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



September 27, 2019

Global Market Comments
September 27, 2019
Fiat Lux

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($NIKK), (TLT), (TBT), ($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.







July 31, 2019

Global Market Comments
July 31, 2019
Fiat Lux


Featured Trade:
(TLT), ($TNX), (TBT), (SPY), ($INDU), (FXE), (UUP), (USO),
(TLT), (TBT),

Italy’s Big Wake Up Call

Those planning a European vacation this summer just received a big gift from Mario Draghi, the outgoing president of the European Central Bank. His promise to re-accelerate quantitative easing in Europe has sent the Euro crashing and the US dollar soaring.

Over the last two weeks, the Euro (FXE) has fallen by 2.5%. That $1,000 Florence hotel suite now costs only $975. Mille Gracie!

You can blame the political instability in the Home of Caesar, which has not had a functioning government since WWII. The big fear is that the extreme left would form a collation government with the extreme right that could lead to its departure from the European Community and the Euro. Think of it as Bernie Sanders joining Donald Trump!

In fact, Italy has had 62 different governments since WWII. They change administrations like I change luxury cars, about once a year. Welcome to European debt crisis part 27.

I can’t remember the last time markets cared about what happened in Europe. It was probably the first Greek debt crisis in 2011. As a result, German ten-year bunds have cratered from 0.60% to -0.40%. But they care today, big time.

Given the reaction of the global financial markets, you could have been forgiven for thinking that the world had just ended.

US Treasury Bond yields (TLT) saw their biggest plunge in years, off 120 basis points to 2.05%.

Even oil prices collapsed for an entirely separate set of reasons, the price of Texas Tea pared 20% since April on spreading global recession fears.

Saudi Arabia looks like it’s about to abandon the wildly successful OPEC production quotas that have been boosting oil prices for the past year. Iran has withdrawn from the nuclear non-proliferation treaty, responding with an undeclared tanker war in the Persian Gulf, which I flew over myself only a few weeks ago. The geopolitical premium is back with a vengeance.

So if the Italian developments are a canard, why are we REALLY going down?

You’re not going to like the answer.

It turns out that rising inflation, interest rates, oil and commodity prices, the US dollar, US national debt, budget deficits, and stagnant wage growth are a TERRIBLE backdrop for risk in general and stocks specifically. And this is all happening with the major indexes at the top end of recent ranges.

In other words, it was an accident waiting to happen.

Traders are extremely nervous, global uncertainty is high, the seasonals are awful, and Washington is a ticking time bomb. If you were wondering why I was issuing so few Trade Alerts in July, these are the reasons.

This all confirms my expectation that markets could remain stuck in increasingly narrow trading ranges for the next six months until the presidential election begins in earnest.

Which is creating opportunities.

The global race towards zero interest  has the US as the principal laggard. So you should keep buying every serious dip in the bond market.

Stocks are still wildly overvalued for the short term, so I’ll keep my low profile there. As for gold (GLD) and the currencies, I keep buying dips there as well.

So watch for those coming Trade Alerts. I’m not dead yet, just resting. The contest here is to make as much money as you can, not to see how many trades you can clock. That is a brokers’ game, not yours.





Waiting for My Shot

June 10, 2019

Global Market Comments
June 10, 2019
Fiat Lux

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April 11, 2019

Global Market Comments
April 11, 2019
Fiat Lux

Featured Trade:
(TLT), (TBT), ($TNX),

The United States of Debt

My “exploding national debt” trade has been one of my most profitable and consistent positions of the past three years.

As I write this, my 64th profitable trade alert for bonds over the last three years is about to go out, now that the iShares Barclays 20+ Year Treasury Bond Fund (TLT) April 2019 $128-$130 in-the-money vertical BEAR PUT spread is approaching its maximum profit point of $2.00.

Many followers have already notified me of their short April $128 puts being called away, meaning they get to cash out at the $2.00 price today.

Sellers of the iShares 20 Year Plus Treasury Bond Fund ETF (TLT) and buyers of the ProShares UltraShort 20 Year Plus Treasury ETF (TBT) have seen riches rain down upon them.

With ten year Treasury bond yields grinding up from 1.33% to 3.25% during this period, what else would you expect?

It looks like things are going to get a whole lot better. For not only is the federal government now on an endless borrowing binge, so is the rest of the country.

We are, in fact, becoming the United States of Debt.

That Washington is taking the lead in this frenzy of borrowing is undeniable. Since the new administration came into power two years ago, the annual budget deficit has nearly tripled from $450 billion to $1.2 trillion.

Add it all up and the United States government is on track to take the National Debt from $20.5 trillion to $30 trillion within a decade.

The National Debt exceeded US GDP in 2016 taking the debt to GDP ratio to the highest point since WWII.

Former Fed governor Janet Yellen recently confided to me that, “It’s the kind of thing that should keep you awake at night.”

It gets worse.

According to the Federal Reserve Bank of New York, total personal debt topped $16 trillion by the end of 2017. An overwhelming share of personal consumption is now funded by credit card borrowing.

Some 33% of Americans now have debts in some form a collection, and that figure reaches an astonishing 50% in many southern states (see map below). Call it the Confederate States of Debt.

Corporations have also been visiting the money trough with increasing frequency taking their debt to $6.1 trillion, up by 39% in five years, and by 85% in a decade.

The debt to capital ratio of the top 1,000 companies has ballooned from 35% to 54% and is now the highest in 20 years.

Another foreboding indicator is that corporate debt is rising faster than sales with debt rising by a breakneck 8.5% annualized compared to 4.6% for sales over the past decade.

Automobile debt now tops $1 trillion and with lax standards has become the new subprime market.

And remember that other 800-pound gorilla in the room? Student debt now exceeds $1.6 trillion and is rising as is the default rate. Provisions in the new tax bill eliminate the deductibility of the interest on student debt, making lives increasingly miserable for young borrowers.

Of course, you can blame the low-interest rates that have prevailed for the past decade. Who doesn’t want to borrow when the inflation-adjusted long-term cost of money is FREE?

That explains why Apple (AAPL), with $270 billion in cash reserves held overseas, has been borrowing via ultra-low coupon 30-year bond issues even though it doesn’t need the money. Many other major corporations have done the same.

And while everything looks fine on paper now, what happens if interest rates rise?

The Feds will be in dire straight very quickly. Raise short term rates to the 6% seen at the peak of the last cycle, and the nation’s debt service rockets from 4% to over 10% of the total budget. That’s when the sushi really hits the fan.
You can expect the same kind of vicious math to strike across the entire spectrum of heavily leveraged borrowers going forward, including you and me.

Remember, all this new bond issuance is occurring in the face of rapidly flagging demand now that the Federal Reserve is out of the quantitative easing business and in to quantitative tightening. Their current plan is to suck $4 trillion of liquidity out of the system over the next decade.

We are also witnessing the withdrawal of the Chinese as major Treasury bond buyers who, along with other sovereign buyers, historically took as much as 50% of every issue. 

Don’t expect them back until the dollar starts to appreciate again, unlikely in the face of ballooning federal deficits.
Rising supply against fewer buyers sounds like a recipe for much higher interest rates to me.

Keep in mind that this is only a decade long view forward. The next big move in interest rates will be down as we slide into the next recession, possibly all the way to zero. As with everything else in life, timing is everything.

So, like I said, things are about to get a whole lot better for the bond shorting crowd. Just watch this space for the next Trade Alert regarding when to get back in for the umpteenth time.




March 13, 2019

Global Market Comments
March 13, 2019
Fiat Lux

Featured Trade:
(TLT), (TBT), ($TNX),