Buying Bonds

“Given how much damage noise can cause, that invisible victory is worth the battle.”
- Danny Kahneman

One of my “invisible victories” this year has been how small my Asset Allocation to Treasuries has been coming into this recent ramp in bond yields. Relative to what it could have been in #Quad4, that is! I started taking Fixed Income up from 2% of my assets on Friday.

That changes as of this week where I’ll be taking my Fixed Income Allocations (not just Treasuries) up towards 25-33% of my hard earned capital. Why? Don’t worry, I’ll get to that. Why not? That’s my question to you this morning. Would you prefer to buy the NASDAQ?

I know the “feelings” and “charts” you may have that give you a bias against buying bonds. It’s been a good decision. But, as Kahneman taught me, “debiasing prior positioning is good decision-making hygiene.” So keep it clean and unemotional this morning.

Back to the Global Macro Grind…

Not unlike sending you notes with titles like “SELL QQQ Now” (when it mattered), I have zero problem writing “Buying Bonds.” Why? Unlike the unaccountable Old Wall types that keep telling you to buy Crypto or QQQ, I’m just being transparent about what I’m doing.

Here’s another Kahneman question for you on what you think or, god forbid, “feel” about that? “Do you know what specific bias you’re fighting and in what direction it affects the outcome.” -Noise, pg 244

Let’s start with assuming a bias that’s already priced into the Treasury Bond market:

1. This morning, Fed Rate Hike Expectations for 2022 are at a new Cycle High of 10.14 Rate Hikes
2. This morning the Short-end of the Yield Curve (2yr Yield) is at a new Cycle High of 2.78%
3. Last night, the Long-end of the Yield Curve (30yr Yield) was at a new Cycle high of 3.08%

After the Fed goes for its 10^th +25 basis point hike, that 0.14 of a hike is going to be scintillating. Did you know that our initial GIP (Growth Inflation Policy) Nowcast for Q1 of 2023 just collapsed to another #Quad4?

Yep, there’s a rising probability of that the US economy is NOT out of #Quad4 until March-April of NEXT year!

For me at least (since I can’t be wrong on something like Gold for more than a week) that’s like 3 careers from now. By that time, it will be crystal clear to even the LATEST of lagging economic forecasters (i.e. the Fed) that:

A) The US economy is in #Quad4 (Disinflation and Real Growth Slowing towards Cycle Lows)
B) The Profit Cycle is a bloody ROC (rate of change) mess careening into an #EarningsRecession
C) The Labor Cycle is well past peak and the unemployment line is correlating with the #EarningsRecession

These aren’t academic narratives or prophecies from hope.com btw (they’re already in the April #Quad4 ISM report)

1. ISM (headline) #slowed to 55.4 in APR vs. 57.1 in MAR (that was a 22 month low)
2. ISM Employment #slowed from its MAR CYCLE PEAK of 56.3 to 50.9 in APR (almost in recession signal mode)
3. ISM Inventories were up with both New Orders and Backlogs #slowing sequentially

“But, but… KM, the Gold chart broke the 50-day Moving Monkey and the 30yr Yield chart”…

Yep, roger that Late Cycle peeps. Both the Long Bond and Gold look about as healthy to an Old Wall Linear Chart Chasing Technician as they did when I was buying both with both hands back in Q4 of 2018 (i.e. the last Rate Hike Expectations peak).

“But, but, Inflation”…

Yep, in addition to the economic DATA update, here’s an update on the #Quad4 Industrial Demand side of DISINFLATION:

1. Iron Ore down another -4.4% here to -11.1% in the last month, breaking bad to Bearish @Hedgeye TREND
2. Aluminum down another -2.0% here to -13.2% in the last month, breaking bad to Bearish @Hedgeye TREND
3. Zinc down another -3.2% here to -9.0% in the last month… and… drumroll, breaking bad to Bearish TREND

So, this former Commodity Cycle Bull (who was buying Commodities, as a major Asset Allocation, in June of 2020) isn’t buying Copper (JJC) or Silver (SLV) on their recent @Hedgeye TREND #VASP Signal break-downs either.

And since he can’t buy many things “Equity” with the VIX and VXN in the F-Bucket of Volatility (> 30), what does he buy?

1. More US Dollars (UUP) on every damn dip
2. More Gold with @Hedgeye TREND support of $1828/oz intact… and, wait on it…
3. More kinds of Bonds other than US Treasury Bonds (BAB, BNDX, BNDD)

Yep, all three of those Bond ETFs are A) signaling immediate-term TRADE #oversold this morning alongside B) short and long-term Bond Yields (both locally and Globally) signaling immediate-term TRADE #overbought.

May I just hold them for a TRADE? Oh yeah. You know me. My bias is being a dirty little Mucker (that’s with an M) of a trader, eh. But what if I go all longer-term Full Cycle Investing on you and hold the bloody things until #Quad4 in Q1 of 2023?

I fully expect the Fed to be cutting rates by then.

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets

UST 30yr Yield 2.78-3.08% (bullish)
UST 10yr Yield 2.67-3.01% (bullish)
UST 2yr Yield 2.44-2.79% (bullish)
High Yield (HYG) 77.74-80.02 (bearish)            
SPX 4030-4291 (bearish)
NASDAQ 12,061-12,899 (bearish)
RUT 1 (bearish)
Tech (XLK) 137-148 (bearish)
Utilities (XLU) 69.50-77.20 (bullish)
VIX 24.88-37.98 (bullish)
USD 100.78-104.65 (bullish)
Oil (WTI) 97.14-106.79 (bullish)
Gold 1 (bullish)
Copper 4.23-4.59 (bearish)
Bitcoin 37,003-41,093 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer