The most significant market development so far in 2019 has not been the wild gyrations of Bitcoin, the nonstop rally in tech stocks (SPY), or the rebound of gold (GLD).
It has been the recent strength of the bond market (TLT), which a few months ago was probing one-year highs.
I love it when my short, medium, and long-term calls play out according to script. I absolutely hate it when they happen so fast that I and my readers are unable to get in at decent prices.
That is what has happened with my short call for the (TLT), which has been performing a near-perfect swan dive since August.
The yield on the ten-year Treasury bond has soared from 2.44% in August to an intraday high of 2.95% weeks ago.
Lucky borrowers who demanded rate locks in real estate financings at the end of September are now thanking their lucky stars. We may be saying goodbye to the 3% handle on 5/1 ARMS for the rest of our lives.
The technical damage has been near-fatal. The writing is on the wall. A 2.00% yield for the ten years is now easily on the menu for 2020, if not 2.50% or 3.0%.
This is crucially important for financial markets, as interest rates are the wellspring from which all other market trends arise.
And while tax cuts are terrible for bonds, they are unbelievably great for stocks. To use Warren Buffet’s characterization, chopping the corporate tax rate from 35% to 21% means your take-home has risen from 65% to 79%, an eye-popping increase of 21.54%.
That means the value of US stocks jumped by 21.54% overnight when the calendar turned the page from December 2017 to January 2018. No wonder the market has gone up every day!
But longer term, and I’m thinking 18 months, rising interest rates trigger recessions and bear markets. So, make hay while the sun shines, and strike while the iron is hot.
Wiser thinkers are peeved that the promised bleeding of federal tax revenues is causing the annual budget deficit to balloon from a low of a $450 billion annual rate last year to $1.2 trillion this year. Add in the bond sales from the Fed’s quantitative tightening and you get true government borrowing of $1.8 trillion for 2019. It will all end in tears.
As rates rise, so does the debt service costs of the world’s largest borrower, the US government. The burden will soar in a hockey stick-like manner, currently at 4% of the total budget.
What is of far greater concern is what the tax bill does to the National Debt, taking it from $20.5 trillion to $30-$40 trillion over the next ten years. If we get the higher figure, then we are looking not at another recession, but a real 1930s style depression rallies.
Better teach your kids to drive for UBER early as they are the ones who are going to have to pay off this gargantuan debt.
So what the heck are you supposed to do now? Keep selling those bonds, even the little ones. It will be the closest thing to a rich uncle you will ever have, if you don’t already have one.
Make your year now because the longer you put it off, the harder it will be to get.