Bet Against All Who Would Dump T-Bonds

February 9, 2015

Nearly six years into a supposed economic recovery, the Great Recession persists for most Americans. Payroll statistics released Friday would have us believe the economy is heating up, but how can this be so? Both statistical and anecdotal evidence directly contradict a rosy “official” picture that has fixated increasingly on brisk growth in McJobs, and on a boom in car sales that would not exist in the absence of ultra-easy credit and cut-rate leases. Home sales have been erratic, marked by price appreciation mainly at the high end and a persistent dearth of first-time buyers. The market for starter homes remains comatose because lending standards have tightened, and because underemployed 20-somethings are understandably skittish about piling mortgage debt on top of the $33,000 they already owe, on average, for college.

On the retail front, vacancies are growing and likely to become far worse in the years ahead. Radio Shack’s bankruptcy, announced last week, was a body blow to suburban malls across the U.S. Ultimately, few of them will survive when department stores join the list of casualties. Bergdorf’s, Neiman Marcus, Nordstrom’s and a few other retailers that cater to upper middle-class shoppers are safe as long as the U.S. avoids recession. But stores that attract a less well-heeled clientele are not long for this world. Sears, for one, is about to die a well-deserved death after 40 years of mismanagement. This has temporarily helped prop up competitors such as Kohl’s, Target, Ross and K-Mart, but even they are fighting for their lives.

Deflation’s Perfect Storm

These developments are all deflationary, but the macro picture is even more so, since a strong dollar is starting to shrink the value of profits earned abroad by U.S. multinationals. In Q4, Apple alone, by selling more phones than ever, and at higher prices, was able to shrug off the effects of a strong dollar on foreign operations. But most others, including Caterpillar, a bellwether for the global industrial economy, got clobbered.

Against this backdrop, U.S. stocks rose sharply last week and long-term bonds plummeted. Traders and investors would be wise to fade these moves, since they are based on egregiously mistaken perceptions of economic strength. Hard-core deflationists that we are, Rick’s Picks has been an aggressive buyer of T-Bonds on weakness, using an exchange-trade vehicle with the symbol TLT. This time around, though, we actually shorted TLT just pennies off the January 30 peak. The put options we bought at the time have allowed us to relax as TLT has fallen, and even to place some cautious bids last week as the pace of the selling picked up. It is already overdone but could become still more so before abating. As for the stock market, we are less inclined to short it at the moment because it is a rabid animal, completely oblivious to economic reality. That said, we seriously doubt that the bull market, which will enter its seventh year in March, has much further to go. There will be a time to short it very aggressively – just not yet. We have precise bull-market targets in mind for the major indices.


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