January 6, 2020

Global Market Comments
January 6, 2019
Fiat Lux

2020 Annual Asset Class Review
A Global Vision


Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)

December 13, 2019

Global Market Comments
December 13, 2019
Fiat Lux

Featured Trade:

 (SPY), (INDU), (NVDA)
(TLT), (TBT)

Now the Fat Lady is REALLY Singing for the Bond Market

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.




November 29, 2019

Global Market Comments
November 29, 2019
Fiat Lux

Featured Trade:

($TNX), (TLT), (TBT)

Whatever Happened to the Great Depression Debt?

When I was a little kid during the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt.

The WWI veteran, who was mustard-gassed in the trenches of France and was a lifetime dyed-in-the-wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard.

Republican presidential candidates Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that would ruin not only my life but my children’s as well.

As a six-year-old, this disturbed me deeply as it appeared that just out of diapers, my life was already going to be dull, brutish, and pointless.

Grandpa continued his ranting until a three-pack a day Lucky Strike non-filter habit finally killed him in 1977.

He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer even though during his war, they referred to them as “coffin nails.”

He was stubborn as a mule to the end. And you wonder who I got it from?

What my grandfather’s comments did do was spark in me a lifetime interest in the government bond market, not only ours, but everyone else’s around the world.

So, whatever happened to the despised, future-destroying Roosevelt debt?

In short, it went to money heaven.

And here, I like to use the old movie analogy. Remember when someone walked into a diner in those old black and white flicks, checked out the prices on the menu on the wall. It says “Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.”

That is where the Roosevelt debt went.

By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, and the great inflation that followed.

The purchasing power of the dollar cratered, falling roughly 90%. Coffee is now $1.00, a hamburger at MacDonald’s is $5.00, and a cheap steak at Outback cost $12.00.

The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch?

Bond owners who received minimal and often negative real, inflation-adjusted returns on fixed-income investments for three decades.

In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as “certificates of confiscation” during the seventies and eighties.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, creating inflation, and then repaying the debt in devalued future paper money.

This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.

Ever wonder how the new, impoverished United States paid for the Revolutionary War?

It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of conflict in 1783. The British helped too by flooding the country with counterfeit paper Continental money.

Bondholders can expect to receive a long series of rude awakenings sometime in the future.

No wonder Bill Gross, the former head of bond giant PIMCO, says will get ashes in his stocking for Christmas next year.

The scary thing is that, eventually, we will enter a new 30-year bear market for bonds that lasts all the way until 2049. However, after last month’s frenetic spike up in bond prices, and down in bond yields, that is looking more like a 2022 than a 2019 position.

This is certainly what the demographics are saying, which predicts an inflationary blow-off in decades to come that could take short term Treasury yields to a nosebleed 12% high once more.

That scenario has the leveraged short Treasury bond ETF (TBT), which has just cratered down to $23, double to $46, and then soaring all the way to $200.

If you wonder how yields could get that high in a decade, consider one important fact.

The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.

Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.

So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI. QE IV, in fact, has already started.

There is a lesson to be learned today from the demise of the Roosevelt debt.

It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra-low interest rates and spending it all.

With real inflation-adjusted 10-year Treasury bonds now posting negative yields, they have a free pass to do so.

In effect, the government never has to pay back the money. But they do have the ability to reap immediate benefits, such as through stimulating the economy with greatly increased infrastructure spending.

Heaven knows we need it.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target.

Here is my shopping list:

$1 trillion – new Interstate freeway system
$1 trillion – additional infrastructure repairs and maintenance
$1 trillion – conversion of our energy system to solar
$1 trillion – construction of a rural broadband network
$1 trillion – investment in R&D for everything

The projects above would create 5 million new jobs quickly. Who would pay for all of this in terms of lost purchasing power? Today’s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese. Notice that I am not committing a single dollar in spending on any walls.

How did my life turn out? Was it ruined, as my grandfather predicted?

Actually, I did pretty well for myself, as did the rest of my generation, the baby boomers.

My kids did OK too. One son just got a $1 million two-year package at a new tech startup and he is only 30. Another is deeply involved in the tech industry, and my oldest daughter is working on a PhD at the University of California. My two youngest girls are about to become the first-ever female eagle scouts.

Not too shabby.

Grandpa was always a better historian than a forecaster. But did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows big borrowing binges.

You know the five acres that sits under the Bellagio Hotel in Las Vegas today? That’s the land he bought in 1945 for $500. He sold it 32 years later for $10 million.

Not too shabby either.

40 Years of 30 Year Bond Yields



October 2, 2019

Global Market Comments
October 2, 2019
Fiat Lux

Featured Trade:

(TLT), (TBT), (ELD), (MUB)

Ten More Reasons Why Bonds Won’t Crash

I have never been one to run with the pack.

I’m the guy who eternally marches to a different drummer, not in the next town, but the other hemisphere.

I would never want to join a club that would lower its standards so far that it would invite me as a member. (Groucho Marx told me that just before he died).

On those rare times that I do join the lemmings, I am punished severely.

Like everyone and his brother, his fraternity mate, and his long-lost cousin, I thought bonds would fall this year and interest rates would rise.

After all, this is normally what you get in the eleventh year of an economic recovery. This is usually when corporate America starts to expand capacity and borrow money with both hands, driving rates up.

Of course, looking back with laser-sharp 20/20 hindsight, it is so clear why fixed income securities of every description have refused to crash.

I will give you 10 reasons why bonds won’t crash. In fact, they may not reach a 3% yield for decades.

1) The Federal Reserve is pushing on a string, attempting to force companies to increase hiring, keeping interest rates at artificially low levels.

My theory on why this isn’t working is that companies have become so efficient, thanks to hyper-accelerating technology, that they don’t need humans anymore. They also don’t need to add capacity.

2) The U.S. Treasury wants low rates to finance America’s massive $22.5 trillion and growing national debt. Move rates from 0% to 6% and you have an instant financial crisis, and maybe even a government debt default.

3) Constant tit-for-tat saber-rattling by the leaders of China and the United States has created a strong underlying flight to safety bid for Treasury bonds.

The choices for 10-year government bonds are Japan at -0.25%, Germany at -0.50%, and the U.S. at +1.62%. It all makes our bonds look like a screaming bargain.

4) This recovery has been led by consumer spending, not big-ticket capital spending.

5) The Fed’s policy of using asset price inflation to spur the economy has been wildly successful. But bonds are included in these assets, and they have benefited the most.

6) New rules imposed by Dodd-Frank force institutional investors to hold much larger amounts of bonds than in the past.

7) The concentration of wealth with the top 1% also generates more bond purchases. It seems that once you become a billionaire, you become ultra conservative and only invest in safe fixed-income products. The priority becomes “return of capital” rather than “return on capital.”

This is happening globally. For more on this, click here for “The 1% and the Bond Market.”

8) Inflation? Come again? What’s that? Commodity, energy, precious metal, and food prices are disappearing up their own exhaust pipes. Industrial revolutions produce deflationary centuries, and we have just entered the third one in history (after No. 1, steam, and No. 2, electricity).

9) The psychological effects of the 2008-2009 crash were so frightening that many investors will never recover. That means more bond buying and less buying of all other assets.

10) The daily chaos coming out of Washington and the extreme length of this bull market is forcing investors to hold more than the usual amount of bonds in their portfolios. Believe it or not, many individuals still adhere to the ancient wisdom of owning their age in bonds.

I can’t tell you how many investment advisors I know who have converted their practices to bond-only ones.

Call me an ornery, stubborn, stupid old man.

Hey, even a blind squirrel finds an acorn once a day.




September 27, 2019

Global Market Comments
September 27, 2019
Fiat Lux

Featured Trade:

($NIKK), (TLT), (TBT), ($TNX),

If Bonds Can’t Go Down, Stocks Can’t Either

The U.S. Treasury bond market has suddenly ground to a halt, puzzling traders, investors, and hedge fund managers alike.

Last week, the yield on the 10-year Treasury bond (TLT), (TBT) traded as low at 1.64% and as high as 1.90%

This is despite the U.S. economy delivering a mediocre 2.0% Q2 GDP growth rate, a massive tax cut, a huge deregulation push, and corporate profits at all-time highs.

If I blindfolded any professional money manager, told him the above and asked him where the 10-year Treasury yield should be, most would come in at around the 5% level.

So what gives?

I have put a great deal of thought into this and the answer can be distilled down to two letters: QE.

Global quantitative easing has created about $17 trillion in new money over the past 10 years. It has not been spent, it hasn’t disappeared, nor has it gone to money heaven. It is still around.

The U.S. Federal Reserve, the first to start QE in November 2008, ended it in October 2014. From start to finish, it created $4.5 trillion in new money. Over the past five years, this has been wound down to $3.8 trillion by letting debt on its balance sheet mature.

Japan actually began its QE program in 2001, long before anyone else, to deal with the aftermath of the 1990 Japanese stock market crash and a massive demographic headwind (they’re not making Japanese anymore).

Some 19 years later, the Japanese government now owns virtually all of the debt in the country. When you hear about Japan’s prodigious 240% debt to GDP ratio, it’s nonsense. Net out government holdings and there is no national debt in Japan at all.

After the 2008 crash, the Japanese government expended its QE to include equities as well. As a result, the government is now the largest single buyer of stocks there. The Nikkei Average has risen by 233% since the 2009 bottom despite a miserable economic performance, and the yield on 10-year JGB’s stand at a lowly -0.26%.

The European Central Bank got into the QE game very late, not until 2015, and its program continues anew, although at half its peak rate. The ECB has just renewed its plan to print a ton of new money.

Part of the problem is that the ECB is running out of bonds to buy, as it already owns most of the paper issued by European entities. That’s why 10-year German bunds are yielding a paltry -0.59%.

As a result, there is excess liquidity everywhere and this has broad implications for your investment or retirement portfolio. It could take as long as a decade before all of this artificial cash is removed from the global financial system.

For a start, bonds may not fall much from here, even if the Fed continues its schedule of 25 basis point rate rises every quarter.

Stocks can’t fall either with this much cash underpinning the market, at least not for a while and not by much. Some $1 trillion in company share buybacks in a $27-trillion market is also a big help.

It also means you can’t have a global contagion leading to a financial crisis. There is ample money available to refinance your way out of any problem when 70% of the world’s debt is still yielding close to zero. This means that the current Turkish (TUR) crisis is yet another buying opportunity for U.S. stocks, as has every geopolitical crisis of the past decade.

The bottom line here is that global excess liquidity can cover up a lot of sins. It means the price of everything has to go up, or at least stay level until that liquidity runs out. That includes stocks, bonds, your home, classic cars, and even that rare coin collection of yours gathering dust in a safe deposit box somewhere.

Yes, when the excess free cash runs out in a decade, there will be hell to pay. Until then, make hay while the sun shines.







September 20, 2019

Global Market Comments
September 20, 2019
Fiat Lux

Featured Trade:

(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),