July 27, 2017
Stocks are lifting off.
The economy is truly heating up.
Buy Stocks - Short Treasury Bonds
Buy Industrial Commodities
The markets do two things…Consolidate and Move.
The Interest Rate Markets, including Treasury Bonds and Eurodollars, have essentially been sideways since December. I think that is definitely about to change. We have reached a tipping point…Sideway is OVER.
I continue to think stocks are in the process of ERUPTING on the upside…And I think the interest rate markets, both Eurodollars and Treasury Bonds, are about to get hit HARD on the downside.
I continue to think the USA economy is showing more and more signs of a boom…Ditto for China, Europe and all the other places where Wall Street’s geniuses have been predicting “collapses”…FOR YEARS…while the world’s major economies have remained firm and the equity markets have been racking up MAJOR percentage gains…
I continue to think the markets have not even begun to account for all the stimulus that WILL be coming out of Washington.
And I continue to think there are more and more signs that inflation is about to vigorously rear its head…perhaps to levels not seen in years…meaning that the idea of rates staying low, or “rising slowly” from their current lowest levels in over a century, is soon going to be blown out of the water.
To begin with…Here are three important industrial markets that I believe are absolutely signaling STRONGER ECONOMIC ACTIVITY…AND SHARPLY HIGHER PRICES FOR ANYTHING THAT HAS TO BE MANUFACTURED OR BUILT (which obviously can impact just about everything we have to buy)…And as noted below, I fully recommend buying all three of these markets…using either futures and/or options.
Buy Crude Oil, Copper and Lumber
December $3.00 call is 5.6 cents or $1400 + $61 = $1461
Expire under $3.00, it will be worthless – At 3.40. it is worth $10,000
December 51.00 call at 2.45 is $2450 + 61 = $2511
Expire under 51.00. this option will be worthless – At 65.00, it is worth $15,000
November 375 call at 10.20 is $1122 + 61 = $1183
Expire under 375, this option will be worthless. At 440, it is worth $7150
Here are the longer term looks…
And a few world demand charts…
Aside from the point that I think all three of these markets should be bought, I would also note that if these markets do move as I am expecting, we WILL most likely see a decided jump in inflation…And as I have written for several years, THE BOND MARKET HATES INFLATION MORE THAN ANYTHING THERE IS.
As also noted on multiple occasions, the interest rate markets lead the Fed, NOT the other way around…and I would emphasize that this statement is decidedly the most accurate when making reference to the Fixed Income markets…or more specifically, the interest rates on long term lending and borrowing..or in other words, Notes and Bonds.
To be clear, the Fed does set the Federal Funds Rate, but this means they only control the interest rate on overnight (1 DAY) borrowing between the Fed and individual banks…but they ABSOLUTELY DO NOT CONTROL LONG TERM INTEREST RATES. Obviously, they can try to influence long term rates, but the fact is, those rates are actually set by the marketplace and nothing else…Putting it another way, prices in the Bond market are determined by the actions and perceptions of long term investors, borrowers, and lenders…GLOBALLY…and NOT by what the Fed wants…This is precisely why I keep repeating that the Fed does “fall behind the curve”, and that the Fed does MISREAD what is happening economically…the end result frequently being that, THE MARKETS THEMSELVES, TIME AFTER TIME AFTER TIME, END UP MOVING INTEREST RATES LONG BEFORE THE FED UNDERSTANDS WHAT THEY ACTUALLY NEED TO BE DOING.
Prices are already rising on a number of fronts
(where aren’t they really?)
And I think it’s about to get worse…
Take a look at this chart of the Producer Price Index (PPI)…
Producer Prices refers to prices received by producers of raw materials...As might be expected, increases in those prices, especially large ones, often HAVE to be passed on through the production chain right on up to the consumer, thus adding to inflationary pressures at the consumer price level...
While PPI was surging, Bonds were concurrently taking a 30 point hit...In fact, the 30 Year Treasury Bond went up a full 1% at the same time.
I would also say that just because we made a little peak in February does NOT mean PPI is going right back down...To the contrary, as global economic activity increases, and demand for goods does the same, I would only expect to see prices be acting more like they did for the bulk of the 50 years shown above...that is, be spending a lot more time up in that 5-10% band that has been somewhat of a norm…
And then there is this…out today…and just one more indication that, in my opinion, the economy IS speeding up…
To me, everything about that chart suggests STRONG DEMAND FOR RAW MATERIALS…which again, would imply upward price pressure.
So here is the big picture for Treasury Bonds…
I said it over a year ago…I wouldn’t own a bond, of any type, for at least another year or two…
And here is what you could do here…
Ok…enough (too much) for one newsletter…excepting a few very brief comments that I am too tired to expand on…
I am not, and never have been, a “Fed basher”. They have a tough job and I personally think the system would have totally crashed without them at a few specific moments in our financial history…But…My inner voice tells me: The Bond Market does not like what the Fed is doing.
I have not even mentioned the possibility for wage inflation here…which I definitely think is coming in tandem with price inflation…I have seen a lot of commentary lately that “wages just can’t go up in this economy.” I think that is pure bunk. The job market is tight. It’s going to get tighter. And WAGES WILL START HEATING UP…RIGHT ALONG WITH THE ECONOMY.
In a world of WIDELY expanding trade…And in a world where totally new MASSIVE industries (AI, Virtual Reality, Self-Driving Cars, Robotics, 3-D printing, Biochemistry, Genetics, etc., etc., ETC.) are arising, representing probable ENORMOUS economic growth that was not even conceivable just a decade or so ago…And In a world where a third of the planet (China, former Iron Curtain countries) has been re-introduced to capitalism and consumer consumption, which prior to now could not possibly be accounted for in ANY economic theory or textbooks…And in a world with stocks markets around the world making new highs, SIGNALING MORE GROWTH?…With all of that, and more I could add, I say that to expect interest rates to be permanently lingering at the lowest levels in over a century is just totally, totally absurd.
And finally, if my read on interest rates is correct…Yes…Eurodollars will be getting crushed as well...And I am still very short that market and still buying Puts in both the December and March contracts.
IT’S BOND TIME. Many of you have been there with me before…and I would add I am also using futures contracts as well on this go round.
Give me a call.
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: Eurodollars, Treasury Bonds