April 16, 2019
If you are long term reader of this newsletter, you will have heard 100’s of times from me, that, AT THE TURNS IN TREASURY BONDS (AND EURODOLLARS), 99% OF THE RHETORIC OUT THERE WILL BE ARGUING EXACTLY THE OPPOSITE OF WHAT IS ACTUALLY GOING TO HAPPEN.
Unless you are reading and hearing interest rate commentary from another planet, you should be able recognize that virtually EVERY analyst, economist, and “strategist” at EVERY major bank and brokerage house is arguing that rates have to stay low, or even go lower. In other words, they are all saying “Buy Bonds” and “Buy Eurodollars.”
I don’t know what else to say…This bunk about slowing USA and World economies is just that…I think that EXPANSION is taking place across the globe…I mean, think about it, what corporate execs out there could possibly be seriously considering contracting their business plans right now? In Tech? In Construction? In Retail? In Energy? IN WHAT?...The Trade War, which has certainly been something of a deterrent, is nearing its end…NOT its beginning...Whether it’s here, or anywhere in the industrialized world, EVERYBODY is gearing up, I’d say, in just about ANY industry you want to name…EVERYWHERE on the planet.
And my very simple point is this: Expansion is not done with cash. It is done with borrowed money…AND THE DEMAND FOR BORROWED MONEY, I BELIEVE, CAN ONLY BE INCREASING…AND INCREASING DEMAND FOR BORROWED MONEY GENERALLY ALWAYS MEANS HIGHER RATES…A HIGHER COST OF MONEY…Throw that demand together with what I believe are the increasing prospects for inflation…AND THE ODDS, TO ME, ARE THROUGH THE ROOF THAT INTEREST RATES ARE UNDENIABLY HEADED HIGHER…AND TREASURY BONDS AND EURODOLLARS ARE THEREFORE HEADED SOUTH…IN A BIG, BIG WAY.
I ABSOLUTELY BELIEVE THE BOND MARKET HAS TOPPED…AND IS HEADED DYNAMICALLY LOWER…
What follows below are close up looks at what EVERY Bond Top has looked like going back to 1982…
These are all ROUTINE MOVES for Bonds and what they look like when they start down…And I long ago learned that when Bonds DO start lower, ANYTHING can happen…So what I’m showing you here are just the BEGINNING moves in bearish phases of the Bond market…How fast they move…and how big.
I encourage you to take a little time to go through them…and if you think I am making sense, call me and do something with this…BEFORE Bonds get down another 4-5 points (at $1000 per futures contract) and start making some headlines…
EVERY POINT HERE IS $1000 PER FUTURES CONTRACT…SO DO NOTE THE SIZE OF THE MOVE, TIME FRAME AND EACH CONTRACT’S PERCENT LOSS AS EACH BEAR PHASE BEGAN…
Taking all of the above into account, I think it is highly probable that we will see AT LEAST a 10% move down in Bonds…Especially with my having recently pointed out that Small Speculative Traders are more long the interest rate markets than at any time in history (when in some cases that had NEVER been on the long side). And honestly, with just about every “genius” on Wall Street also saying, “Buy Bonds!”, with interest rates STILL just barely above the lowest rates in modern history, SEEING TREASURY BONDS GET HIT FOR 15% WOULD NOT SURPRISE ME AT ALL.
The math then? A 10% move takes Bonds down to 135. A 15% move takes them down to 128.
Here is an option I LOVE here…And I would note that THE SMALLEST MOVE I HAVE NOTED ON ALL THOSE BOND TOPS, GOING BACK TO 1982, IS 5.7%.
Short Term Interest Rates
Eurodollars – otherwise known as LIBOR
As for all this talk that "the Fed won't raise rates this year," let me just suggest that if 2-3 months from now, stocks are still banging higher and higher…and GDP is strong…and robust economic activity is OBIVIOUS…and wages are growing…and inflation showing ANY sign of accelerating? You need your head examined if you think the Fed is STILL just going to be twiddling their thumbs. There is a TON of time and NEWS between now and December...for SEVERAL rate increases...especially if the feeling arises that the Fed has let it itself get behind the curve...which, IS, what I think could be happening...As I've written SO many times over the years, THE MARKETS LEAD THE FED...NOT THE OTHER WAY AROUND…So believe me, this latest Wall Street Sheep Bandwagon about Fed easing, can quickly be blown out of the water…and we CAN end up 2019 by having had a few rates increases…December is really a LONG way off right now.
This contract goes down as interest rates, specifically LIBOR, go up…
I firmly believe that both of these market have ENDED their upswings…and quite typically turned everybody on Wall Street on their EVER-wrong heads…and that BOTH TREASURY BONDS AND EURODOLLARS HAVE NOWHERE TO GO FROM HERE BUT SHARPLY LOWER…The trap is set. Every “strategist” and his brother has gotten LONG these two markets during the past month…and they are ALL already losing…and GOING to be losing…and eventually SELLING in BIG, BIG numbers as this “slow economy” nonsense proves them all wrong for the umpteenth time.
Call me and GET SHORT.
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
All charts, unless otherwise noted, are from Aspen Graphics.