Bonds vs. Stock: Sometimes headlines Matter

A buddy of mine – and a bond-dude here in Texas in a big city that gets a lot of raise and has stupid-high property taxes – has been a wee bit skeptical of something I have been forecasting for months.

Yet here we is:  Bonds going nowhere and stock at new record highs.

Means what?  Namely that as the bond market tries to find a bottom – which is to say where yields stop going lower and actually face the prospect of moving up – that we would see a massive rush from the bond market into the stock market.

There is a case for just such an event in the lead-in to the Great Depression.

\I swear to God, sometimes I think I’m the only one who reads economic history…me and maybe my friend Dr. Jack Lessinger, professor of B usines History Emeritus from the University of Washington..  (There is an alternative to the doom scenarios, by the way…suggest you consider it.)

The bond market, starting in 1928 ,or so, had a couple of interest rate hikes.  Yes, rates were higher then than now but go with me on this because it really matters….

The dynamic of what happened was sikmple:

Bonds yields stopped going down – a phenomena that had drive their prices up

Think of it this way:  If you buy a bond and it is paying 10% per year and prevailing inflation is 10%, and you hold it for a while such that prevailing inflation drops to say 6%, then the PRICE of the bond will skyrocket.  After all, bonds (goes the mantra) are safe and  with a yield better than inflation…what could be better?

The mechanical problems for bonds are two-fold.

One is that bond issuers ain’t fools.  Why would they pay 10% for their borrowed money *(which is what bonds provide) when they could refi the b bonds at lower rates?

What happens in  this case is the bond issues “call the bonds.”

They give the bond holder the face value plus whatever is due for interest to that point.  But that bond is then kaput.

A real-life example from my family:  Back in the 1980’s, about the peak of the  bond market, Pappy bought a small assortment of WPPSS bonds (Washington Public Power Supply System) bonds.  These were to be used to fund nuclear plants.

The reason he bought them was simple:  Thery were paying 14% and Pappy figured the interest rates were about as high as they would ever go.  He loaded up.

Needless to say, the bonds soared because bond did hit a long-term yield peak.

Eventually, the WPPSS bonds were  called p- Pappy did a little better than just “OK” – and the bonds were retired.

Fast forward to this morning.

If you read the Fed Minutes extract I put up on the site on Wednesday, you will see that the Fed is using a critical phrase in their market influencing.

“, several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability”

The “phrase that pays” is likely the reference to MISPRICING.

Now we flip over and look at the 10-year Treasury proxy, the ^TNX:  1.56% is very damn low.  Sort of creeps up on the “free money” category.

In order for bonds to show a huge return from here the 10-year rate would need to drop to a lousy three-quarters of one person and I just don’t see that happening.

On the other hand, as came out in the Fed Minutes, several members of the Fed are already thinking it’s time to raise the Fed rate a tad…but when they do, the huge money that has been made in bonds will have to look for greener pastures or have their pechewzelwhackers whacked.

OK.  Fine.  Everyone in the bond market is a grown up, except the widows and orphans who will be brought in at the bottom to buy as the strong hands sell to the weak.,

Let’s consider what the accomplished Greedster will be looking at as investment options.  Short list only:

    1. Foreign Markets
    2. Real Estate
    3. Precious Metals
    4. FOREX
    5. and…er  STOCKS.

    I can give you reasons a mile long to avoid foreign markets.  China is rolling into war prep mode and is building out their middle class, so screw the Colonies (that’s us).

    Europe is going down the shitter because it has been a bad idea this EU bullshit from the start because they have more overhead that brains and at some point raw materials matter.

    Real Estate is sort of bouncing along – but remember the Fed still has paper sacks full of old MBO paper, do they not and when will thatr all be marked to market and in a 2% inflation world,  where is the leverage for hot money which likes to think about two or three years, not the 10-20 year range that real estate might take.

    And on the commercial side, at least one bondie had the sense to read the Peoplenomcs report a while back called “Bezos and Bentonville: Barbarians at trhge Mall” which forecast the not-terribly-slow erosion of the traditional shopping mall and all that goes with it…

    So real estate pretty much sucks.

    On the metals?  Same kind of issue.  Until someone comes up with an antigravity device or transporter that requires lots of gold and silver, the industrial demand is limited because there is no reason to design with high-priced materials when cheap stuff will work.  Besides, materials engineering is a science now, right?

    Sure, there are going to be some preppers who will trade bags of silver among themselves, but in terms of demand?

    Have you been to a casino lately?  Even at the dress-up lounges we checked out on your recent trip, people dress like shit.  No one is Big on Bling…and Elaine’s two gold bracelets were total overkill.  In the gender amorphous tee-shirt crowd even in the high-end restaurants.

    So with jewelry demand static, no country facing collapse so no monetary demand (except from Germany which STILL wants its Gold back), where is the double going to come from?

    People send me snips from charlatans who keep forecasting “Big Move Up in Gold” or “Get Silver or You’ll Die” crap.

    FOREX sounds like a big money option until you figure that for every winner there is a loser of equal magnitude so the only people making money are the trading houses.  Otherwise, it’s a zero sum game, but it sure sucks in the mathematically challenged.  Unless you can afford a long term short on a currency headed for a big flushing (Euro) when multiculturalism blows up and we have the New Balkans from Russia to the shores of France.

    OK, this leaves stocks.

    Look out:  I’m getting to a point here.

    When I see a CNBC story like “Equities are the new bonds—but avoid the ‘dividend darlings’ it tells me a whole bunch.  But I can boil it down to two words for you in case the coffee hasn’t kicked in yet.  Ready?

    Urre’s right.  Or, he will be, just give it time.

    So sure, the market COULD roll over during the presidential horse play (or is that horse-puckey?) but when all is said and done we have few investments left for Big Money.

    Which is why I am so reluctant to drop my present long position.

    When the Bond market wakes up one morning and discovers it’s in Ure’s World where things actually due check-sum  and balance, the stock market highs of today will look tiny.

    That’s because (write this down) the Bond market is a third bigger than the stock market and that’s a whole lot of rats that will be looking for a way to abandon ship when rates actually begin to move.

    Widows and orphans last, of course.

    Ure’s Next Crazy Investment?

    I may already own it…

    Yes, our old Beechcraft is on the market.  Yes, I SHOULD SELL IT.  However,

    BUT…the Eyes are back to legal for flying again, and I drove the majority of out recent 5,400 driving trip and didn’t hit anything…so it is possible to keep on flying…

    And then, president Obama actually did something right for a change – he signed the revision to the third  class medical requirement for private pilots.  So, in a year (from July 15th) a one-time  medical exam and then a drivers license is all we will need for non-commercial flight operations.

    Which matters because?

    The U.S. Pilot Shortage Continues to Rear Its Ugly Head.”

    Which means that we COULD transfer that plane into a single-purpose LLc (for liability reasons) an d then rent it out and put a few bucks into the new engine reserve fund.

    When that’s done, I take the aging 150 HP engine – which still flies fine – and repower with the same engine except 8.5 to 1 compression cylinders and balanced and blue-printed and high performance exhaust and electronic ignition on one side so that it will dyno about 170 HP for high altitude ops, and then keep on flying for a while longer – several years.

    Now, there are lots of steps to this, but it’s how you take a news story and a trend and see if there’s a way to work it to your personal advantage. 

    Training airplanes like mine (low wing) ors the Cessna 172 class…those ought to ber high demand in a few years and I’ve always been a buy low, sell high kind of guy.

    Every headline you spend the time to read is trying  to tell you how the future is coming and how to make money on it is up to you.

    Cruise the News

    Now comes the easy part of my morning:  Scan headlines, see who and what is stupid:

    We can skip most of the presidential horse-puckey except to say the Clinton “repeat the lie” modus is still operandi with Clinton Campaign Cites Fake Documents to Claim Hillary Health Questions Are “Debunked”.  This is tigers not changing stripes crap once again.

    Chi WHAT?

    Until this morning I had no idea what Chi Running was.  Now I do, but I can’t say my life is exactly changed by it.

    Still, the story How ChiRunning Can Make You a Faster Runner may be of interest.

    I tapped a copy to my treadmill, as I turned it on to let it run for a few hours.  Without me on it, of course.

    Sure, I don’t lose as much weight, but I feel a lot better about it.

    Weren’t We Just Talking About gGold?

    Gold is doing something it’s never done before — and it could be a reason to buy.

    Still, empirically, I don’t buy based on “relationships” – I buy based on demand.  Oh, and greed…that works.

    Another Ure Zillion-Dollar Idea

    The story Herd of cattle rescued from Louisiana flood gets me to thinking of a new enterprise:

    How about a floating slaughterhouse?  Swim the cattle in…already washed off and ready to be made into filets…  What do you think?

    Not sure about Coast Guard requirements on “life jackets” for ‘em…

    Meantime, as Louisiana Flood Victims Struggle to Find a Place to Shelter thoughts run to a combination cruise ship with built-in meat factory.  Hmmm…wonders if I could get a big-ass FEMA grant to develop it…

    Obviously my new rescue-burger concept won’t work in Michigan.  And why is that? 

    Piranhas have been found in Michigan.

    (Maybe we could teach them to eat Zika mosquitoes, you think?)

    Smack-Alert

    Avoid Huntington West Virginia: 27 heroin overdoses in 4 hours.

    Looking Ahead?

    Markets are flat.

    It’s still raining  in Texas.

    And I had the “earthquake tireds” this week, so I am watching for something there.

    TGTIF.  (Thank God tomorrow is Friday).

    Comments

    Bonds vs. Stock: Sometimes headlines Matter — 14 Comments

    1. Dear George: U (re) correctly pointing out the DANGER inherent in long bonds. Please note well that on the 5 year Ratio Chart of $USB:$SPX (long us trashury vs Spoozer) the .083 June/July 2016 price is NOT CONFIRMED at MACD 7,39,38! http://stockcharts.com/h-sc/ui?s=%24USB%3A%24SPX&p=W&b=5&g=0&id=p58731312947 This is Evidence of the movement of “Big Early Money” into Stocks in USA.
      I am very glad to hear indications that your eyes are doing fine! Stay Strong! Let’s ID some levered ways to play the move from long bonds into Shares!
      Personal regards, Walter Wimanski

    2. Russia used to be an even match militarily with the U.S., now Putin has done more serious upgrading than the U.S. (I’ll post some links at another time), another reason why the American public won’t be giving the Trumpamaniac access to the nuke button.

    3. Cessna’s 172 are a prime jump plane, when properly equipped, for flights to 10,00…sometimes a little bit more.

    4. Renting out your plane might be ‘the ticket’, but I would have some really good insurance, – what if there was an accident and it was determined that you were at fault for not maintaining the aircraft properly? Buco bucks, buco bucks!

    5. Not piranhas in Michigan, but their mostly plant eating relatives, called Pacu. Thought to be released by aquarium owners when they get to big for the tank. Doubtful they will survive the cold winters!

    6. When I owned a Cessna 182, in another lifetime in California, I leased it to an FBO (Fixed Base Operator) so that everything about the plane was a business. When I flew I paid myself, through the FBO, to keep it all legit with the IRS. It was better equipped (10 waypoint RNAV, etc.) than some airliners of the day, so many commercial pilots rented the plane for personal flying. Worked out great! The tax savings more than paid for my own flying.

    7. So that’s how a treadmill works! LOL.

      In this economy you dont want to draw attention to yourself, People visiting Rio for the games found this out the hard way.
      And too the same could happen in Panama City Panama. Or any place people are desperate just have a piece of food every couple of days.

      People are going to do what they have to do to survive,its a built in to our DNA.

    8. Hi George, what was your reference to gold???
      Also, regarding cruise ships, what a perfect way to produce Soylent Green! Why not have old folks homes on cruise ships? Once you pass on you are recycled but at least you were on a cruise when it happened. Hell, you could even charge them for it. As we all know by now,,, EIABM. Remember where you heard it first.

      • Used to work for an answering service, and one of their accounts was a nationwide company that handled funeral services, cremations, and the like. People did ‘pass away’ constantly on cruise ships,etc., and it was always ‘interesting’ to get them back to the USA . . .

        At least it was while ‘having fun’.

    9. George – With all due respect I think Treasury’s – the 10 year could go to .50% to .75% the reason being is that because of fiduciary investment obligations primarily being insurance and pension funds which have to maintain durations of the 10 year and longer cannot sell regardless of price and given the vast amounts of money present in negative yielding Central Bank jurisdictions the money will flee to our “cheap” (relatively speaking) treasury stack. The tide has gone out Miss Yellen has been spotted without a bathing suit …..raise rates I double dog dare you……..

    10. Hell George I’m afraid I don’t see any happy ending for this mess, that the cabal who seized power in the 60’s created for their own sense of power and greed,wages have gone no where jobs suck while they turn to robots for ever cheaper product which makes one wonder just who in hell will pay the taxes buy the goods being made by the robots and no Trump won’t bring the jobs back and our debt will continue to climb while the only thing the MSN’s keeps bleating is that the stock market is going up which means nothing when its done with Fed. (taxpayer money that our grandchildren and great grandchildren will inherit),so what do have left either a banana republic or a revolution,civil war or some other type of public eruption,lol hell of a mess that we old geeks for our future generations is it not.!!!