June 20, 2016
Wall Street is about to stick it to the public again…
Some random ramblings here…
Spurred by a SINGLE 1 month jobs number AND all the horse manure about the supposed importance of the upcoming British vote this week, Bond prices reached the truly stupid stage on the upside during the past few weeks. On February 8th I referred to Bonds as the “worst investment on planet earth”, and now, with Treasuries about 1-2 points higher, I will repeat that sentiment…If you buy the 30 Treasury Bond here, you are making the assumption that inflation will remain below 2% for the next 30 years, and more importantly, you are making the assumption that there will be enough demand for a piece of paper yielding 2.4% to keep Bond prices at or above current levels for the next 30 years…AND I THINK THOSE TWO ASSUMPTIONS ARE ABOUT AS FINANCIALLY STUPID AS IT EVER GETS...I THINK THAT BUYING BONDS HERE, AND I MEAN ANY KIND OF BOND, WOULD RANK AS ONE OF THE WORST INVESTMENT DECISIONS ANYONE COULD EVER MAKE.
Really. I think bonds could be down 30-40 points within a year or two, meaning that while you were earning that glorious 2.4% (of which maybe .5% will go to taxes on the income and the balance will be offset by inflation, which will pretty much result in a ZERO percent real return) the principal value of your bonds will have possibly declined by 15-20%. In other words, buy $100,000 worth of 30 year bonds right here and they could easily be worth $15,000-$20,000 less in 2018…And they call this a “Safe Haven”?
For some time now, as the media and analytic community have been beating the “economy-not-good” drum, Wall Street has been marketing trillions of dollars in fixed income (Bonds of all types) to the investing public with the idea that the “safety” of bonds is far more attractive than the risk of owning stocks…And you can be sure the brokerages have been making big, big bucks while promoting and unloading all that paper to the public.
So guess what comes next? And how many times in a lifetime do you have to see this scenario played out to not know that WHATEVER those guys have been creating and flogging to everybody WILL end up being a loser? IF YOU BUY BONDS HERE…AND I MEAN ANY TYPE OF BOND…I PREDICT THAT 6-12 MONTHS FROM NOW YOU WILL BE SERIOUSLY REGRETTING HAVING DONE SO…And what is more, I think you will also be regretting NOT having put that money (spent on Bonds) in the stock market…which, according to the brokerage house geniuses, supposedly has very little upside potential from current levels…and LOTS of risk.
All the latest hype about Brexit is just that…in the big picture totally meaningless...For sure, if the Brits vote to leave the European Union, it will generate some administrative, accounting and political hassles, but to assume it’s going to herald the end of Europe is nothing but media bunk…I mean, how many times do we have to hear this song before the nitwit yakheads understand that Europe…a 1000 YEAR OLD CONTINENTAL CIVILIZATION…is NOT going down the tubes? And how many times will this fear mongering be foisted on the public before they realize that 98% of the economic and market “logic” that is out there is just eternally backwards and wrong?
I am pretty sure that EVERY economic theory I have seen during the past 36 years has been disproven many times over...and I don’t care which famous name has been attached to those theories…with whatever is the latest favorite generally dealing with one theme, that being, “Everything is going to hell”, “The economy may have been cranking out growth for 7 years, but it’s WEAK! Weak I tell you!”, or “A big correction MUST be coming. Don’t buy stocks here!”.
Getting back to the “significance” of the recent “weak” jobs number (38,000 jobs created in May), and the media conclusion that the economy and markets are on shaky legs, I will repeat that I think all you have to do is look out your window to see that THE ECONOMY IS HOPPING. Construction is everywhere. Vehicle sales are booming. Housing prices are rising. Everybody is out driving, spending and consuming. The airports are so crowded it feels like you are walking into a stadium with 100,000 other people for the Super Bowl. “Now Hiring” signs are everywhere. Energy prices are low (but rising I think) and money (economic “grease”) is cheap as dirt…Really. They can talk all they want about the economy not being “good enough”, or that China is slowing, or that Europe is busting up…or God knows what else all the glass-is-empty “experts” will come up with…but I BELIEVE WE ARE IN THE EARLY STAGES OF AN OUTRIGHT BOOM…
The bottom line is: THESE ABNORMALLY LOW RATES ARE NO LONGER NECESSARY…AND MORE VEHEMENTLY THAN EVER, I WILL SAY THE BOND MARKET HAS BEEN IN A TOP BUILDING PROCESS THAT IS NOW ENDING…LITERALLY, RIGHT NOW…THAT ALL THE PANIC I SAW IN THE MARKETS LAST WEEK, BASED ON THE ABSURD NOTION THAT HOW THE BRITISH PUBLIC VOTES THIS COMING THURSDAY COULD BRING EUROPE TO ITS ECONOMIC KNEES (AND US ALONG WITH IT), WAS JUST THE LAST MOB PSYCHOLOGY STRAW…AND FROM HERE FORWARD, I SEE THE BOND MARKET DOING NOTHING BUT TRADING RELENTLESSLY LOWER, TO BEGIN WITH, FOR AT LEAST THE BALANCE OF 2016.
And this may sound simplistic, but common sense says that interest rates cannot get any lower than “negative”. So, for anyone who thinks the current state of negative rates in some countries is anything but temporary (VERY), go right ahead and think that way…But my take would be: IF THEY ARE NEGATIVE. THEY CAN ONLY BE GOING UP FROM HERE. THEY ARE NOT GOING TO GET EVEN MORE NEGATIVE…And furthermore, if you really think that rates here in America are going to follow the course of what is happening in other countries, you are totally ignoring the fact that THE USA IS STILL THE ENGINE FOR THE PLANET…and it is not with some sort of patriotic fervor that I say this, but WE LEAD…AND THE REST OF THE WORLD FOLLOWS…AND TO SUPPOSE THAT WE “NEED” FOR INTEREST RATES TO BE ANY LOWER HERE, OR FOR THAT MATTER, TO EVEN “STAY” LOW, IS, I BELIEVE, JUST TOTALLY IGNORING REALITY.
One more time…
the interest paid on Bonds, and the price level of Treasury Bonds,
ARE directly related to the inflation rate.
If the inflation rate is 2.5%, and a bond is only paying you 2.5% , you are therefore earning NOTHING by owning that bond…Furthermore, if you buy a Treasury at today’s sky high prices, you have the risk that ANY increase in interest rates will decrease the principal value of that bond…THEREFORE, IT IS HIGHLY IMPORTANT TO NOTE (ON THE CHART FOLLOWING), THAT DURING THE PAST 50 YEARS, WE HAVE ONLY SEEN THE INFLATION RATE AT OR BELOW ZERO…TWICE…AND VERY BRIEFLY ON BOTH OCCASIONS…The first was during the Great Recession when everything was crashing in value, and the second was last year when Oil was plunging and taking a number of commodities down with it…which is now, I believe, definitively no longer the case, that contrary to last year, Oil and commodity prices are on the rise…But my primary point is, those ABNORMAL declining price days ARE behind us I think it is only a matter of time (and short at that) before we see the inflation rate returning to its 50 year norm…which I would estimate as being in the 2.5% area…And as this does become the case, the interest paid on Treasuries will HAVE to be going up (to attract buyers), which will mean bond prices going down…I mean, think about it…Do you think health care is going to get cheaper? Or housing? Or food? Gasoline? Consumer goods? Airfares? What in the hell can you think of that you expect to be paying less for a year, or two, or three from now?
To be clear, and it is substantiated by the CPI chart above: INFLATION IS THE NORM…and those two recent occasions when we didn’t have inflation were nothing more than fleeting aberrations…And that although we have already begun returning to the norm, the mob psychology driven investing masses have not understood this yet…which is why Treasury Bonds are still sitting here around 170…whilst talking head after talking head is yapping about “Japan’s negative interest rates soon to be ours”, and “Oh, It’s for sure. Rates HAVE to stay low”, and whatever other eternally wrong “logic” they are always spewing…I’m telling you, it’s no different than a few years back than when 99% of the banks and brokerages were touting Gold at $1900…or just a few months back when they were calling for $10-$20 Crude Oil…ALL of the markets go through periods when there is this overwhelmingly unanimous avalanche of “expert” commentary touting an idea, and all these FOREVER WRONG painted face media sheep are ever really doing is helping set up the masses to lose their shirts, AGAIN, in whatever market these “professionals” are lately hopped up about…And that, dear friend, is exactly where the bond market is today…The GAME is over. They aren’t going any higher. Everybody who would be get long already has done so. BONDS GO DOWN FROM HERE.
I’m beating this subject to death, but really, I cannot count the times I have seen some UNIVERSALLY accepted “logic” in the markets just get TOTALLY blown away…where you look back at some price level, and the unanimously supportive media “story” that went along with it…and then note that this market had actually SCREAMED off in the opposite direction…And guys, THIS IS PRECISELY WHAT YOU ARE LOOKING AT WITH ANY ARGUMENT SUGGESTING THAT NEGATIVE, OR EVEN SUPER LOW INTEREST RATES ARE THE NEW NORM…A year from now, all of that ludicrous, economically ignorant “logic” will have been thrown in the “horribly stupid concepts” history bin…
Take another look at that CPI chart…Do you REALLY think the world has gone through some transformation that means that the past 50 years of 2 ½ to 3% inflation will no longer be the case? And again, WHAT CAN YOU THINK OF THAT WILL BE CHEAPER 2-3 YEARS FROM NOW? INFLATION IS COMING BACK…and I’m not talking hyper-inflation, just plain old ordinary 2-3% stuff…but exactly the sort of numbers that should take the Bonds back to the plain, old ordinary 130’s…which STILL would mean something like 3.5% long term interest rates…
In that same vein, here is a long term perspective as to where we really are in interest rates…
Bottom line to me? I think we WILL see an uptick to at least 2.5% inflation…and if this is the case, I cannot imagine that long term yields will be anything less than 3.5%...and Treasuries WILL be trading in the 130’s…Beyond that, suppose we only get inflation up to 2%? That still would probably put Bonds back in the 140’s…which would still represent a 25-30 point ($25,000-$30,000 per futures contract) from current levels.
After a spike reversal on last Thursday, and a dead low close on Friday, Bonds actually had a highly unusual (for Bonds) gap down this morning…and then another dead low close this afternoon…As I have posted in previous newsletters, once Bonds Do start down, the first 6-10 points are often sharp, fast and relentless so I am NOT sitting here thinking, “Wonder if the top is in”. I AM PERSONALLY ON THIS…So here’s the option I would recommend buying TODAY.
SELL HIGH? Here’s where the 166 put is on a long term chart…
And stocks? Where your Wall Street friends are so negative?
These headlines are all from just this morning…
With all the FEAR I was seeing in the markets last week, with Bonds and Precious Metals all flying while Stocks and everything else on the board were down, you would have assumed the Dow had just dropped 4000 points…but this is not the case…As I continue to reiterate, THE STOCK MARKET IS STILL ON ITS HIGHS BUT THERE ARE A TON OF WALL STREET GENIUSES ADVISING YOU TO SELL…and, again, by now, you must know what this means…STAY LONG STOCKS. BUY THE STOCK MARKET…
Here is an interesting chart…Sure looks higher to me….
I continue to view this market as fairly ready to explode into new highs and chart a path quite similar to what I have drawn below...Maybe I am dead wrong but since January ALL we have heard is that the USA economy is shaky, China is slowing and Europe is disintegrating...and STILL, after all that CRAP…we are sitting here right on the highs. This thing looks ready to go.
And for the record…
We are again LONG CRUDE OIL…
If I have got this right, this will be just one more bearish factor for the Bond market…
And Still Buying Puts in Eurodollars (again, this is not the Eurocurrency).
There is still a lot of press about “how many rate increases will the Fed make this year…and when”, the general consensus being, “not many…and not anytime soon”, with which I firmly disagree…As I have maintained forever, the interest rate markets will move LONG before the Fed does…and that, in reality, the Fed will generally end up FOLLOWING what the markets dictate to them.
The Eurodollar Futures Contract, which basically tracks International Short Term Interest Rates, is the largest and most heavily traded futures contract in the world…and going back decades I have seen it repeatedly move AHEAD of what the Fed was doing…and absolutely expect it to be no different now...Eurodollars go down in price as short term rates are rising and this is exactly what I expect to see now…I continue to believe the US and World Economies are by no means as “weak” as the media, analysts and economists seem to think they are…That, to the contrary, for reasons often stated in these newsletters (see my archives), I say we are in the early stages of a worldwide, outright economic boom…and there is no longer any need for interest rates to remain at today’s record low levels.
I BELIEVE THAT BOTH LONG AND SHORT TERM INTEREST RATES HAVE NO WHERE TO GO FROM HERE BUT UP…AND I THEREFORE WANT TO BE SHORT EURODOLLARS IN TANDEM WITH MY SHORT POSITIONS IN TREASURY BONDS.
For as long as I've done this, the markets have been "surprising" analysts...to the extent that it really is a "surprise" when those guys are right...At any rate, "surprises" to the masses are where the big money can be made...and I say that "surprises" in this business are actually the norm…and am absolutely certain that this IS the next big one.
I will try to cover the grains in a few days…I am still wildly bullish wheat.
I cannot emphasize enough how bearish I am in the Bond market…and encourage you to do what I know it is hard to do…especially if you already have done this…and lost…PUT THE MONEY ON THE TABLE AGAIN. If you don’t, you are just making yourself (with my help for sure) nothing but market fodder…taking a poke here or there, and losing, and then giving up. Bonds ARE a sale. They DO have big potential. DON’T let yourself be convinced that all the BS hype about rates staying low, slowing economy, Brexit, etc. means you ought to “wait and see” on this…If you ever would trade the bond market, and you aren’t willing to short them at 170, I’d say you never should consider trading them again…
Give me a call if you’re interested…
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, Dow Jones, Eurodollars, Wheat.