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 Iran has withdrawn from the nuclear non-proliferation treaty, responding with an undeclared tanker war in the Persian Gulf, which I flew over myself only a few weeks ago.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),

Why Bond Yields are Going to Zero

I just checked my trading record for the past three years and discovered that I have executed no less than 61 Trade Alerts selling short bonds and all but one was profitable. It really has been my “rich uncle” trade.

However, all good things must come to an end.

I have been scanning the horizon for another short bond trade to strap on and I have to tell you that right now, it’s just not there.

Bond volatility has been incredibly low in recent months, with United States US Treasury Bond Fund (TLT) prices trapped in a microscopic and somnolescent $3.5 point range. What’s much worse is that bonds have been stuck in an incredibly snug 14 point range for two and a half years with no place to go but sideways.

As a result, the risk/reward for going out one month for a bear put spread in the (TLT) is no longer favorable.

So what is the market trying to should at us with such boring price action?

It is becoming painfully obvious that since 2016, the bond market hasn’t been putting in a topping process. It is building a long term BOTTOM. That means the next major bond move could be a major RISE in prices and collapse in bond yields.

Let me tell you what is wrong with this picture.

When stocks melted down during Q4 last year, bond yield plunged by 65 basis points as they should. But what did yields do when the Dow Average rallied by 4,500 points after the Christmas Eve Massacre? Absolutely nothing. Here we are today at a scant 2.62%, a scant 12 basis points above the intraday spike bottom seen at the end of 2018.

Not good, not good. As any long term pro will tell you, it is the bond market that is always right.

Yes, the next target in bond yields could be ZERO. The 3.25% peak in yields we saw last September was probably the top in this economic cycle. That’s what my former Berkeley economics professor Janet Yellen thinks. So does Ben Bernanke.

And how much have bond yields dropped during recessions? Some 400 basis points. That how you get to zero, and possibly negative numbers at the bottom of the next cycle.

The reasons for a historically low peak in bond yields are, well, complicated. Past cycles seen during my lifetime yield peaks anywhere from 6%-12%.

For a start, after waiting for a decade for inflation to show, it never did. Wages, far and away the largest component of inflation, are only growing at a 3% annual rate according to the February Nonfarm Payroll Report, and even they are rolling over now.

The harsh reality is that companies have been able to cap labor costs with technology improvements, and that trend looks to accelerate, not slow down. There is no way that wages are going to increase with malls emptying out and businesses moving online. Tesla’s move here is only the latest in a long term trend. Yes, the rise of the machines is happening.

I thought that the $1 trillion tax stimulus package would provide a steroid shot to an already hot economy and fuel inflation. But I was wrong. Instead, tax savings and cash repatriated from abroad went almost entirely into share buybacks and the bond market, not capital spending as promised.

And what do the wealthy do with new cash flow? They buy more bonds, not invest in job-creating startups or other high-risk plays.

The Fed has become a willing co-conspirator in the zero rate scenario. Governor Jay Powell has made abundantly clear that rate rises are on hold for the foreseeable future and that there may not be any at all this year. In fact, the next Fed move may be a cut rather than a rise.

The Fed’s policy of quantitative tightening, or QT, has also been greatly pared back. Instead of unwinding its balance sheet back to the $800 million last seen in 2008, which was the original plan, it is drawing the line at a hefty $2.7 billion, only $500 billion lower from the current $3.2 billion level. That will give our nation’s central bank far less flexibility with which to act during the next recession.

Did I just say the “R” word?

It’s become clear that the tax package and $2  trillion in new government debt bought us exactly two quarters of above-average economic growth. Since Q2 2018, the GDP growth rate has plunged from a 4.2% annualized rate to an expectation of under 1% for Q1 2019.

That’s an eye-popping decline of more than 76% in the US growth rate in a year. If the Fed is truly data-dependent, and they tell us every day of the year that they are, these numbers have to be inciting panic in Washington. Hence the sudden, out of the blue “pause.”

We won’t know for sure until April 23, when the first Q1 GDP estimate is published. Mark that date on your calendar. It could spell the end of the bull market in stocks.

If ten-year yields truly go to zero, what would they do to the (TLT)? That would take them from today’s $122 to over $200. There they will be joined by the industrialized countries that are already there, with German ten-year bonds yielding 0.4% and ten-year Japanese government bonds at -0.10%.

Where will that take home mortgage rates? Oh, to about 2%, where they already are in Europe now. We may be on the refinance opportunity of the century.

That is if you still have a job.





February 27, 2019

Global Market Comments
February 27, 2019
Fiat Lux

Featured Trade:

(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA),
 (USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),

Why China’s US Treasury Dump Will Crush the Bond Market

Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.

It looks like Armageddon is finally here.

Once again, the Chinese boycotted this week’s US Treasury bond auction.

With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.

You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.

For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.

Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.

In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:

Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X)
Emerging Markets – Buy asset producers like Chile (ECH)
Bonds – run a double short position in the (TLT)
Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA)
Commodities – Buy copper (CU) as an inflation hedge
Energy – another inflation beneficiary (USO), (OXY)
Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)

Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.

Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.

This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.

I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.

Imagine how long it will take them to forget about washing machine duties?

By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.





October 4, 2018

Global Market Comments
October 4, 2018
Fiat Lux

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