, 2025By Steve Blumenthal