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Bond Market Rally?

I've never been popular, never sat at the cool kids' lunch table, and nothing I say today will change that situation. I choose to focus on things I can control."

- Clay Baker

​​The Portfolio Performance

The portfolio is UP +15.13% YTD

The S&P 500 is UP +12.46% YTD


Bond Market Rally

The portfolio has held the ProShares UltraShort 20+ Year Treasury (TBT) since 2018. Holding a levered fund for long periods is unusual and not recommended due to the daily rebalancing. But these have not been usual times. The TBT was a winner as long as interest rates were going up. Now that rates are coming down and are likely to be forced down by a host of macro factors (see below), I'm investing on the opposite side and betting that rates will decline and bond prices will go up. My investment is the ProShares Ultra 20+ year (UBT); see all details of the fund here ( To fund the transaction, I'm selling 500 shares of the TBT position to buy 1,000 shares of the UBT. I am keeping about half of the TBT position in case rates bounce up again, but I expect to sell the rest in tranches to keep adding to the UBT or other positions.

Everything below this paragraph has influenced my decision to short U.S. treasuries in 2018 and to now bet on a bond market rally. If the bullet points below anger my subscribers, that's a reasonable response. My statements have much to unpack, and I'm prepared for some backlash. I want to remind everyone that I'm not a member of any political party. My comments below are facts that have influenced my investment decision, and these facts will impact the stock market, the bond market, and the global economy. I'm not alone in my position on these issues, but I'd say them even if I were (see the quote above). My job is to navigate the markets, and information is how that goal is accomplished. All my subscribers must evaluate the available information and make their own decisions concerning how they invest.

Macro Factors I've Observed

  • The Federal Reserve on Monday kept rates unchanged at 5.25-5.50%. This is the second pause after raising 11 times, the fastest rate hike in Fed history. This is bullish for a bond rally.

  • The spread between the 2-year and 10-year treasury has remained inverted for over a year. An inversion is often regarded as an inflation watch trigger moment. That's incorrect; it takes 12-18 months of inversion, which we've already had. The more recessionary indicators are that the curve has recently de-inverted, re-inverted, and steepened. Recessions are not a time to pull out of the stock market; they present massive buying opportunities. This is bullish for a bond rally.

  • Companies have announced hiring freezes, we've seen hours come down, and we're starting to see layoffs. I think more layoffs are coming, and those layoffs will spread to smaller companies that rely on bigger companies for their revenues. This is a MASSIVE warning to anyone considering buying a house because your current job pays enough to afford the 6%-8% mortgage. I'm warning that your job may go away and leave you with a mortgage you can't pay. The result will be homes selling at much lower prices as the volume of homes for sale increases. Interest rates will come down while presenting the cash strong with fantastic opportunities in the housing market.

  • Interest expense on our national debt continues to rise by hundreds of billions of dollars, and the 5%+ interest rate drives interest expense ever higher. This is bullish for a bond rally.

  • Jeffrey Gundlach (The Bond King) states that 50% of the treasury's public supply matures in the next 3 years. If rates remain at 5%+, we will have an interest expense of $2 trillion on the Federal debt very soon. The deficit today is nearly $2 trillion. Stanley Drunkenmiller says that the maturity of the debt is 6-years. Regardless of which number you trust, "these estimates always leave out the $8 trillion in overnight funding in the REPO market." Even the Fed leaves the REPO market out of their reports. It’s important to look at the consolidated debt because it’s what all taxpayers are responsible for.

  • We have had a deficit of 6% - 8% of GDP for several years. If we continue at the current interest rate levels, the interest expense will be 50% of tax receipts in about 5-years. This is a massive interest expense problem that I think will be the trigger for the next global financial crisis. How do we cover everything else if 50% of taxes is going to interest expense alone? Raising taxes will string us along, but there aren't enough taxes to cover the spending.

  • shows over $211 trillion in unfunded liabilities. $219.5 trillion of assets. Our unfunded liabilities nearly match our total national assets. When a bank or a hedge fund has liabilities larger than its assets, and the redemptions come in, we get a financial crisis. The situation with the Federal government's liabilities isn't much different, and being a sovereign doesn't release the United States from the basic math. We need the debt, the deficit, and spending to come down, and none of those are happening. This is just math. If the government does do something, the markets will.

  • Rates falling while inflation calms at the same time the economy weakens is the making of a bond rally. Remember, there is an inverse relationship in bonds between prices and rates. When yields fall, prices go up, and that’s what the latest investment relies on. Remember that I don’t see my purchase of the UBT as a long-term investment. This may last months, not years.

  • When Willie Sutton was asked, "Why do you rob banks?" he said, "Because that's where the money is." The debt must be serviced, and the money is in Social Security and Medicare. The Federal government can either invest in cost-cutting treatments, medicines, and devices that can significantly reduce Medicare care costs while improving outcomes, or they can cut benefits. The same is true for Social Security. The services of these two mega-benefit programs are not in question. The problem is how we fund the services. Social Security can't keep spending money to run an organization that distributes money; obviously, there is a cost in the middle that needs to be cut substantially. Prescription drugs represent only 9-10% of healthcare spending but deliver far more benefits than the cost. Politicians constantly demand big pharma cut prices and recently passed legislation to force capped prices. The major cost areas are hospitals and doctor visits, which account for 51.5% of costs. When was the last time we heard a politician berating doctors or hospital management for their costs? When was the last time anyone in government suggested that hospital CEOs be brought before a committee to explain the costs of their services? These expenses can be reduced significantly by investing in new standards of care instead of ever-increasing costs for the current standards of care. Case in point, each year in the United States, sepsis accounts for 270,000 deaths and costs nearly $27 billion, making it one of the largest cost drivers for U.S. hospitals. The latest technology to detect and treat sepsis is approved and was partially funded by BARDA, The Biomedical Advanced Research and Development Authority, to the tune of $60 million. BARDA's funding was for developing a single test panel for bio-threats. That $60 million could have placed the latest testing equipment in 10% of hospitals and reduced overall healthcare costs by billions yearly, saving tens of thousands of lives. For $600 million, the government could outfit every hospital and reduce costs by over $20 billion annually while preserving 270,000 tax-paying lives yearly. I can cite many more investment areas that would reduce costs and improve outcomes. The point is some change to Medicare and Social Security is going to happen and must happen; I'm just stating that the problem is in interest rates and how we fund the programs.

  • The unemployment rate is low but noticeably trending higher. The current unemployment rate is above the 12-month moving average and about to go above the 3-year moving average. Very low unemployment followed by an uptrend is a precursor to a recession.

  • Consumer confidence is deteriorating. The consumer is 70% of GDP; everything declines when spending declines. Money will flow to bonds for a perceived risk-free investment.

  • Equities can do very well in the near term but suffer in a recession, which could come as soon as the first half of 2024. I would not be a seller of stocks at these levels but would focus on quality, low debt, and free cash flow. When a recession comes, look to buy quality at bargain prices. Holding 20% cash now through mid-2024 wouldn’t be too much.

  • Cash is not KING. In a cash strategy, an investor will buy 6-month T-bills and earn 5-5.2%. Or put the cash into a money market or savings account, earning a high rate. But when a recession hits, possibly in the first half of 2024, the Fed will cut rates, and they will cut deep, like 100-200 basis points. The loser in that scenario is the cash investor, whose interest rate will get cut deep. I still prefer stocks, ETFs that leverage bonds, and a cash position that’s large enough to allow you to buy when valuations are cheap.

  • Countering everything I’ve put forward, the Treasury Department announced the sale of $112 billion in notes and bonds. That’s an increase from last quarter's $103 billion sales. Over the next six months, the U.S. Treasury plans to borrow $1.59 trillion. There is no slowdown, cutting, or funding of these debts. The opposite is true. The Federal government is increasing the borrowing rate, debt, and deficit to unsustainable levels. We have now reached the point where action must be taken; some austerity must occur, as we are at the inflection point where we can no longer service the debt. Who will buy all those bonds the treasury prepares to issue from a country that can’t service the debt?

  • One last point: what about “Tax the rich,” “Corporations need to pay more,” or “Do your fair share”? These are political potshots that keep voters in the dark. I don't care who says these things; none of these strategies to raise revenue work because there isn’t enough money in those sources to satiate government spending. Above, I noted that liabilities are about to exceed assets. Theoretically, if we sell everything, we end up even, but we can't pay for the spending that will continue. The solutions are easy to understand but hard to do.


SELL 500 TBT @ $40.40

BUY 1,000 UBT @ $17.40

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker


Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When good stocks you own drop 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your own homework.

RULE #10: Being early and being late is the same as being wrong...move on.

Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:


I am invested short in these securities mentioned in this post:

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.


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