July 26, 2018
Why I am AGGRESSIVELY
SHORTING TREASURY BONDS AGAIN
If you are not totally versed in interest rate lingo, much of what follows may sound like Greek to you, but I will do my best to express what I have to say in a way that hopefully makes what I am recommending, and why, halfway understandable…But I can’t help thinking that this will be my worst newsletter ever…I have no idea if I can make this set of logic at all comprehensible.
If you follow the financial media at all, for the last 3-4 months you have heard tons of talking head gibberish about “the flattening Yield Curve”, with all of these nouveau interest rate “experts” UNANIMOUSLY yapping with absolute certainty that the “curve will invert”…AND that the inversion will have all sorts of economically nasty implications for the economy…And believe me, most of those guys barely knew what the yield curve was before all their cohorts started talking about the “flattening” early this year. And I would add, they all jumped on this idea, easily, a year AFTER it had actually begun happening. Classic after the fact realization.
Anyway, “inverting” refers to the idea that long term interest rates, which are tradionally higher than short term rates, will have their relationship reversed, that is…that short term rates will become HIGHER than long term rates.
This first chart below is one example of what all the NY geniuses are talking about...What you have there are the 90 day Treasury Bill Interest Rate (short term, in other words), and the 10 Year Treasury Note Interest Rate (long term)...The idea that the banks and brokerage houses are espousing is that short term rates are climbing steadily, while long term rates are doing so much more slowly, and their expected result is that Short Term Rates will soon equal, or become higher, than Long Term Rates...thus, as has been the case in the past, leading (supposedly) to a recession...And lastly, I will tell you that all these brilliant financial "analysts" are almost unanimous in their belief that this absolutely will happen.
AND I COULD NOT DISAGREE MORE. I AM FIRMLY OF THE OPINION THAT WHILE SHORT TERM RATES WILL CONTINUE ON THEIR STEADY UPWARD PATH, LONG TERM RATES ARE NOW READY TO MOVE SHARPLY HIGHER...MEANING THAT THE YIELD CURVE WILL BE DOING EXACTLY THE OPPOSITE OF WHAT WALL STREET IS NOW PREDICTING (nothing new about that). AND THAT FURTHERMORE, WHAT THIS REALLY MEANS IS THAT TREASURY BOND FUTURES ARE ABOUT TO DROP PRECIPITOUSLY.
Now this will get enormously confusing…
The next 4 charts are of Commitments of Traders in the four major interest rate contracts we trade…I will tell you ahead of seeing them that you will note that Large Speculative Funds (which largely reflect mainstream-Wall Street type thinking) are all very short the first three markets, representing very short term rates (90 days) out to 10 year rates…And the last chart here is of Treasury Bonds, which represent that longest term rates, or 20 years and up…where those Fund guys are now net LONG the market…And just taking it one confusing step further, what I am trying to show you here is that the markets are jam packed with traders who, by being short the “front end” (short term rates) and long the “back end” (long term rates, or Bonds), are betting that the curve WILL flatten…are betting right along with all that unanimously stupid (I think) opinion that short term rates WILL get higher than long term rates…AND I THINK THIS TRADE IS GOING TO BLOW UP IN THEIR FACES.
And I know that none of that makes sense as I re-read it now…So hopefully, the following charts will make the point halfway clearly…
On these next 4 charts, in the Commitments section, anything below the zero line indicates to what extent the three groups of traders (Commercials, Small Speculators, Large Speculators or Funds) are short, and anything above the zero line indicates to what extent they are long.
And then there is this…
Again, what I think you are seeing reflected here is that all of these guys ARE short the front (shorter term rates)…and long the back (longer term rates)…in big numbers…thereby betting on this idea of the “curve inverting”…And what we are about to see is a classic case of how this mob psychology game works…That the biggest moves are made when everybody is on one side of a trade…and the move does NOT happen in the crowd’s favor…that it in fact does quite the opposite…and like I said, frequently in a BIG way.
SO THE NEXT CHART, THE “SPREAD” BETWEEN TREASURY BONDS AND TEN YEAR NOTES, IS ONE WAY IN WHICH TRADERS CAN USE THE FUTURES MARKETS TO POSITION FOR WHAT THEY ARE EXPECTING THE YIELD CURVE TO DO… (and now this will probably just get more difficult to comprehend…And I salute you if you are able to decipher the basics…and the message…that I am trying to convey.)
Spreads are confusing to most people so all I’m going to say is here is…If ALL those sheep who are bleating about the curve inverting are right, the next move in this will be to the upside. And if they are wrong, with SO many people all over this idea…in record numbers I think…the next move should be sharply lower.
This spread is the difference between the price of the Treasury Bond and the Ten Year Notes...If this chart moves lower, it will generally mean that Treasury Bond futures are falling faster than Treasury Notes...that is, that the yield (interest rate) on the 30 Year Treasury is going up faster than the yield on the Ten Year...in other words, that the curve is WIDENING, NOT FLATTENING.
And oh boy, again, as I am re-reading this, even though I know this all quite logical, I can barely follow it myself…
I hate this newsletter…but I do know that it all makes sense…
Okay…SELLING this spread is one of the ways I am positioning to be short Treasury Bonds..that is, I am selling 1 Treasury Bond Future while buying 1 Ten Year Note future…but I will get to those mechanics a little later…But the next thing I want to show you is how this spread…which I am 150% convinced is heading sharply lower…compares to the Treasury Bond futures contract…and more specifically, to show you that they are as close to identical as any two charts ever get in this business…
For reasons I will leave out here, I will simply tell you that the Bond vs Note spread IS virtually identical to the Treasury Bond contract itself...that, whatever the spread does, you can be absolutely confident that the Bonds will be doing pretty much the same...And the BIG point here, aside from any number of reasons I already have to expect a sharply lower bond market, the confluence of what this spread looks like...and what I believe is my very accurate read of what the ever-stupid brokerage houses guys are looking for...If this spread is going to crack, it should also mean the same thing is coming in the Bond market itself...
Enough of all that...except to say that I still have some major reasons (other than just a few charts) as to why I think Bonds are about to move LOWER…as to why I think long term rates are about to shift rapidly/sharply HIGHER, but this piece is already too “cumbersome”, so I’ll just throw in a few one liners:
The Chinese own more of our Treasuries than anyone else on the planet. I do not think they will back down…And they HAVE discussed selling US Treasuries as a means of reciprocating against the Great Dealmaker’s War. Chinese selling, in big numbers, could crush the Bond market.
Putting stiff tariffs on everything coming into the USA DOES mean potentially sharply higher prices at both the producer AND consumer level, which in a nutshell, can mean severe INFLATION…and Bonds HATE inflation.
And, I assure you, sooner or later, I don’t see how that long term rates WON’T have a commiserate response to the short term rate rises we already have had…and WILL be having. I REALLY CAN SEE NO WAY THAT LONG TERM RATES CAN JUST CONTINUE TO SIT HERE WHERE THEY ARE.
Here are the recommendations I have at current levels…
Here is how to position in the spread…
And here is the options trade I would do here…
As I myself was just about ready to give up on the idea of being short Bonds, after SO many months of trading sideways, I am pretty sure that just about everybody else who was trying to do the same HAS given up…And NOW, FOR THE PAST WEEK OR SO, IN CLASSIC FASHION AFTER MAKING ONE LAST NEW HIGH, THEY NOW APPEAR TO BE ON THE MOVE…and I would add, off of no particular news…which I consider to be significant. THE POINT IS, AND YOU NEVER EVER KNOW IN THIS STUFF, IT LOOKS TO ME LIKE THEY ARE NOW GETTING STARTED ON THE DOWNSIDE. AND I DO MEAN “NOW.”
Still Short and Still Shorting
Gold and Silver
I believe that the Liquidation of
YEARS of LOSING PRECIOUS METALS BUYERS
is now accelerating…
I haven’t done a scientific study or anything but my experience tells me that the over-over-overwhelming majority of clueless brokerage house analysts have pretty much done nothing but recommend buying Gold and Silver for YEARS now…going all the way back to the highs in 2011 at $1900…and ever since…ALL THE WAY DOWN.
As I pointed out back in February when the Dow dropped about 3000 points in 6 days…and Gold went DOWN….If something like that didn’t move this supposed “safe haven” higher, WHAT IN THE WOULD?…Since then we’ve been through all sorts of turmoil for months…AND BOTH GOLD AND SILVER HAVE CONTINUED TO SLIDE INTO NEW LOWS…
Gold moves on nothing but emotion…Actual Supply and Demand are irrelevant…And as I have been saying for months, I think there are essentially nothing but sellers in both Gold and Silver…TONS of them that have owned this loser for years and that there is nothing to spur more and more selling like more and more losses.
As I stated in the headline above, I SEE THIS AS NOTHING BUT A LIQUIDATING MARKET…MEANING AN OVERABUNDANCE OF SELLERS…and I still think we have a LONG way to go on the downside…Although they must be out there, I have yet to see the first braindead analyst recommend getting short these markets or even suggesting possible targets as to where they are headed (all I see from them are references to where “it might bottom”).
FOR MY MONEY, I CONTINUE TO BELIEVE WE WILL SEE GOLD TRADE UNDER $1000…AT A MINIMUM.
I have seen this script before I think…where a slow slide, such as we more or less been having since April, suddenly turns into a rout in which the daily moves just get bigger and bigger…and to be quite honest, seeing a $75-$100 down DAY at some point would not surprise me at all.
I THINK THIS MARKET IS A BIG SHORT. RIGHT HERE. RIGHT NOW. I THINK IT IS JUST GETTING STARTED ON THE DOWNSIDE. AND I THINK THAT THE TARGETS I’VE POSTED ON THE CHART BELOW, QUITE HONESTLY, ARE QUITE MODEST FOR WHAT I REALLY THINK THIS MARKET (AND SILVER) WILL DO.
I am short Silver as well but this is enough for one day…
I think both of these markets (Bonds & Metals) have massive potential…Otherwise I would not be involved with them…And as always, I have to remind you that I may be dead wrong about all of this…and if I am, it can mean losing every dollar you have on the table.
Big things happening. Lots of volatility…which is ideal for the both sides approach…So I urge not to just sit there and watch…if, that is, you do have the risk capital, and the temperament, to be doing something like this…
Give me a call if you are interested…or just to talk. I always like hearing from all of you and what is going on in your life.
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, Treasury Notes, Gold, Silver.