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Day 220: Bond Bubble?

Mother's Little Helper portfolio was UP today +$3,237.71 (+0.41%). Overall GAIN YTD: +$200,971.18 (+34.42%).

According to CNN Money our benchmark index, the S&P 500 is up +10.63% Year To Date.

Something is not right! I'm not a professional investor, I haven't worked at a hedge fund, I simply selected a group of stocks according to my own version of 'common sense' and they just keep going up and up and up, I'm sorry but my ego elevator doesn't go to that floor. Something is not right.

In July 2016 when U.S Treasury bonds hit a low I began building a small position for my own portfolio in a fund called the ProShares UltraShort 20+ Year Treasury (TBT) as a hedge against rising bond yields and falling bond prices. I also maintain a position in the GLD gold fund as a hedge against all uncertainty. I don't normally short anything but it seemed like a good idea at the time to have a plan in case yields suddenly shot up. History tells us that this is not out of the realm of possibility, and with the current experiments in ultra low rates, negative rates, the fed buying up sub-prime mortgages and more rate hikes coming in the near future I thought it wise to keep a warm coat on hand in case the weather changes.

Interest Rates Are Going Up

The yields on the 10- and 20-year Treasury notes are up significantly since the low we experienced in July of 2016. And the Federal Reserve has been raising the Fed Funds Rate again, a trend investors haven’t seen since 2006. We do have short memories.

Source: U.S. Department of the Treasury.

ProShares Inverse Bond ETFs

Bond yields and interest rates generally move opposite bond prices. When rates go up, prices come down and vice versa. If the trend continues and bad days are ahead for bonds, inverse bond ETFs can make it a good day for bond bears. I'm not necessarily a bond bear I just think its a good idea to hedge against all uncertainty. I like the idea of keeping 10%-20% of my portfolio in a gold fund, I like the GLD. Likewise I think a 5%-10% stake in the TBT while rates are low and poised to go higher is a good idea.

I'm not an expert at this stuff so why would I bring up this topic when I'm knee deep into my recession predictions? For the answer to that question we have to take a short trip back in time with my dad, the 47 year veteran of the brokerage business. My dad had a professor at NYU named Kenneth Galbraith, if you don't know him he was kind of a big deal in economics. Like most students who need help from their professors, my dad was sent to Galbraith's TA, a guy named Alan Greenspan. If you don't know Mr. Greenspan as the long time head of the Federal Reserve you might remember his famous quote about "Irrational Exuberance" shortly before the dot com bubble burst. Anyway, dad said Greenspan was a pretty smart guy and worth listening to when he spoke, especially when he was nervous about something. 10 hours ago Mr. Greenspan, in a most emphatic tone, stated that the bond market is in a bubble due to abnormally low rates. Some are writing Greenspan off as wrong, maybe at 91 years old they think he's just not on top of his game anymore. I'll choose to play this one safe.

Please read the whole article or listen to the interview, quotes out of context always deliver the wrong message. Click the quote above to go to the interview.

Does this mean it's time to panic? NO. Should we start selling our stocks? NO. Maybe what's most useful is just knowing that there is something brewing in the markets and if bond yields rise dramatically you should expect a little excitement in the economy. One possibility is that as money comes out of the bond market it may very well go into the stock market which would only serve to push prices up higher. Study the news, ignore the noise and decide what's right for you. Something else to keep in mind is that there is a significant amount of foreign investment in U.S. Treasuries, the result of our low rates being better than negative rates. If or when the bond bubble does burst it will have a global impact.

Stay Invested

Clay Baker

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