Ray Dalio thinks bond markets are on the brink of a significant shake-up.
Dalio, the billionaire investor who created Bridgewater Associates, wrote in a Linkedin.com post on Tuesday that “there’s a significant likelihood that we have made the 30-year top in bond prices.” When these extreme moves happen, some investors will be shaken out of their positions, “making the move self-reinforcing” for a while, he wrote.
I’ve been saying some very similar things over the last year. Bonds embarked on a multi-year trend that took prices as far removed from their longer term trend as they tend to get. Last I spoke about this, I referenced my 1998 analogue, and a similar trend structure. Here’s a recap of those charts:
25 Year Chart of 30 year Treasury Index
3 Year Chart $USB: 1996-99 Momentum Trend Reversed
3 Year Chart $USB: 2013-2016 Momentum Trend Top
As I’ve said most of the year, this is the most crowded long I’ve ever seen. As it should be. It’s a 30 year trend. However, this year, I’m curious as to exactly how popular this ticker symbol became to the unwashed. It reminds me of my first ever $GLD trade. I bought $GLD for $62.50 in 2006 in my long term account, and added multiple times on the way up. At the time, I had a significant audience via my blog, podcast, and through work at Investools/thinkorswim. The concept of trading Gold was so foreign to retail traders back then, but 5 years later, I couldn’t go a day without being asked about it. Same seems to be the case with $TLT over the years.
Here’s the updated chart of the last 3 years:
Perhaps this is the spot for a technical bounce, but with this trend getting faster the lower it gets, I’d rather watch others play with fire here. The unwinding of these trends gets very messy, but they unwind nonetheless.
The most important element I discussed in this topic was not bonds themselves, but how stocks reacted after these selloffs. This was another staple to my bullish argument over the longer term.
Thoughts?
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lol
Harambe loved Bonds.
he was killed for trying to hold a junk bond to maturity.
I thought the “bond” he was holding was relatively immature……
it was. he wanted to hold to maturity though….and got margin call’d.
those margin clerks….
LOL.
I used to work at a growth equity mutual fund shop…. the unwinding of the bond trade was what our CIO continuously pointed to as the factor that kept him bullish at these valuations. He figured if money was fleeing bonds then it had to move into equities, because “where else would it go?”
Perhaps ironically, another PM at that same shop was pretty outspoken that a rout in bonds could trigger a major liquidity crisis in that market. Considering how widely own bond mutual funds are I see that as plausible as well.
Large crowd, small door – wonder if the retirees who swore off the stock market in favor of safe bonds will get screwed once more…..
if money leaves bonds, it has to go somewhere, and if there is a strong dollar, than would lead me to believe that US stocks would be the beneficiary of much of the rotation If the Trump election wiped out $1T in the bond market, then it looks like a lot of those proceeds went into the US market with a focus on value
Capital has to go somewhere in rotation. However, if old debt coming due isn’t replaced with new loans you could still have deflation, and money disappearing, particularly if interest rates rise. There’s logic for either depending on which theory you prescribe to.
In theory higher rates mean people stop borrowing but it’s certainly possible the assumptions made in standard models were wrong. (extra Nassim Taleb). Specifically the would be borrower may initially have less urgency to borrow due to the expectation that rates would continue to go down… Even though they typically will like to borrow more when interest rates are lower, they may be relying on future expectations of rates (opportunity costs), and know standard policy of the fed is to ease until things improve. If the picture finally changes enough they may revise their expectation of rates as well as the expected return and borrow enough to offset money leaving. There are historical instances of rising bond yields and stocks in uptrend and even periods of very high inflation (1940-1980). But certainly 1980-2000 was declining interest rates and increasing. (Not to mention global implications of capital rotation.
Because of the tendency to try to use interest rates as a tool to influence the economy, interest rates historically are low during bad times and high during good times so it makes the correlation even harder to spot, but certainly Japan 1989 onward shows that lowering interest rates doesn’t necessarily solve things, and when combined with making short selling illegal and other protectionism may even make things worse or more drawn out.
Meanwhile… there’s not only rotation of assets but currency demand and relative value changes, implications of changes, and global capital movement. Even in deflation if all the capital concentrates into dollars as well as stocks with strong balance sheets of US dollars (like Apple), stocks can stay flat in the US but still increase in purchasing power relative to other currencies around the world which makes for a strong trend of foreign capital if they expect the trend to continue and triggers a flight of capital into the US to even create a bull market priced in dollars, but certainly priced in other currencies and an increase in purchasing power for US stock holders.. Meanwhile, if other assets are performing badly people will specifically seek quality dividend paying companies with strong balance sheets immune to a dollar rise.
The macro view is fun to think about, but not necessarily always actionable.
Very well put
+1
watching GLD here for a potential brekadown
I know you can’t time this stuff, but assuming another banking/credit crisis in countries that can’t print as easily, I imagine fixed income preferences will quickly revert to US Treasurys, “safe state” Munis, shock-resistant corporates, and everything else will be dogshit. The flood into USD / Treasurys would quickly re-wind whatever selloff we have ahead.
I’m also assuming Trump’s win has strengthened the USD in terms of reserve status, as China/Russia/Iran might be less inclined to push forward with their SDR scheme.
In the meantime while we wait for macro things that never happen on time, all your reasoning and evidence makes total sense.
Right. I’m big on timing.
Still waiting for now. I get interested when these things are less popular, and not discussed as often.
Meaning hard to time macro sky is falling stuff. When you point things out, I pay attention.
+1
Divergences – I never see them until OA points them out, then it is like, “oh yeah”
BAC coiled pretty tight today
Me.. I bought SRPT earlier with a two-buck stop. Looking to add to SPLK.
Until the Trump pictures settles it’s hard to predict anything. Rarely do things go as planned.
I’ll just wait patiently for the right setups and do my thing.
VLTC poped today
There is no reason to think the bull market in bonds is over unless you feel there is a potential credit event in the medium-term.
Rates are where they were this time last year. And even with lower taxes, less regulation, and more deficit spending a surge in inflation is far from guaranteed. Economic conditions are presently negative and turning more so. The entire economy is over indebted. The expansion is almost 7 years old which means the bulk of the big ticket items that people finance to buy are already bought.
When Obama’s Stimulus in 2009 was announced people rushed to price in higher inflation that never came.
When QE2 was announced people rushed to price in higher inflation that never came.
Show me the inflation and I will consider the run over. This wouldn’t be the first false start.
Butttt…. if the inflation meme is just a lazy explanation and the market is more worried about Trump discussing potential haircuts then the run may really be over.
Sounds like you and I are working through similar thoughts…
🙂
Can someone please explain the reasoning behind this hypothesis, heard yesterday on a webcast conference:
Roughly…”We believe there will be a tradable rally on the treasury declines going into the end of year. We recommend buying bonds on pullback days, munis, not corporate. We are not interested in dividend stocks or equities as a whole.”
Sounds incredibly bearish the more I think about it.
Like, sell all equities kinda bearish…
I don’t understand the rally of treasuries part though. If it’s a rally, that means that the trend will continue as it was after the rally, downward.
Sooo, treasuries AND equities sell off and everyone is in bonds? I don’t understand that scenario.
Is there a correlation out there someone can point out?
Sounds like they are looking for people to buy stuff they want to unload.
You dare accuse The Bond King (long live the king) himself of jockeying a trade?
Stopped out of $XON shares at approx 30%.
Pinched my nose and added to $BTE shares.
Also opened a position in $GLUU shares.
In a similar way that stocks and bonds have gone up for the last x years, I believe we are going to see a similar breakdown in both – bonds will fall and yields will rise, which will fuel or exacerbate the move lower in stocks. Yes, the money has to go somewhere…eventually.
I’ve been watching your (OA) analysis on the markets and your points are very valid relating to historical analysis and the setups have proven correct so far. With that said, I cannot believe that what we are about to experience over the next 6-12-18 months isn’t going to have significant effect on the market. Who knows what policies will or won’t be enacted, but many have such unknown consequences. I don’t think it’s unrealistic that we retrace 50% to the financial crisis lows at some point.
On the flip side, if he really goes to 15% corporate tax rate, I’m not sure there’s any amount of economic impact that would trump (get it?) the benefit from the tax cuts. In addition, we have $20 trillion in debt to service, so having rates stay low forever seems possible as well.
That leaves me somewhat flat-footed right now in all directions. Certainly can go after individual names as the market rips, but very hesitant to put any long-term money to work in either direction. I ultimately think there’s a meaningful shake-out lower, then we see how much damage and where we go from there.
This move leaves me at a difficult point regarding house hunting. I am shopping for mortgage lenders and they are all pointing to last week’s move, and they should. But I think I may have to lock in a rate on the technical bounce now. That would expire and means I would have to find something within that time frame Annoying as hell.
yeah, higher rates are going to be an issue unless there is accompanying wage growth or some other confidence building in the economy, cuch as GDP growth, lower regulation
For those interested, OA made a point about checking Finviz performers the day after the election to spot possible new leadership. I was curious about names that would hold their moves, so I checked yesterday, allowing for a week of price action.
Here are top 60: http://finviz.com/screener.ashx?v=211&t=PTCT,TUBE,IONS,HALO,CXW,ARIA,BLUE,CENX,X,CRC,ACM,BOFI,RDUS,EXEL,GEO,CLVS,NAVI,CVI,ALNY,HAR,JUNO,SC,LCI,CMC,XON,AMP,MENT,WDR,RF,KBR,URI,ADPT,OZRK,TASR,OMF,CONN,ENDP,TLRD,VRX,CHS,AERI,DK,SGEN,NVDA,FOSL,MRC,PBF,TGNA,OSK,STL,NTNX,TEX,ETE,KSS,VOYA,INSY,ZION,HZPN,PACW,ATI&r=41
Here are bottom 60: http://finviz.com/screener.ashx?v=211&t=WUBA,TRIP,IPXL,THC,CNC,SWHC,COTY,SLW,CBD,TTM,AMX,MOH,CSIQ,CSAL,MOMO,ITUB,TSU,ARMK,AEM,BRFS,TV,SBAC,GOLD,AMT,EDU,PM,VIV,CEF,FNV,BUFF,CCE,BUD,WATT,SYK,ABX,AU,PAYC,BABA,STOR,NFLX,AIV,HCA,STZ,SEDG,NTES,BVN,ADM,MNST,KHC,NEE,SRC,KSU,MDLZ,PF,CCI,TAP,SBGL,INFY,ZEN,PEGI&r=41
These are based on 750k min vol, stocks only, over $10. (Sorry $DRYS)
Winners: Bio is almost 33% of the group. Banks/financials not quite a quarter. This is probably just a representation of the larger sample, but bio stocks that got hammered this year (down >20%) represented 9 names of 60, while flat (hugging breakeven- 4 names) or trending (meaningfully up on the year- 5 names) were less represented.
Energy & materials / tech / retail were also represented noticeably, and in that order.
59 of the 60 top performers were up more than 20% on the week. 2 of the bottom 60 were down more than 20%.
Mean reversion seems to be in play, because with an average 29% gain on the week, the top 60 are up 18% on the year, and with an average loss of 11% on the week, the bottom 60 are up 14% on the year.
I intend to refresh performance of these names after a month and a quarter to see how things change.
a couple of interesting shorts for those looking to balance their books: $HCA right about here and $PF about 60 cents higher. They’re both on the shitty 60 list but have bounced up into resistance.
I got puts in both $HCA and $PF.
Looking to add to my 2018 $GILD calls if I can get my bid hit.
Long a falling knife-
SFUN
“Risk parity” is a bitch, Mr. Dalio.
so should we institute a 72-hour ban on FSLR questions?
What question is left? We’ve seen this story play out before for solar companies. Going to 0. Glad I got out early enough to escape this bloodbath.
Harambe must’ve loved fslr. This thing is going to 0
I’ll be adding a bit lower.
Liking this BAC action. Wound tight
Closed a portion of my $NMBL position for not quite a double. Freaking misprint on their own website so earnings isn’t until next week. Taking delivery on the rest of the shares. I’ll be there for $20 come hell or high water.
Conviction!