April 3, 2019
Start with this: The Fed does NOT control the Bond market…Yes, the Fed has some degree of control in short term interest rates, but LONG TERM INTEREST RATES ARE DETERMINED BY THE MARKETPLACE. Period. The Fed can wish for this or that…but for the past 39 years I have watched any number of factors, unmanageable by the Fed, determine the next direction in Long Term Interest Rates…Those factors, which are driven more by media MOB PSYCHOLOGY than anything else, can include professional and public PERCEPTIONS regarding inflation, deflation, gov’t spending, gov’t surplus, geopolitics, stock market moves (fears and euphoria), etc., none of which involves a dial that the Fed can turn to “on” or “off” as they can with the Fed Funds Rate that they do set…which, literally, by the way, is nothing more than the cost of overnight money between banks…NOT, for example, what the interest rate might be for anyone who wants to loan or borrow for 10 years. THAT rate IS set by the marketplace…Of course, the Fed Funds Rate does have some influence over the whole interest rate spectrum, but I cannot count the number of times that MAJOR movements in the Bond market have TOTALLY baffled the Fed…FOR REAL.
So, the point here is: SIMPLY BECAUSE JUST ABOUT EVERY SMOOTH TALKING, PAINTED FACE ON TV OR THE INTERNET IS SHEEPHERD BLEATING THAT, “THE FED NEEDS TO EASE,” IT DOES NOT MEAN INTEREST RATES ARE GOING DOWN OR THAT BOND PRICES ARE GOING UP…I swear to you, 100 times more often than not, the Bond Market is, I will say, ALWAYS moving dead, dead, dead opposite whatever direction the talking heads are expecting…ALWAYS…So please, if you can, go find me any of them who are talking about higher interest rates…
TRILLIONS OF DOLLARS HAVE LEFT STOCKS
AND GONE INTO BONDS AND BOND FUNDS…
AND WILL GO BACK TO STOCKS…
This is basic, but there are essentially just two types of paper in which investors can spend their money…Stocks and Bonds…and other interest rate instruments of course, but these are the two “biggies.” And since the beginning of time, fund flows into, out of, and between these two investments have been of primary importance as to whether each of them is going up, down or even sideways…In other words, sometimes money is being vigorously SOLD in one of them to be used to then to BUY the other, with the result being that the SELLING pushes one of them down, while the BUYING does just the opposite for the other. Obviously, there are times when this “transfer” of funds does not have a noticeable effect on the value of the two markets…but then again, there ARE times when it does…in a BIG way…which is where I think we now stand.
For at least 4-5 YEARS now, all the brokerage house smarty pants guys have been preaching caution regarding the stock market and endlessly recommending that investors park their money in the “safety” of the bond market…Just think back a bit and remember (what all those idiots want you to forget) all the various supposed “CRISES” that have “threatened” the world’s economies and stock markets in recent years…Like Grexit, when they tried to tell us that Greece, with an economy smaller than the state of Georgia, was going to topple Europe and take the rest of the world with it…Or, oh yeah, let’s don’t forget the Italian bond market “crisis”, or the same in Spain, or if I remember, even something of the same for France, and really when you get down to it, that we’ve been hearing garbage opinions for years that the whole European economy is about to roll off a cliff…And then there’s periodically Korea with their atomics…or Russia’s invasion of Crimea…And then on to the big ones in 2016, starting with the supposedly devastating implications of a sell off in China’s stock market in January, then Brexit in July, and then the election, when Wall Street’s conviction was that Trump’s victory was going to collapse the stock market…AND so on, which also has to include Wall Street’s decade long general insistence that the “economy is weak”, or “growth is not strong enough”, or that the ONLY reason the economy was still growing was “due to the Fed doing too much”, etc., etc., etc…THE POINT OF ALL THIS IS TO HELP YOU REMEMBER THAT THE EVER-WRONG “PROS” HAVE BEEN TELLING YOU, FOR YEARS, TO “BEWARE OF STOCKS” AND PUT YOUR MONEY INTO BONDS…AND THAT IS WHAT THE PUBLIC, AND MANY OF THOSE SAME PROFESSIONALS HAVE ALSO BEEN DOING…IN HUMONGOUS NUMBERS…AND IN PARTICULAR, THEY HAVE BEEN REALLY BEATING THAT DRUM SINCE 2015-2016…WITH BONDS AT THEIR HIGHEST PRICES IN HISTORY…THE IMPORTANCE OF WHICH, I BELIEVE, IS OBVIOUS ON THE CHART FOLLOWING.
To be specific…Between 2015 and 2017, Treasury Bonds were trading between about 150 and the July, 2016, Brexit-inspired high of 177…And as of today, and for a while now, with the Bond market BELOW 150, this means that ANY investor who bought pretty much ANY Bond, or Bond Fund, during those years, IS already losing money.
Meanwhile…What were stocks doing throughout all the supposed “crises?”
Do NOT let the slick brokerage house “experts” fool you into remembering otherwise...Wall Street HAS been preaching endless caution all the way up (documented in my newsletters) while urging people to put their money in the "safety" of Bonds...And they CONTINUE to do so, particularly since the Nov-Dec 2016 Stock sell off convinced them all to return to preaching "slow down", "fragile economy", and "recession."
THE BOTTOM LINE:
Eventually, most investors WILL sell whatever piece of paper they own that has already lost them money…especially when they see the statements getting worse and worse as that market slides lower…AND especially when they look at something like a Bond that they bought at 100, that is now trading at 90, with news of a HOT economy becoming more and more prevalent…AND, then on top of that, they are only earning something like 2.5%...AND when they also look up and every day the stock market is screaming into newer and newer highs?
With all that, what DOES happen, and it has happened forever, is THEY WILL SELL BONDS…EN MASSE…AND THEY WILL GO RUNNING TO BUY THE STOCK MARKET…THE RESULT BEING, BONDS GET TANKED EVEN MORE…AND STOCKS TURN INTO A ROCKET.
I might be dead wrong…but I can’t see this any other way…THERE ARE TRILLIONS OF DOLLARS IN BONDS THAT WERE NOT THERE 3-4 YEARS AGO. TRILLIONS THAT HAVE BOUGHT THE HIGHEST BOND PRICES IN HISTORY.
Buy Stocks…Short Treasury Bonds.
Believe me, the stock market WILL keep going until it at least becomes noticeable that there are SOME NY nitwits starting to make predictions about “How high” the market will go…At present, about the only thing I here is, “Where will it stop?”, NOT “How far will it go?” I THINK WE ARE MANY 1000’S OF POINTS AWAY FROM THE HIGH IN THE DOW.
Somewhere in here, maybe with Friday’s employment report, we ARE going to get some blow-the-roof-off numbers that WILL start demolishing this “weak economy” junk…And Stocks will explode…while Bonds get TOASTED…And really, I’ll keep saying it…You need to be there BEFORE that sort of news starts hitting…What I genuinely would prefer not to have is a bunch of people calling me with Bonds 2-4 points below today’s close, and saying, “Okay, I’m ready.” (RHL!)
If you can write the check…Pick up the phone and call me…
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