Tao Economics

Economics, Investing, Markets & Survival

What the People Can’t Yet See – The Bond Duration Surprise.

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What people haven’t realized yet is that all this political shit is not going to stop. Everyone is too caught up in the moment and chaos. The Clinton side will continue to blame the FBI and Russia for the election and Trump will not stop being a total jack ass. The deep state including the intelligence departments will do what they can to hold onto what they have and keep the war gears grinding.

Confidence is failing. It is no longer a United States. U.S government long term bonds (our debt) has been in a 35 year bull market. This debt cycle is coming to an end as confidence erodes at a faster rate. The two go hand in hand. More on the end of the bond bull market and what it means below.

Within the next 16 years we will likely see at least one state leave the union as capital flows move toward China.

Nobody (including myself) is really understanding the role they are playing in all this.

Trying to find a news source you can consistently trust is next to impossible. If an important item comes out in the news it may take another 20 minutes to scout around to get the complete context, understand how much of it is real and wonder what agenda could be behind the release.  Who’s got time for that?  It’s a lot easier just to let your emotions flair up.

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Going back to bonds. Retries are told to keep the majority of their savings in bonds. The Social Security fund is required by law to be invested in non-marketable securities issued and guaranteed by the “full faith and credit” of the federal government.

Due to bond duration (a bonds sensitivity to interest rates), the 10-year and 30 year government bonds will take a large hit if interest rates move just 2% higher.

Example: “For instance, if interest rates were to rise by two percent from today’s low levels, a medium investment grade corporate bond (BBB, Baa rated or similar) with a duration of 8.4 (10-year maturity, 3.5 percent coupon) could lose 15 percent of its market value. A similar investment grade bond with a duration of 14.5 (30-year maturity, 4.5 percent coupon) might experience a loss in value of 26 percent1. The higher level of loss for the longer-term bond happens because its duration number is higher, making it react more dramatically to interest rate changes.”

http://www.finra.org/investors/alerts/duration-what-interest-rate-hike-could-do-your-bond-portfolio

The bond losses are going to effect a tremendous amount of people. We are going to soon have a large “Oh shit” moment as Martin Armstrong likes to say.

I’d advise people to do the best they can to check their emotions do NOT align yourself with either Dems or Republicans so you can try and keep a more objective view to see what is unfolding.  Easier said than done.

Politicians never admit when they are wrong.  They only double down on the bad idea the moved to push.  The above is not what I want it to be, but it is the trend. I do not believe there is anything that will stop it.Politicians never admit when they are wrong. The above is not what I want it to be, but it is the trend. I do not believe there is anything that will stop it.

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Trump’s Challenge: Tariffs, Not Taxes

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As Trump’s cabinet fills out and markets price his administration’s economic impact for perfection, investors have to wonder if the new team can actually deliver.

Asia and economic expert Eamonn Fingleton, the only other analyst I know of predicting a Republican/Trump victory back in February, has some sage insight and advice for America’s tough road ahead.

In short, Fingleton identifies Trade and Immigration as the key issues for American voters and the economy. Pundits failed to give these issues proper consideration during the election (thus missing Trump’s appeal), and will likely continue toeing the corporate-establishment line of free trade orthodoxy. This would be a massive mistake.

A more recent Fingleton interview reveals that:

    ‘America was for its most successful decades very protectionist .. The entire federal government from the George Washington administration to the Abraham Lincoln administration was funded by tariffs a hundred percent. From the Lincoln administration to World War One two thirds of the government was funded by tariffs. World War One to World War Two, one third of the government was funded by tariffs. And now, our tariffs are pretty much non-existent.’

Though Trump may be able to storm his way through transnational trade agreements, demolishing any legal defenses against a more autarkic, protectionist US trade regime, the level of domestic investment and coordination necessary to re-industrialize presents a daunting challenge. Though the historical precedents of post-WWII Germany, Japan, and even China provide examples of success, some level of great power war, foreign invasion, and widespread destruction came first (a subject for another day).

For the time being we’ll let the qualified hypothesis stand, that a return to America’s days of industrial-trade greatness will not be a smooth transition. At best, we’ll see a euphoric blow-off in US equity markets, as masses of money flee negative/zero rates abroad, and rising rates in the US, to chase hopes of fiscal stimulus and “war bride” re-armament in the United States. As we’ve seen numerous times throughout history, however, the realities of trade and real war are no good for the average investor’s returns, much less the national economy.

TickerTruth Major Assets reflects many of these themes:

tickertruth-major-assets

Good Hunting!

Darshan Dorsey, Founder, Dorsey Intel
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Municipal Bond Fund Oversold?

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The Invesco Value Municipal Income Trust (ticker: IIM) has had a big sell off recently along with treasuries and other bonds.

I think this closed ended fund is now oversold.

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IIM is trading at a discount of 11% to it’s Net Asset Value.  That is like paying 89 cents for a 1 dollar bill.  Buying the fund will also net you a 5.21% tax free yield.  Because this is a muni fund you do not have to pay federal income taxes on the yield.  You will be hard pressed to find this type of deal anywhere.

The fund will likely bounce off the $14 level.

Action: buy IIM, sell if the fund closes below $13.90.

Buying the fund allows us to collect a great dividend with limited down side.  Please use a 18% trailing stop as well as sell if it drops below $13.90.

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Chart Highlights Pension Changes to Earn 7.5%

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Bill Bonner had a good chart today in his blog highlighting what pensions needed to earn a 7.5% yield in 1995 compared to today.

In 1995 a pension could put everything in the 30-year treasury and be just fine.   By 2015 the 30-year could only make up 12% of the overall pension in order to get the same 7.5% return.

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The above highlights what Martin Armstrong has been stating for the cause of driving down bond yields.  The 2008/2009 crisis scared even more people into government bonds causing the melt up.

Pension funds WRONGLY assumed that government debt was safe, and as a result, many pension funds simply bought 30-year bonds in an effort to match maturity dates for pensions. That led to a strong bull market and the break-even was 8%. They kept bidding to try to lock in rates for pension payment in the future and their lack of management skills led to this 35-year bull market. Rather than picking stocks, they just believe government is the best thing since sliced bread. Now, they can no longer survive with rates this low, which is why the Fed keeps saying we must “normalize interest rates” for we will see a massive wholesale collapse in pensions. Yes, the 2007-2009 crisis helped create the final Phase Transition into a major long-term high in bonds (5,000 low in rates), but it obviously is not responsible for the 35-year bull market in bonds (decline in rates).

Now, if we are quickly approaching the end of the bond market bull run this last part from Porter Stanberry on bond duration will leave you even more squeamish.

Bonds with longer maturities generally have higher durations. This means they’re more sensitive to changes in interest rates. For example, according to Wall Street Journal data, one-year U.S. Treasurys have effective duration of 0.959 years. In simple terms, this means that one-year Treasurys will fall about 0.96% in price for every percentage point increase in yield. By comparison, 10-year Treasury notes currently have a duration of 9.184 years (representing a 9.2% decline for every percentage increase in yield) and 30-year Treasurys have a duration of 20.692 years (representing a 20.1% decline for every percentage point increase in yield). 

Putting all the above together: GET THE HELL OUT OF GOVERNMENT BONDS.

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The Only Upcoming Major Trend Change You Need to Watch

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My friend known as ‘Da bear’  has been doing wave counts on long term U.S bond rates.  We are both of the opinion we will see a blow off top (that is one last push for lower bonds) before the trend reverses.  U.S bonds have been in a bull market for over 30 years now.  How many more years do you believe it has?  I think long dated government bonds are the true macro distorted bubble we are seeing in the western world.  We use treasuries for the bases of credit for damn near everything and when the trend changes so will the world financial structure.

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The German bund just went negative for the first time.  Watch below:

https://finance.yahoo.com/video/german-bund-goes-negative-093100082.html 

Would you pay your government to loan it money?  I most certainly would not!  I would rather have cash, gold, stocks… hell I would rather buy baseball cards!

Let’s get back to Da Bear’s wave counts:

30 Year Bond Rates Channel

Long term rate count

I lifted these directly off of Da Bear’s FB page.  He doesn’t even have a profile or background image for his page which amuses me. If you have any questions regarding his counts just visit him on his FB page or in the message board.  He’ll respond to you, he loves this stuff.  He has wave counts for just about everything.

 

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