18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
21,503 Blog Posts

Single Best Trade Idea: Long Long Bonds

Bear with me and please inflationistas out there do not throw tomatoes at this blog.

Rates are too god damned high. And it’s because of the higher rates, the specter of Fed action, that is causing tech and biotech to correct so severely. Just over the past month SAAS stocks and biotech too are down in the magnitude of 35%. This is plainly insane, but not without precedent.

What is the market pricing in?

In layman’s terms, slower growth. But we’ve been down this road before and at the first sight of slow growth the Fed changes a word in their statement and the whole market go bananas to the upside. The point being, there is a Fed put and that put demands LOWER interest rates. That’s just the way it has been.

Let’s offer a few scenarios for you to gameplan.

Markets careen lower on fears of stagflation. Do you really think oil is going to buck the trend up? That’s very rare and oil is sensitive to the economic winds, so to say. Admittedly, we are enduring a rather unique spate of inflation, which has been caused by the COVID lockdowns and stimulus. Nevertheless, it would be extremely rare for markets to tank and bonds not become an avenue of safety.

The other scenario s straight up. But how will SAAS and biotech bottom with rates pressuring higher? Moreover, how can the market do two things at once? Impossible.

The answer is simple: BOARD THE ARK, via TLT or TMF for leverage. I am 10% weighted in TMF now and to be honest I am liable to sell at any time. That still doesn’t mean the thesis isn’t true or should be followed.

On the other hand, out algorithms inside Stocklabs just tagged the biotech ETF XBI with a 30yr oversold tag. Lo and behold, we are at very historical levels of carnage in the biotech space and there will be a mean reversion trade to the upside with severity, rate or not.

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  1. Mr. Cain Thaler

    So with regards to your specific question “Markets careen lower on fears of stagflation. Do you really think oil is going to buck the trend up?”, the answer is obviously yes because in some sense that is the definition of stagflation. Nominal gdp up, real gdp down.

    And yes if stocks collapsing in and of themselves create deflation the Fed is back in the game. But based on the open neighborhood of where we are, I think that’s actually a worse gamble than you might expect.

    Look at job quit rates of 55+. The stock market has allowed numerous employees to exit the economy as much as a decade before their time. Sure the stock market cratering has normally (last 10 years) occurred alongside deflation but that’s not always the case. The 70s are full of counter examples.

    Basically the inflation / bond bear / stock bear thesis is that inflation leads to higher yields but the economy holds up in a way that the Fed’s hands are tied. Where if they try and step in we look something like Turkey does today.

    But to your point, yes if as rates go up the whole system implodes then yeah we lose. Fed saves the day again. The bear case cannot involve waterfalls of stocks and the collapse of the economy. It only works if there’s a prolonged and very painful years long bear market with weak growth rates and persistent inflation.

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  2. Mr. Cain Thaler

    In other news, the supply chain is now visibly getting worse again.

    To recap, lead times are a convenient way to measure strain on just-in-time lean manufacturing.

    Back in June 2020, lead times were extended to a then unprecedented 2 weeks. A month later and they had exploded to 2 months.

    After numerous conversations with engineers over the holidays, it seemed like the situation was further deteriorating. Since then I’ve had more conversations that make it clear lead times are worsening again. Probably 3 to 4 months on average now.

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  3. nocigar

    We had stagflation during the Carter years. In 1979 crude oil price doubled. That’s the “flation”.

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  4. Mr. Cain Thaler

    Natural gas was up 14% yesterday.

    Natural gas is down 11% today.

    What was the fucking point of this?

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  5. Mr. Cain Thaler

    Last comment from me today…

    If the Fed wants to tame inflation then raising the interbank lending rate isn’t even the best tool. They should just start selling off their $9 trillion in treasury holdings instead. At about 6% yield…

    That will sop up liquidity and bring demand inline with supply. Stocks and corporate bonds will hate it and die. But the economy would probably hold up. No banking crisis, especially if they give primary dealers a heads up.

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