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BFI Capital
July 19, 2019

Is There Ever a Time for Greed?

Yes. The last time I thought there was a time for greed for stocks in general was in March of 2009. What I did, if you remember, was to say that any purchase of stocks or ETFs was fine and gave several examples. Had I been managing money for people at that time, I would have had a field day, buying "hugely", to quote an American president.

But ten years later, I see the bull market for stocks in a different light. Indeed, it is possible that it is already over, and that it ended last autumn. Time will tell. I am keeping a smallish percentage in 'iconic' stocks as insurance.

But if there is a time for greed now in anything, it would be in the precious metal universe. This was particularly true in late May and early June. I sent out several Alerts at that time.

That area has risen in the weeks since then, but I don't think the rise is over. That burst of energy was so great that it would not surprise me to see a period of consolidation here. For gold, playing around the $1400 level would be the expected thing. But quoting that figure in itself strikes a different tone to the gold market. For so long it had been at or below the $1300 level. It feels good to see it at or around the $1400 level.

The general course is now up, but don't expect a one-way ride. I am happy with our positions in this area.

Today Marks Three Years Of A Tricky Yield Market

The one area that concerns me the most is interest rates. I am writing this on July 8. And this day marks exactly the third anniversary of the bottom of the long-term Treasury yield. That day it hit 2.1%. As I write this on July 8 of 2019, that yield has risen to 2.522%. That is a large jump, in percentage terms. It is around 20% higher. And yet our chosen vehicle, TBF, has not kept pace. Even allowing for the expense rate of just under one percent annually, TBF is only a tiny bit higher than the lows of three years ago today, at $20.35, compared to $20.21, which was the closing price three years ago.

For the US 30-year bond, you can see how much lower the price is (and higher the yield is) by looking at the chart below:

Three years ago today the price rose to a high of 177. Now it is around 155. It has risen sharply from around 137 last autumn. But my gut feeling is that the rise in price is about to run out of steam. It has been around the 155 area since early June. It is only a matter of time until the market becomes worried about future currency depreciation and will demand higher yields for 30-year debt. When that time will come exactly, I wish I knew. But I don't.

For now, I'm going to hold positions. TBF broke down under the old lows for a day, and then bounced back up. Granted, it is not an ideal vessel. But virtually every bad investor I know of who has made their wishes known has just sold. By 'bad' investor, I mean the ones who can be counted upon to buy near the tops of any asset or sell at or near the lows.

Also, I see that "everyone" now expects the Fed to cut rates in a few weeks. But I wonder if that is not the herd braying. Not all that long ago "everyone" expected the opposite.

I know that the US president wants the Fed to cut rates. He must be jealous of the Turkish president, who fired the head of that nation's central bank last weekend. Turkish official rates were about ten times the US rates: 24% vs 2.5%. In the immediate aftermath, the Turkish lira plunged by 4% vs the USD. And we know that Trump would love to see the USD fall by that percentage or even more.

By law, the US president cannot fire the Fed chief. But it is possible that he makes life so miserable for the chairman that Jay Powell quits. I don't think this will happen, but nothing is for certain in this crazy world.

I must stress once again that though the Fed can control very short-term rates, only the market can control long-term rates. By long-term we mean from 20 to 30 years in maturity.

More than anything else, it must be stressed that I could be completely wrong about yields and TBF. Ideally, the way to profit from a bond bear market is to short the 30-year futures or short individual benchmark 30-year US bonds. But US regulators have made it so that only the very wealthy can do this. For our money management firm, we could only do this for only a small percentage of our clients who have sufficient net worth. Even if we went very conservatively into the futures markets, say by putting down fully 50% for just a 2 to 1 leverage for shorting, we would only be allowed to do this for only the wealthiest of clients.

For US brokers, this is called the "suitability regulations", or FINRA Rule 2111. The brokers have to be very careful: the riskier the investment, the tighter the rules. And futures are regarded as the riskiest of all, since you can go as much as 20 to 1 leverage. The brokers have to look at a combination of age, net worth, income, number of dependents, employment status, risk tolerance, investment objectives and other things that could possibly enter into it. And even if all these look good on paper, sometimes the broker may still not allow a client to trade futures, if the broker thinks they are being 'excessive'. Of course, this is completely subjective. And this is not just for futures. Thank goodness that Fidelity, for example, has limited or forbidden the purchases of such triple-leveraged ETFs, as NUGT or JNUG. Not just the miners, but the triple-leverage for anything, even the S&P. They have done this, because they have judged that these are too risky for certain clients, and they don't want to get in trouble with the regulators.

The Euro-zone won't even allow most people to buy GDX or GDXJ, as we've seen, so good luck trying to short things on the futures markets. The regulators have gotten so crazy in recent years, it is hard to know what to tell people. As of now, the Swiss brokers can do pretty much anything, but there has been a lot of pressure put on them by Brussels to have them conform to the Euro-zone regulations. This is because people have left that zone and gone to far more liberal Switzerland, or even Singapore.

There are ways to avoid the regulations, but these are for the wealthy only. On the one hand, I can understand the regulators' zeal: so much money has been lost by unsophisticated or just plain greedy people that the idea is to protect people from themselves. But on the other hand, there can come a point where regulations get so onerous that you just want to tear your hair out. However, if no investor was greedy or stupid, there'd be no need for such regulations. But I wouldn't bet on that ever happening.

But back to TBF. I'm holding current positions, but I reserve the right to change my mind in the future. You, of course, can do what you think best for you. I remember the last change in trend with interest rates, from late 1979 to end-September of 1981. A lot of money was lost in that period of choppy uncertainty. I continue to think that the next trend in long rates will be up. Or rather, taking the levels of three years ago exactly, continue to be up. Remember, long rates are up by 20% from what they were on July 8, 2016. And 30-year bond prices are down by 12.5%. I think this is the start of a trend, but it will not be a clean one. And more than with most things, I know I could be wrong. It is possible that we see US long rates plunge down to European levels of nearly zero. That's a crazy thing, but this is a crazy world. If I see that happening with US long rates, I'll have to admit my mistake.

Chris is a money manager and he has been sharing his insights with clients and readers since 1974. He regularly writes and publishes ,The Weber Global Opportunities Report, a subscription-only newsletter. With a focus on precious metals investing, the Weber Global Opportunities Report covers a variety of topics that should be of interest to Global Gold subscribers and clients as well.

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