Treasury Inflation-Protected Securities, or TIPS, are the benchmark for so-called real interest rates. They are pegged to the US Consumer Price Index, which means that the Treasury pays investors the rate of CPI inflation over the maturity of the bond in addition to the coupon, which is now negative 1.2% for a 10-year note.

After inflation, that is, investors pay the US government 1.2% a year to hold their money for them. That’s a good deal for the government, and a prop for all other assets: If real returns on Treasuries are negative, investors have to hold risky assets, like the S&P 500 at 30 times earnings, or rental homes at a yield of 3% (which is roughly the rate of depreciation on houses).

How does the Treasury get away with this? The simple answer is that TIPS are a manipulated market.

There are just $550 billion of TIPS outstanding and the Fed now owns $300 billion of them. The small quantity left over for everyone else functions like an insurance policy, not an investment. If inflation comes in much higher than expected, TIPS will pay off. TIPS are a hedge against unexpected inflation, which is why they trade closely with another hedge against unexpected inflation, namely gold.

The Biden budget assumes that real interest rates for Treasury borrowing will be negative for the next ten years, which means that the bigger the Treasury deficit, the more money the government saves because investors are paying the government to hold their money for them.

There’s no doubt in my mind that plunging TIPS yields are driven by Fed buying. Time-series analysis shows that the size of the Fed portfolios of TIPS has been the dominant factor driving down “real” yields for the past five years – more important even than a short-term interest rate of zero.

The perpetual levitation of equity prices, in turn, depends on negative “real” interest rates.

Bubbles last until they feel like fundamentals, one of my mentors on Wall Street liked to say. But some of the fundamentals are looking extremely squishy.

The biggest surprise in today’s GDP report for the second quarter came from the GDP price index, rising at a 6% annual rate, something we haven’t seen for forty years – at the tail end of the great Jimmy Carter inflation.

The Federal government cannot forever run deficits in the order of 10% of GDP in order to subsidize incomes, trying to pump demand through the sclerotic supply-chains of the underinvested US economy.

When that will break is like trying to predict when an embolism will kill a patient with advanced vascular disease. I don’t know the answer to that and neither does anyone else, but I’m very afraid of equity valuations. You should be, too.