This newsletter is way too long but this idea goes SO opposite 99% of the opinion currently out there that I have no choice but to TRY to show you why I continue to make this recommendation in Interest Rates…I salute you if you read the whole thing…It’s long but mostly charts really…And would also ask that if you think my work is worthy, please do pass it along to anyone else who you think might be interested. Thanks.
March 30, 2019
Let’s start with this: Since I entered this business in 1980, I cannot count the times that some major idea has become unanimously accepted by all the analysts, talking heads and brokerage house “strategists”…who ARE the primary source of opinion for 99% of the investing public…and then seen that idea simply be dead, dead, DEAD WRONG…over and over and over again…and I want to say, pretty much 100% of the time.
For the zillionth time, the markets are just a giant mob psychology game…No value of ANY of these pieces of paper that we trade is real, and certainly not fixed…And when you have every one of those bank and brokerage house “experts” endlessly repeating the same, seemingly “logical,” but erroneous opinion, MUCH more often than not, the end result is exactly the opposite of whatever it is they have been predicting.
And today? THE unanimous idea that is EVERYWHERE, that is used to “justify” all sorts of conclusions about what will happen in various market sectors, is, “the slowing world economy,” and the “coming recession.” Heard that anywhere? I have, maybe 100 times a day…And as I have written here for years, I think the idea of the WHOLE world slowing down…and dragging the USA down with it…is #**##*# absurd…just the latest version of the SAME CRAP those guys have been intermittently spouting for almost a decade now…as the Dow has gone from 7,000 to 27,000…And right now, they are spewing their “be cautious” nonsense about as LOUDLY as I have heard it in a LONG time.
And concurrent with their “slowdown,” one of their other genius conclusions has therefore lately become, “The Fed needs to ease,” or, “Interest rates HAVE to go lower.” Really. This opinion, which otherwise stated, is “Buy Treasury Bonds” and “Buy Eurodollars,” has become almost unanimous…and I think, is just totally, totally BACKWARDS.
I still see MUCH higher Stocks
Treasury Bonds & Eurodollars
going MUCH LOWER…
On Feb 8th, with Wall Street bleating that we were entering a bear market, I wrote that I thought we would see at least 28,000-29,000 this year in the Dow. I still do. Let all the geniuses keep talking about the "slowing world economy" or the "potential recession", I continue to see USA and World Economies in a MASSIVE expansion...and one result will be higher...NOT lower...interest rates.
Here is the latest chart look for the Dow…And DO be aware, though they will deny it, that the majority of Wall Street analysts have spent the last 10 years, since 6500 on the Dow, coming up with all sorts of reasons, year after year, to NOT be expecting much on the upside…
And just for the record…Regarding the SUPPOSED worldwide economic slowdown all those guys are predicting, here are charts of what all of the other major Stock Markets of the world have been doing since the beginning of 2019…the point of presenting them being, and it is OBVIOUS, that all this DUMB negative talk about a world economic slowdown is occurring when EVERY major index on the planet is trading on its highs for 2019…and already SOLIDLY higher for the year…So, as for all those Brokerage House geniuses (whose MISERABLE ability to make market projections I have documented going back for YEARS in this newsletter) let them keep insisting that bad times are coming…What I will say is: KEEP BUYING. STOCKS ARE NOT STOPPING HERE…OR ANYTIME SOON.
Start with Great Britain…Where the experts have been telling you Brexit is the next economic bogeyman we should all be worried about? And where they all keep insisting that the outcome of this “crisis” could be critical to the entire planet?
And oh yeah, Europe on the whole is supposed to be standing on weak legs? The STOXX is something like an European Dow Jones.
And they are rioting in the streets in France? But their market is up 12%?
And CHINA?…You hear 100 times a day about China slowing…But they are up 11%...SO FAR…this year?
So…ALL of these stock indices from around the world are wrong? Is it merely coincidental that ALL of them have pretty much done nothing but go up since we started the year? Or, is it that all this negative Wall Street claptrap just as wrong as it perennially is?
You know my answer…I think this “slowdown” idea that the brokerage house nitwits are STILL touting is ridiculous…and the corresponding idea that rates “need” to go lower to save us all is just total BUNK.
How Treasury Bonds Make Tops
I have said it for decades. The Treasury Bond and interest rate contracts are THE contrary opinion markets…and EVERY turn in Bonds, both to the upside and downside, has always been accompanied by OVERWHELMING opinion arguing against that turn…And more specifically, relative to the present, I will tell you that at EVERY top I have ever seen in the Bond market, the Bank and Brokerage house guys, were, as usual…and as the ALL are now…unanimously seeing Bonds as a Buy…and NOT a Sell.
I believe there are reasons why it ALWAYS works this way that derive from the fact that the major players in interest rates are conservative, crowd following banker types and fixed income investors…NOT risk takers…And these people have a decided tendency to only hold “me too” opinions, by which I mean they are only SURE about anything when they know that everybody like themselves is talking the same game…And if you then combine their sheep herd mentality with the same sort of crowd-following mob mentality that is forever present in the media? What you then DO get, over and over, are these situations, like NOW, where EVERYBODY is screaming “Buy” and presenting supposedly undeniable “logic” that rates can ONLY be going in one direction…when the truth is, they are about to do exactly the opposite.
What I try to do here is SHOW you some of what forms my opinions…So the first thing I here want to show you is what Bonds looked like at each of the 13 Treasury Bond tops I have personally seen take place since entering this business in 1980.
And I will tell you that at every one of them, there was certain point in time…precisely when they were about to start down with a vengeance…at which opinion was virtually identical to what we now have…When ALL of the logic was, “NO WAY BONDS ARE GOING DOWN FROM HERE. NO WAY THAT INTEREST RATES ARE GOING HIGHER.”
Every market has its “personality” or tendencies…And in my experience, the Bond market’s tendencies at a top are more definitive than any market I’ve seen…As you go through these next 13 charts, you will see, on at least 10 of them, some version of the same broad, somewhat squared off topping range…of various time durations…that ultimately end with one last BRIEF punch into (or close to) new highs…and then they FAIL…IMMEDIATLEY AND SOMEWHAT PRECIPITOUSLY. In trading terms, they force out the last shorts and trap the last foolish buyers…before collapsing lower.
Okay…Now take what you’ve seen here and compare it to the present…both what the current Bond chart looks like…AND what you KNOW is the OVERWHELMING opinion out there today…that Rates are going lower…and therefore going higher…I mean, really, find me somebody who…RIGHT NOW…is even remotely suggesting that Bonds are going down…
TREASURY BONDS TODAY…This looks almost identical to SO many of those previous 13 tops…
Obviously, it is possible that Bonds will trade higher from here…but to be clear…THIS IS ALMOST EXACTLY WHAT THE OVERWHELMING MAJORITY OF TOPS, FOR THE PAST 39 YEARS, LOOKED…AND FELT…LIKE. PERIOD.
And now take a look at what traders are doing…
The Commodity Futures Trading Commission publishes Commitments of Traders once a week. In this report, the CFTC divides traders into three groups to present an up-to-date picture to what extent these three groups are positioned (long or short) in each commodity market…There are Commercials, comprised of organizations who either use or produce the commodity and use futures to hedge their prices. Then there are Large Speculators, otherwise known as Hedge Funds, who are trading large sums and are in the market strictly to speculate. And finally, there are Small Speculators, which includes just the sort of traders it sounds like…that is, private individuals who are speculating using small amounts of money…And it is this group that has recently grabbed my attention in the interest rate markets.
While the MUCH larger Commercials and Large Speculators undoubtedly are the real money forces that move prices in all of the commodity markets, I have long regarded Small Speculators as generally being nothing more than fodder for markets…As traders, they are often unsophisticated, inexperienced and underfunded in a highly leverage arena in which most of them tend to only lose…and beyond that, as they are EASILY the traders most likely to be influenced by what the forever-wrong talking heads are thinking…they ARE at times one of the best contrary indicators you will ever find. In other words, nothing in this business is absolute, but if Small Specs are going one way, you need to be going in the opposite direction.
I made that point because Small Speculators have recently become more net long the interest rate markets than at any other time in the history of futures trading…
In fact, they are actually now net long these markets (Treasury Notes and Bonds)…when they have ONLY been short…FOR YEARS…and in one major case, are even long when they have basically NEVER been long.
If you just glazed over through that, and didn’t fully grasp why I highlighted it so much…Read it again.
So there you have it…And as I often ask: How many times do you have to see ALL the opinion piled up on one side of market…and again, it will ALL sound logical…to understand that this is precisely when you go in the opposite direction?
The economy IS heading towards BOOM territory…As I also keep saying: Just look out your window. Drive down any street…The roads and shopping centers are JAMMED with cars…the airports are FULL…and the Interstates are PACKED with Trucks…If this isn’t a case of all the analysts not being able to see the forest for the trees, I don’t know what ever would be. So…one more time…the idea that the economy is “fragile”, or “slowing”, and “needs lower rates” is just plain stupid.
And together with our HOT economy,
I think that Price AND Wage Inflation Jumps are coming…
THE primary enemy of the Bond market is inflation…And without going into detail (this newsletter is already WAY too long), with the current 10 Year Treasury Note currently paying 2.4%, if the inflation rate gets anywhere above that…which I think is definitely on the horizon…Long term rates generally will HAVE to go up…Otherwise, investors won’t buy these paper investments…as they know that, right up front, they have PRINCIPAL risk (the actual value of what they invest can go down…considerably, really), and secondly, they also know that the interest they are earning is being totally negated by inflation…
THE BOTTOM LINE, THEN, IS THAT IF INFLATION DOES START HEATING UP A BIT, YOU’D BETTER BELIEVE THAT OUR CURRENT ABNORMALLY AND HISTORICALLY LOW RATES WILL TURN HIGHER IN A BIG WAY…WHICH IS WHAT I THINK IS COMING.
Crude Oil pervades everything
And it is the primary driver behind
Commodity Price Inflation…
And I continue to see Crude Prices moving higher…
I THINK ENERGY PRICES WILL CONTINUE HIGHER…and as I point out every few years, there is a very real relationship between Crude Oil and Bonds...and that, as can clearly be seen below, they absolutely tend to move in opposite directions...This is DIRECTLY related to the inflation implications of rising (or falling) Crude Oil prices...as well as the fact that Crude prices may be an indicator of strength or weakness in the economy...At any rate, as noted, THE INVERSE RELATIONSHIP IS REAL…AND IF CRUDE DOES CONTINUE TO STRENGTHEN, IT WILL HAVE AN INFLATIONARY IMPACT, AND IT WILL BE BEARISH FOR TREASURIES.
Crude Oil versus Treasury Bonds…No, they do not move EXACTLY opposite each other…but it is pretty damn close…
Long dormant but now moving higher…
In general, Wages and Prices are the two primary sources of inflation…with Prices easily being the most commonly recognized, and as noted above, can be significantly affected by what the Crude Oil market is doing…
Wage inflation, however, pretty much only occurs in hot economies, when there is a shortage of employees (skilled or otherwise), and businesses have to “pay up” to attract, or keep, the people they need…And for YEARS, wage inflation has not been a concern, but in today’s economy with its LOWEST UNEMPLOYMENT RATE IN 50 YEARS, employers ARE having to compete for employees…and as can be seen on the next chart, WAGES ARE BEGINNING TO INCREASE SOMEWHAT SHARPLY…which certainly would be expected…and just as certainly, DOES have an impact on inflationary expectations…which, AGAIN, is BEARISH FOR THE TREASURY BOND MARKET
And a final note? In spite of what you might think…and what all the “experts” might lead you to believe…the Bond market does NOT like a Fed that is perceived as “dovish”, that is willing to err on the side of inflation…which IS what we seemingly have now…And again, regarding all this talk that the Fed “HAS to lower rates,” I will remind you that, due to nothing more than the stock market scare in December, they totally reversed their gameplan 2-3 months ago, which is just one more example of what I would almost call a FACT, that being that THE MARKETS LEAD THE FED…and NOT the other way around…And that for the umpteenth time, I REMAIN CONVINCED THAT THE ECONOMY IS STILL EXPANDING RAPIDLY, THAT STOCKS WILL CONTINUE TO SURGE ON THE UPSIDE, AND INTEREST RATES, I BELIEVE, CAN ONLY BE HEADING HIGHER.
Here’s the big picture…
Here are two ways to do it…
The smart way…Using the 2 & 1…
Or just buying naked puts…
And I will reiterate…10-15 point moves are COMMON in the Bond market….To be back at 136 is NOT a big move here…AT ALL…If you want evidence, go back and skim through those 13 Bond Tops provided above…
That’s enough…If you read all this, and disagree with me, I would REALLY like to hear what you think…
Otherwise, I can only say that I think this is a KILLER…that in all my years of calling the interest rate markets, this is about as sure as I ever feel about my opinion…This does NOT mean I will be right for sure…But I absolutely want to be all over this…And HOPE you can see through all the garbage that is out there arguing the opposite…and DO SOMETHING WITH THIS.
Thanks for reading,
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Treasury Bonds, Eurodollars