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Paul FrankeNationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer..... moreFollow11.7K Followers

The Great 2021 Bond Market CollapseMar. 15, 2021 11:20 AM ETiShares 20+ Year Treasury Bond ETF (TLT)BIL, BRK.A, BRK.B...145 Comments


  • As the global economy recovers from coronavirus shutdowns this summer, interest rates may have nowhere to go but UP.
  • Spiking inflation rates starting in May-June will be a wake-up call for foreign investors, Wall Street, and the Federal Reserve.
  • The gap between nominal GDP output growth and long-term Treasury rates may approach record levels soon.
  • Retail investor euphoria during early 2021, based on artificially low interest rates, may be about to end with a thud.

Sometimes in investing, its best to keep things simple. Absent massive Federal Reserve suppression of the free market in Treasury yields, mortgage rates, and corporate debentures, the U.S. bond market would look quite different than its current setup. My worry, growing daily, is the bond/stock/dollar backdrop is quite artificial in pricing and experimental in relation to each other, after this week’s Washington passage of another $1.9 trillion in “borrowed” stimulus spending. Sprinkle in the crazy retail investor euphoria of early 2021, and I can promise you, what you think you know about American financial markets could rapidly be turned on its head with little notice. [I’ve been trading since 1986, and participated in market events nobody believed possible weeks or months earlier.]

To artificially drive interest rates lower for the common good over the last 12 months, the FED under Chairman Powell has purchased nearly $4 trillion in Treasuries, added mortgage securities, and even acquired corporate bonds to stabilize prices after the coronavirus pandemic recession of 2020. In total, measured from the Great Recession bond buying program begun under Chairman Bernanke in 2008, the FED’s balance sheet has risen $7 trillion. For perspective, $1 trillion in FED assets was accumulated over the previous 95 years of the central bank’s existence. These quantitative easing efforts have injected $7 trillion in paper money and liquidity ($23,000 per U.S. citizen, $92,000 for a family of four) into the financial system the last 12 years, producing the biggest bond/stock bubble in the financial world’s history.

At some point soon, if interest rates are not allowed to free float again, either capitalism will be supplanted by complete government management of the economy like other socialist experiments that ultimately failed miserably, and/or confidence in our currency by foreigners could implode.

The problem with free floating our bond market, and allowing capitalism to decide what fair interest rate levels should be, is found in reality. The disconnect between where government-controlled interest rates stand today, and where they should be is HUGE, if a fair shake to bond risk-takers was the goal.

Using decades of history, one financial data truism standing the test of time and based in logic/reason is long-term interest rates in America have largely mimicked changes in nominal GDP. When you add yearly inflation rates and economic growth together, usually in the 4-6% range the last four decades, Treasury interest rates have traded at an equivalent level. Private market loan and company lending rates have generally settled at numbers above Treasuries, closer to nominal GDP, depending on the degree of inherent default risk.

Well, with loan rates still being held underwater by record Federal Reserve interference in the world’s primary bond market, the 2021 rate picture could quickly become the most detached from reality since 1966. The projected 6% gap between nominal GDP growth in the second half of the year and the current 10-year Treasury rate is absolutely horrible news for bond investors. According to a Bloomberg article by Yie Xie last week,

Analysts are boosting their growth and inflation forecasts, with Americans on the cusp of getting stimulus checks under President Joe Biden’s $1.9 trillion package. The average projection for nominal gross domestic product hit a 32-year high of 7.6% in Bloomberg surveys. Even after doubling to 1.6% since November, 10-year bond rates can barely keep up with the growth upgrade, leaving the gap between the two likely to be the largest since Lyndon Johnson was President.

The last time nominal GDP to bond market yields was this out of whack with reality came during the rising inflation 1960s and spiking inflation 1970s. While some of us have been suggesting investors look to inflation hedges since the FED announced “unlimited money printing” efforts last March, the reality of 3% to even 4% YoY CPI gains by the summer is only now sinking into mainstream thought on Wall Street.

Buffett & Dimon Agree

Two titans of global finance have come out in recent weeks screaming the U.S. bond market is headed for a massive implosion or at the least a prolonged period of losses. Arguably the best investor in modern times Warren Buffett, CEO of Berkshire Hathaway (BRK.B) (BRK.A), and Jamie Dimon, CEO of JPMorgan Chase (JPM) the largest bank in the America, have been sounding the alarm. Mr. Buffett, in his annual report letter to shareholders released late in February, specifically mentioned fixed-income investors face a “bleak future” as inflation and economic growth accelerates after the pandemic. Mr. Dimon correctly and aptly recommended investors shun the Treasury market back in early December. He said he would not touch the U.S. government bond market with a 10-foot pole, much less consider buying securities at today’s record low yields. A number of other financial analysts have been succinctly explaining the Treasury bond market situation of early 2021 as all risk (future price will decline as rates rise), with almost no reward (received from yields hovering near zero).

Do you think we can sustain interest rates of 0.5% to 2.0% in the Treasury market with inflation running double or more the yield offered by risk-free bonds? Owning low-yield bonds is now a lose-lose proposition as the coronavirus economy fades, and the recovery gets more pronounced from here. If the FED refuses to raise short-term savings rates and/or allow long-bond yields to increase a further 1-2% this spring, we could see a complete loss of confidence in the dollar’s exchange rate, forcing foreigners to liquidate U.S. financial assets. And we desperately need overseas capital with our staggering structural sovereign deficit borrowing needs of $2+ trillion each year, alongside the $5-7 trillion mountain of annual refunding requirements.

My argument today is the FED is stuck. If they don’t allow a bond market rout (likely cascading to a stock market tank similar to 1987), even bigger issues with our currency will hit like a bomb later in 2021. Compared to a relatively stable U.S. currency situation for decades, none of us in America have experienced a true currency crisis, or what repercussions a 30-50% drop in the dollar would unleash on world trade and wealth movements. [For example, given a Yuan to dollar value increase of 40%, the Chinese economy would almost overnight become the largest in the world, passing America with a gracious wave as they zoom by the former #1.]

Modeling the Future

If you think the small increase in mortgage rates is unnerving to your home purchase or refinance decision the last several months, wait a few more before making any resounding conclusions. I am projecting a fair market-derived 30-year fixed mortgage rate should be well above 5% by late summer, which would be up dramatically from the 2.75% national-average low of December. This number would “honestly” account for 3-4% CPI, with some default risk factored into the equation.

Given our economy picks up steam as forecasted today by Wall Street consensus, and inflation spikes with the commodity explosion since last March, Treasury market rates should be at least 3% on the short end, and 4% on the long end of the duration curve in 6-9 months. What if free-market capitalism is a thing of the past, and the FED says "father knows best" is the only option?

The flip side is a FED adding fuel to the inflation fire by continuing to interfere in Treasury security, corporate debt and mortgage markets. If that is our future, I fully expect a dollar tank will be the release valve for those wanting to express their disappointment in America’s failing economic experiment in socialism. A total train wreck in the dollar’s exchange rate could quickly lead to even higher inflation and interest rates in 2022, nicely above 5%. Then we will all be talking about Uncle Sam’s solvency, namely its insolvency. There is no way America can honestly afford 5% or greater interest rates on $30 trillion in debt by the end of 2021. We could be forced to spend 6-7% of GDP several years from now (up from 1.5% presently), just to pay the interest cost on decades of overspending.

My gut feeling is the March 2021 world is looking a lot like the middle of 1987, which I traded. A weakening dollar, record money printing, a super-strong +50% stock market advance over six months, spiking commodity prices, an upturn in the economy, and a zig-zagging lower bond market were ingredients of the 40% equity market crash over less than seven weeks into October 1987. Sound familiar? The scary difference to consider is today’s stock market is the most overvalued in history, based on total market capitalization to GDP output, price to tangible book value, and price to underlying business sales.

If the FED wants to keep Uncle Sam solvent past 2021, it may have to allow the U.S. bond market to deflate in 2021, a necessary effort to slow a surging economy and equity market. More than likely, a rapid increase in loan rates for businesses/consumers, alongside a rerating of equity valuation models to reflect far more bearish discount variables, could generate a memorable and painful rout in stock quotes in coming months.

If you are a foreign owner of U.S. Treasuries, earning 1-2% in annual yield as the “reward” side of the equation, against a currency devaluing roughly 15% the last 12 months (measured by the U.S. Dollar Index), and inflation spiking well over 2% in the near future as the “risk” side, it’s getting pretty easy to visualize the developing disaster on the return of your wealth! Playing the FED’s current game of manipulation, guaranteed to outline amazing losses in asset purchasing power, spells real trouble for funding Uncle Sam going forward, at a time of record need.

Action Plan

The question you have to ask yourself is do you want a stock/bond collapse now or later in the year? What if we have no other possible options, when a stronger economy forces everyone to reevaluate our financial market position vs. inflation realities. The clock is ticking, whether you want to make a choice or not. I have been warning investors for months, we are approaching a “be careful what you wish for” moment. We all want a world returning to normal from the coronavirus, but Federal Reserve decisions and U.S. financial market pricing are still assuming the 2020 economic disruption environment will last indefinitely. It is not. Deal with it. Change is the constant. Time to sell the good economic news, after buying the rumor since April.

I wrote a bearish article in late December here, explaining the growing odds of a substantial decline in the iShares 20+ Year Treasury Bond ETF (TLT) during 2021. TLT remains the "poster child" bond investment to Avoid or Sell. I am modeling another 20-30% price decline, on top of the 13% loss in 2021 to date, assuming coronavirus herd immunity is being reached into June and the FED realizes its aggressive easing mantra has reached checkmate.

The steady drop in yields outlined by the Treasury market for decades has only reversed higher to a minor degree. With a 1.65% trailing cash payout from TLT, a robust increase in long-term rates (becoming more necessary to save the dollar's value) back above 3% would devastate the price of this ETF.

I have been short TLT off and on since December. My battle plan today is to reenter a small short position in the $136-138 area, on a minor rebound following last week's beat down. This position is a good candidate for a straight 10% stop-loss level (buy-stop in this case) on my sale price. If my thesis is correct, more intense bond selling is right around the corner with robust and upgraded economic/inflation numbers reported by the government.

Outside of parking capital in cash as a short-term diversification tool against approaching bond and stock market volatility, I would be reducing my intermediate and long-term duration bond investments/ETFs/mutual funds to minimal levels of exposure. I don't own any personally. Real estate holdings, REITs, oil/energy conglomerates, and utilities as income alternatives seem to have better odds of maintaining their purchasing power years down the road. However, these investments may also suffer losses in a stock market debacle, before rebounding.

I can think of just two events that could prevent a bond market implosion the rest of 2021. Scenario #1: the FED talks the big New York City banks into intentionally crashing the stock market first, thus relieving the building consumer confidence, spending and inflationary pressures. Scenario #2: variants of the coronavirus unaffected by current vaccination formulas make a big comeback in April-May, forcing new economic disruptions, lockdowns and stay-at-home orders, like those appearing in Europe this weekend. So yes, we may be stuck with a number of rotten realities to choose from right now.

The beauty of running a fully-hedged portfolio, close to net-neutral for long exposure, is the nuttiness developing in the markets 2021 can still be an opportunity to generate gains. If you pair short sales in weaker securities like bonds against relatively undervalued names continuing to witness strong buying, your portfolio can rise in value even if the wheels fall off our financial markets. That's how I am positioned. You can also sleep well at night if the bubble bursts in 2021, and the average investor is about to experience monster bond/stock losses.

Thanks for reading. This article should be the first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

This article was written by

Paul Franke profile picture.

Paul FrankeFollow11.7K FollowersNationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer..... more

Long/Short Equity, Commodities, Deep Value, Growth At A Reasonable Price

Contributor Since 2013

Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....

Paul Franke is a private investor and speculator with 35 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of May 2021, he was ranked in the Top 10% of bloggers by TipRanks® for stock picking performance.

A contrarian stock picking style, along with weekly algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning 20-30 undervalued, unappreciated, turnaround favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep value names due for a bounce or long-term bottom.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TLT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.145 CommentsLike This ArticleSharePrintCommentGet alerts onTLT - iShares 20+ Year Treasury Bond ETFFollow61.96K Followers

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Comments (145)Sort byNewestPublish

tjhalligan131 Mar. 2021, 11:28 AMComments (5)|+ FollowNot to pile on, but this is pretty concerning as well, regarding Citadel's $123+ billion bond exposure - here's a preview: Citadel and friends have shorted the treasury bond market to oblivion using the repo market. Citadel owns a company called Palafox Trading and uses them to EXCLUSIVELY short & trade treasury securities. Palafox manages one fund for Citadel - the Citadel Global Fixed Income Master Fund LTD. Total assets over $123 BILLION and 80% are owned by offshore investors in the Cayman Islands. Their reverse repo agreements are ENTIRELY rehypothecated. www.reddit.com/...ReplyLike(1)

kimbillro31 Mar. 2021, 3:47 PMPremiumComments (49.54K)|+ Follow@tjhalligan1 , If they're short long term bonds they're making money...that's all that counts.ReplyLike

tjhalligan131 Mar. 2021, 4:34 PMComments (5)|+ Follow@kimbillro thanks, but I recommend you read the DD provided in the linkReplyLike

tjhalligan131 Mar. 2021, 4:42 PMComments (5)|+ Follow@kimbillro Sorry, sent too soon...the DD mentioned refers to the changes in the DTCC and FICC changes effective tomorrow re: SLR deposits and how that will likely impact the entire bond market and possibly cause a collapseReplyLikeSee More Replies

Paul Franke23 Mar. 2021, 2:12 PMContributorPremiumComments (1.8K)|+ FollowTLT benefiting from huge "risk off" day. Russell 2000 is down -2.5%, oil and precious metals down big, and Dollar Index higher. You might not know it with QQQ up slightly and S&P 500 barely down.

If we get more days like today in the near future, interest rates will steady or decline slightly for a bit.ReplyLike(1)

kimbillro24 Mar. 2021, 1:03 AMPremiumComments (49.54K)|+ Follow@Paul Franke , Yes, it turned into a flight for safety day as the dollar went higher also.ReplyLike

Steve Crawford21 Mar. 2021, 3:15 PMPremiumComments (375)|+ Follow@Paul Franke

One of the best articles I've read lately. Thanks for the effort in putting this together.ReplyLike

Paul Franke21 Mar. 2021, 6:33 PMContributorPremiumComments (1.8K)|+ Follow@Steve Crawford Thanks for the comment.

Clearly, the 2021 market condition is one of the most experimental in U.S. history. There are so many variables to worry about unraveling quickly.ReplyLike

kimbillro24 Mar. 2021, 1:03 AMPremiumComments (49.54K)|+ Follow@Paul Franke , It is very perplexing. I am standing back awaiting the end of March.ReplyLike

stoneweapon21 Mar. 2021, 12:40 AMComments (11)|+ FollowGlobal hyper-inflation is upon us now, this is global flight from fiat! We face uncharted waters where many countries are gradually unwinding their dependence on US dollar denominated trade. Many businesses are unwinding their dependence on fiat denominated trade. The disconnection between the physical value of production/natural resources and the speculative value of digital paper assets has reached a point where those who are subjected to accountability on the street despise the financial corruption and addiction of the bankers money laundering schemes serving the oligarchies and globalists. A crisis of confidence, accountability and integrity ultimately leads to a rejection of that system where new competing alternatives are embraced. I don't know what will come first....a $10 trillion deficit or sorry my factory only accepts partial payment in fiat....what else do you have to trade?ReplyLike

kimbillro21 Mar. 2021, 4:02 AMPremiumComments (49.54K)|+ Follow@stoneweapon , The dollar still buys things and pays taxes.ReplyLike(2)

stoneweapon21 Mar. 2021, 9:44 AMComments (11)|+ Follow@kimbillro so does the bolivar...but nobody wants it, it just takes more time with global fiat hyper-inflation to find alternative places to flee to. I think barter is underestimated, especially if the use of a barter was innovated into an advanced architecture of software integrating large pools of trade. I built half of my house with barter one on one. The effect and cause of inflation that destroys a currency is a deep study that comes in many shapes and forms that most people don't see outside digital markets. Ultimately, we need sound money again that is backed by natural resources to keep us accountable to the finite reality of our planet.ReplyLike(1)

Analyst_question21 Mar. 2021, 1:48 PMComments (1.09K)|+ Follow@stoneweapon, what is the evidence of hyper-inflation?ReplyLikeSee More Replies

Publicliterature.org18 Mar. 2021, 8:05 PMComments (1.14K)|+ Follow5% Mortgages would completely collapse the housing market. Home prices would decline similar to 2009. The Fed can't allow that either. It would easily sacrifice foreign buyers of Treasuries over a complete 2009-level meltdown. The housing market is completely addicted to the low rates. Even quarter point increases exponentially slow it down until its moving prices in reverse. Also, companies are leveraged up on cheap corporate debt. Allowing the risk free rate to float higher would collapse all businesses as well. The Fed is stuck, he'll have to wait for the economy to sneeze and then do QE infinity.

The 40-year downtrend in yields is still intact. I think we are going into a Japan style low growth low yield environment. Inflation fears are well overblown.ReplyLike(4)

kimbillro19 Mar. 2021, 5:41 AMPremiumComments (49.54K)|+ Follow@Publicliterature.org , I am not worried about it.ReplyLike(1)

r cohn18 Mar. 2021, 11:43 AMComments (2.47K)|+ FollowThe dollar will start to become the centerpiece of any discussion on the financial markets.
How does the dollar affect all other financial markets
It affects the price paid on all imported goods. A Lower dollar means higher prices on imported goods and more imported inflation.The dollar directly affects the ability of the Treasury to sell bonds and finance the deficit.A lower dollar will mean any current holder of Treasuries will face a loss on its purchase of Treasuries. Some of these long term holders will actually become sellers in order to limit losses.Concern about the dollar going lower will discourage foreign buyers from buying Treasuries.
A lower dollar increases the probability that other currencies replace the dollar in international trade. This in turn weakens the ability of the US to influence foreign policy and influence other countries in non economic ways
Yesterday ,Powell’s silly determination in keeping short term rates low was accompanied by no mention of QE or yield curve control for longer rates. So for now the entire burden to defend the dollar is placed on longer term rates.Powell has lost control of the long end of the curve . If the dollar goes lower the Fed will lose control over the short end of the curve ad will be forced to panic raise short term rates to prevent the dollar from going even lowerReplyLike

sr.sr18 Mar. 2021, 12:31 PMComments (186)|+ Follow@r cohn kkReplyLike

kimbillro19 Mar. 2021, 5:43 AMPremiumComments (49.54K)|+ Follow@r cohn , Watch the dollar go higher if stocks keep going down and interest rates keep going higher.ReplyLike

sr.sr18 Mar. 2021, 11:24 AMComments (186)|+ FollowDoes anybody know how 2% target on the 10y UST was arrived at? Why isn't 1.75% equally satisfying as a post pandemic target? I get that the nominal rate is the real rate plus inflation. But why is 2% target on the 10 y UST unanimously accepted as the stopping point? Seems rather arbitrary.ReplyLike(1)

Publicliterature.org18 Mar. 2021, 8:07 PMComments (1.14K)|+ Follow@sr.sr It's been 2% since forever, not just recently.ReplyLike

kimbillro19 Mar. 2021, 5:44 AMPremiumComments (49.54K)|+ Follow@Publicliterature.org , It's called a 2% target.ReplyLike

dmzporter19 Mar. 2021, 8:17 PMPremiumComments (786)|+ Follow@sr.sr Guys, feel free to pour hate on me, but I see 2.25 percent by End Of Year (Calendar) and it will hurt companies like Tesla a lot harder than cyclicals.

I am ok with it because TINA (what’s the Fed to do? Seriously it’s weak, and more interventions will cause holes elsewhere). I adjusted my portfolio accordingly, and shed all my tech in late January that thankfully saved me heartburn into value...

GLTAReplyLike(1)See More Replies

r cohn17 Mar. 2021, 3:15 PMComments (2.47K)|+ FollowFinance 101
Equities are worth the present value of the streams of future cash flows. To determine present values requires using a discount rate or interest rate .Higher interest rates lower the present value of these streams of cash flow.Higher interest rates mean lower equity prices.
unless estimates of future cash flows are also increased, pure and simple.
Because so much of today’s stock market valuations are dominated by companies with either very low or no current streams of cash flow, such companies will be affected more negatively when interest rates rise.

So far junk bonds have not been negatively affected by the rise in rates of Treasury bonds.The reason for this is simple. Such companies do not have to go to the bond market for financing;it is cheaper to sell stock . But once the stock prices of these companies tube, they will have to go to the bond market to raise money and junk bonds will also tube.

As long as longer term bonds reflect a negative “real return”, there is no incentive for anyone or entity to purchase them , except for a short term trade . The current bond market is reflecting this lack of demand.ETFs like TIP are currently reflecting this negative “ real return” and will have to reprice lower in order to offer a positive “ real return”.

The affects of higher interest rates on real estate are obvious, higher monthly costs and lower maximum loans and lower returns .If the stock market tubes as a result of higher interest rates, the real estate market will tube for the same reasons

The term NEGATIVE GAMMA has been currently discussed relative to the short squeeze of GME.
But what has not been emphasized is how many of the new strategies and how many of the new products such as ETFs have negative gamma inherent in their design. These products have the capacity of exacerbating any downside move.ReplyLike(7)

kimbillro18 Mar. 2021, 2:07 AMPremiumComments (49.54K)|+ Follow@r cohn , In the meantime bonds went down again yesterday, Wednesday.ReplyLike

r cohn18 Mar. 2021, 11:04 AMComments (2.47K)|+ Follow@kimbillro
Note what Mr Powell did not say.No mention of yield curve control.This means at this time the Fed is not even trying to set a ceiling on longer term rates.Thus, longer term bonds are adjusting lower in price to try to attract buyers of the $4 t deficit.
Probably yield curve control is coming but not until %2 or %2.5 on the 10 yearReplyLike

kimbillro18 Mar. 2021, 6:05 PMPremiumComments (49.54K)|+ Follow@r cohn , I agree!ReplyLikeSee More Replies

catsaunders financial17 Mar. 2021, 8:23 AMComments (378)|+ FollowWell written article but missing only one component, as bond prices drop, yield rises so there will be a equalization of bond price vs. yield. As bond prices drop there will be epic buying of bond funds raising the price of the bond fund as well as reaping the yield. For me, age 63, I keep 33% bonds (average durations (D)<2 years (Y)), 25% cash (on reserve waiting for a 10-20% pull back the end of 2021 or in 2022, 10% foreign (buying now esp. Eur. financials), I like to have about 7.5% in global/US REITS, the rest a pure US stock funds/CEF/stock....(financial, health, utility, industrial, communication, consumer defensive, basic materials and 10% tech. which we do not like.) This is how we are situated at this time. Even with our age 34 year olds portfolio we keep 15% bond and 10% REITs. with the rest in a target date 2050.ReplyLike(2)

Captain Value17 Mar. 2021, 10:38 AMComments (360)|+ Follow@catsaunders financial "Even with our age 34 year olds portfolio we keep 15% bond and 10% REITs. with the rest in a target date 2050."Aren't target date funds a mix of bonds and stock, so your 15% bonds is really more, yes?ReplyLike

r cohn17 Mar. 2021, 7:45 PMComments (2.47K)|+ Follow@catsaunders financial
Bond funds hold bonds of various descriptions and maturities . The NAV ( net asset value) of such funds reflect the price of its underlying bonds. As interest rates go higher , the prices of these bonds move lower ; thus the NAV of such bond funds also move lower.
Now public buying may temporarily distort the relationship between the price of bond funds and its NAV , but ultimately they will converge.ReplyLike

kimbillro18 Mar. 2021, 2:07 AMPremiumComments (49.54K)|+ Follow@r cohn , There is also TLT.ReplyLike

katmandu10017 Mar. 2021, 1:08 AMComments (4.24K)|+ FollowExcellent data and commentary.ReplyLike(1)

kimbillro17 Mar. 2021, 5:38 AMPremiumComments (49.54K)|+ Follow@katmandu100 , I agree!ReplyLike

Kershaw16 Mar. 2021, 4:37 PMComments (1.19K)|+ FollowPaul, I enjoyed reading your article and am also very weary of where we're headed financially speaking in the long-term. What's your opinion of digital currency as hedge against coming inflation?ReplyLike

Paul Franke16 Mar. 2021, 5:07 PMContributorPremiumComments (1.8K)|+ Follow@Kershaw I don't really understand crypto and how to value them. I haven't owned them, and probably won't. I thought $1,000 on bitcoin was crazy high. What do you call $50,000 for something you cannot touch or see and has no utility beyond hoping someone will pay you more for it tomorrow? Clearly I am no expert on the subject. I stick to stocks and bonds. I fully believe it is a function of ultra-easy money the last 10 years. Mark Yusko of Morgan Creek, a big bull on bitcoin tried to convince me to buy it many years ago. He has done well riding the trend.ReplyLike(2)

Captain Value17 Mar. 2021, 10:40 AMComments (360)|+ Follow@Paul Franke reminds me of a quote I heard recently, "Valuing crypto is like trying to guess how many angels can dance on the head of a pin."ReplyLike(3)

r cohn17 Mar. 2021, 7:54 PMComments (2.47K)|+ Follow@Paul Franke
Except for some utility in industrial uses, gold stored in vaults and in the form of coins has no utility. Yes one can touch it , but how does that effect its value. I can touch sand, but that does not mean that it is worth much.
Practically I can not use gold in transactions.
Gold can be easily confiscated by the FEDS, which was done via FDRs executive order in 1933.ReplyLikeSee More Replies

Patrick Doyle16 Mar. 2021, 1:38 PMContributorPremiumMarketplaceComments (1.56K)|+ FollowSo you think the inflation of the 1960s and 1970s with their demographic tailwinds, huge velocity of money, oil shocks etc. are relevant analogs to our current situation with ageing out boomers, slowing velocity of money etc.?

Is "Studio 54" coming back, too?ReplyLike(2)

Paul Franke16 Mar. 2021, 4:15 PMContributorPremiumComments (1.8K)|+ Follow@Patrick Doyle Never had M-1 at +70% YoY in the 1970s. 15-20% was the mutli-decade record increase back then, for 12 months.

What rate would concern you? If govt keeps handing out free money, soon it is worthless and we get monster inflation far worse than 1970s.ReplyLike

Patrick Doyle16 Mar. 2021, 5:31 PMContributorPremiumMarketplaceComments (1.56K)|+ Follow@Paul Franke
Hi and thanks for the reply. I understand that these times are certainly extraordinary, which makes predictions about them very challenging.

I'd say that while the greenback has reserve status, it's far from worthless. I think Americans sometimes forget that their country is a bit of a basket case, but the rest of us are far, far worse. Investing is a relative game, and I'd rather own dollars than any other asset. The fact that the greenback is moving higher against the Euro, GBP, Yen while TLT continues to fall (a bit) is not bearish for bonds. That plus the fact that TLT is more shorted now than at any time in its history suggests that it's a very crowded, spring loaded trade.
Anyway, let's check back in a few months. Take care in the meantime.

Analyst_question17 Mar. 2021, 1:12 AMComments (1.09K)|+ Follow@Patrick Doyle, I am really interested in your view on how this could play out?

The constraint in my mind is difficulty with negative interest rates which means increasingly QE will need to be done (or a big recession and possible stagflation), and with more dollars printed currency must surely fall, and possibly going forward lenders are more likely to want to lend in their own currencies rather than a depreciating US dollar.ReplyLikeSee More Replies

VIPERMAN9416 Mar. 2021, 12:18 PMPremiumComments (22)|+ FollowJANET YELLEN WANTS THE 10 YEAR AT 1.5%, AND INFLATION AT 2.5%. NOW THERE A GOOD IDEA FOR BONDHOLDERS!ReplyLike(1)

r cohn17 Mar. 2021, 2:28 PMComments (2.47K)|+ Follow@VIPERMAN94
Just one simple question.
Why would anyone buy a 10 year bond to lock on a “real “ return of negative %1.ReplyLike

dmzporter20 Mar. 2021, 12:02 AMPremiumComments (786)|+ Follow@r cohn if you are a large insurance or institutional pension it may be mandated for liquidity or as collateral for loans

If you plan on deflation

If you are a super dummy and think you can sell it for a premium on secondary would be my guessesReplyLike

Patrick Doyle20 Mar. 2021, 7:45 AMContributorPremiumMarketplaceComments (1.56K)|+ Follow@VIPERMAN94

inflation isn't something that people just create through sheer force of will. If you don't believe me, I've got some Japanese folks to introduce you to....ReplyLikeSee More Replies

smithcor15 Mar. 2021, 9:51 PMComments (136)|+ FollowYou are right on the money for references to 1969 and 1987... spot on! I have been trading Fixed Income for over 50 years. Nevertheless, this summer is one of the best opportunities I have seen in years. Whatever the scenario, the result is the same. Equity and High Yield get slaughtered as "solvency" comes into question. IG spreads widen dramatically. After July, you can rebuild cash with confidence.

Do your homework NOW, be patient and you will be rewarded for the next 20+ years. Corporate curves will invert, the real "value" will be deep discounted 30yr paper with a current return that can last. At 7.20% money doubles every 10 years. Quality BBB 30yr paper will break 9.0% current return at 50 on the dollar.

(Note: I have no precipitous move in the Treasuries in my paradigm.)

NO need to trade it, just put it away and enjoy !!!!

Thank you for your insight.ReplyLike(3)

kimbillro16 Mar. 2021, 6:49 AMPremiumComments (49.54K)|+ Follow@smithcor , What are you buying and selling?ReplyLike

Robin Heiderscheit16 Mar. 2021, 1:59 PMComments (5.51K)|+ Follow@kimbillro I'm more interested in what he is smoking. 9% BBB paper. If the 10 year goes to 3% that would be 600 bps of spread pickup. Haven't seen that since the peak of the GFC. Even in March 2020 when the world was supposed to be ending we only saw 475 bps. Also, how much BBB 30 year paper is even out there anymore. The Fed would buy it all up in 30 seconds

Things could get rocky but not like that.ReplyLike(5)

kimbillro16 Mar. 2021, 2:53 PMPremiumComments (49.54K)|+ Follow@Robin Heiderscheit , The world is supposed to be ending? Thanks for reminding me it hasn't. I just pinched myself and verified it hasn't ended. The stock and bond markets seem to have taken it on the chin in reversals to the down side today. I think things are getting rocky like you say.ReplyLikeSee More Replies

PreCambrian15 Mar. 2021, 9:49 PMPremiumMarketplaceComments (1.14K)|+ FollowYour viewpoints pretty much coincide with mine. Since I bought my first house in the stagflation years of the early '80s with a rate of 14% I haven't been able to buy a bond over three months. For a while I was 100% cash but I worry that the Fed will somehow prolong things and keep rates low with inflation running high. So I decided that I need some type of all weather portfolio. I have 50% real estate (farmland), the remainder of the 50% is split 12.5% US equities, 5% Developed Market Equities (International), 7.5% Emerging Market equities, 15% Precious Metals, 15% Commodity Equities (mining, energy, agriculture, chemicals), and 40% cash. I already had the farmland and I didn't want to sell it. It usually is a good inflation hedge, everyone needs to eat. I expect my US equities to go down, the developed market equities I hope will hold even (Europe (because of Germany) and Japan are net exporters which will be a big difference in a world where the dollar is no longer king or perhaps a pariah). Emerging markets may do fine because they tend to be commodity exporting economies, and the commodity equities should hold on or thrive (combination of US and International equities). I am hoping but at the same time I am very disappointed in the US. A typical wage earner shouldn't have to spend hours each week strategizing on investments and should have a living wage and a place to safely put his earnings to keep up or surpass inflation. I have traveled relatively extensively and I know what it is like to be in a country where the currency is not wanted on the world stage (think Argentina). The US may find itself in that situation soon. It is a hopeless feeling and there is no way out but pain, good political leadership, and hard work. Those three don't occur together very often.ReplyLike(3)

kimbillro16 Mar. 2021, 7:01 AMPremiumComments (49.54K)|+ Follow@PreCambrian , Speaking of stocks, I got in touch with a direct ancestor of mine from the end of the Precambrian 541 million years ago by using a special vibrational wave length Ouija board and tapping into the dimension of deceased life. I was told to start raising cash before a sizable dip occurred in the stock market.ReplyLike

PreCambrian16 Mar. 2021, 1:25 PMPremiumMarketplaceComments (1.14K)|+ Follow@kimbillro If your ancestor had started investing 541 million years ago there would be a lot of "magic of compounding".ReplyLike

kimbillro16 Mar. 2021, 1:27 PMPremiumComments (49.54K)|+ Follow@PreCambrian , LOL!ReplyLikeSee More Replies

Sknarf15 Mar. 2021, 6:43 PMComments (16)|+ Follow“Scenario #2: variants of the coronavirus unaffected by current vaccination formulas make a big comeback in April-May, forcing new economic disruptions, lockdowns and stay-at-home orders, …”

Very good possibility!

We already see a deluge of illegals coming across the now wide-open border; while not all have been tested, based on the testing that has been done, 6 -10% are Covid positive. Over a hundred years ago, when sick immigrants arrived at Ellis Island, they were either treated, if possible, or returned to their home countries, if not. We have gotten pretty stupid about commonsense stuff like that in our time. Now the Covid-positive are put on buses along with the presumably healthy and send throughout the country.

Yes, there will be a 4th wave; we are importing it now, whether or not current vaccines can handle it, more lockdown insanity will ensue. When your only tool is a hammer, every problem looks like a nail!ReplyLike

Paul Franke15 Mar. 2021, 7:32 PMContributorPremiumComments (1.8K)|+ Follow@Sknarf I am more worried about the variants than a couple of weeks ago. The 60 Minutes story last night didn't help my mood. We'll know more in 3-4 weeks after spring breakers return home.ReplyLike

Maxiumed115 Mar. 2021, 5:14 PMPremiumComments (6)|+ FollowWould TIP's save your bacon ?ReplyLike

Paul Franke15 Mar. 2021, 5:19 PMContributorPremiumComments (1.8K)|+ Follow@Maxiumed1 They should help some if inflation picks up dramatically, especially vs. regular T-bonds. The iShares TIPS Bonds ETF is only down slightly on the year.ReplyLike

PreCambrian15 Mar. 2021, 8:21 PMPremiumMarketplaceComments (1.14K)|+ Follow@Maxiumed1 The problem is that the CPI dramatically understates true inflation. So you might keep up with CPI inflation but not "real" inflation.ReplyLike(4)

kimbillro16 Mar. 2021, 7:04 AMPremiumComments (49.54K)|+ Follow@PreCambrian , Real inflation may be off the charts.ReplyLike

ckarabin15 Mar. 2021, 1:43 PMComments (16.58K)|+ FollowThe way you can tell that Paul's scenario is going to come true is that NOBODY believes it. You never worry about the crises that everyone else worries about, you worry about the ones nobody sees coming. This one is being denied by almost everyone. Read on in the comments and see for yourself.ReplyLike(3)

Paul Franke15 Mar. 2021, 2:05 PMContributorPremiumComments (1.8K)|+ Follow@ckarabin Whenever Buffett, Dimon and Franke agree on something, it is something to take note of? Doesn't happen often.ReplyLike(3)

ckarabin15 Mar. 2021, 2:37 PMComments (16.58K)|+ Follow@Paul Franke Exactly and then everyone else disagrees with them? Hmm. I know where my money is bet! Herd instinct leads everyone astray again!ReplyLike

Zeke Hilgenflotsamflopsin15 Mar. 2021, 2:44 PMComments (255)|+ Follow@Paul Franke so buying foreign blue chips makes sense here, correct? Or am I better off sitting on cash?ReplyLikeSee More Replies

Zucks15 Mar. 2021, 1:24 PMComments (1.98K)|+ FollowAn increase in the 10 year bond up to 2.5% may not have the full effect you and the honchos estimate, not including of course the common sense goal of avoiding bonds per se. Mortgage rate increases of 1%, assuming direct correlation with bonds, still leave mortgages at historically lower levels. Increased rates have bolstered the dollar in the short run, which impacts prices, which partly clouds the direct impact of the rise in rates itself. Increased consumer spending and hopefully sane increases in taxes( ie see Peterson Foundation and Cooperman’s response to Warren) can ameliorate deficit fears until more money is printed.
However this is all about the short term, say through the end of the year plus or minus. Otherwise, as we enter 2022, I have the same concerns as you, though to be fare, seeing the 10 yr at 0.55, I began repositioning my portfolio to mostly more conservative dividend stocks with one basket of bond alternatives. Coincidentally, I sold one today that doubled, HASI, kept the profit as cash. There will be more of this as the year progresses.ReplyLike

kimbillro16 Mar. 2021, 7:06 AMPremiumComments (49.54K)|+ Follow@Zucks , Yes but with home price values stretched...1% higher mortgages will hurt.ReplyLike

abcde115 Mar. 2021, 12:36 PMComments (520)|+ Followpaul, your entire article sounds reasonable, and alarming to an ordinary retired investor with weath parked in conservative boring dividend paying stocks. i have tried to anticipate what you are preaching by investing in beaten down oil companies, the thought being that the dollar price of oil still in the ground will rise with inflation. leaving money in the bank or money markets seems like a bad idea as the Fed refuses to let interest rates rise to where they should be. for those of us not as sophisticated as you and who would never dream of shorting anything, would you have several ideas of where we should park our wealth as the jimmy carter deja vu all over again era approaches?ReplyLike(1)

Paul Franke15 Mar. 2021, 1:02 PMContributorPremiumComments (1.8K)|+ Follow@abcde1 Gold/silver/platinum should do well outside a financial markets crash. Think late-1960s and 1970s. I do like oil and natural gas. They will also go down however in a crash scenario. An outlier idea is trouble in the Middle East could spike crude oil and really pump inflation above 4% later in the year. In that scenario, oil stocks should continue to outperform nicely.

Cash will do best in a crash, over the short-term anyway.

My advice is to own some of all the above, and stay diversified. I am holding shorts on stock, bonds and the dollar, while still owning a list of individual stock longs. Gold/silver/platinum are essentially dollar shorts for IRAs. Placing all or nothing bets is difficult in the current environment of experimental money printing. There are a number of variables that could break down in a variety of orders from here. No crystal ball, just preparing for wilder times, and more unpredictable than the last 3-6 months.ReplyLike(5)

abcde115 Mar. 2021, 1:33 PMComments (520)|+ Follow@Paul Franke thank youReplyLike

peterinjapan15 Mar. 2021, 12:31 PMPremiumComments (1.07K)|+ Followis found in reality <- is founded in reality.

When you're a "financial otaku" as I am, I admit it, you learn to categories the various kinds of people out there. There there "Fed truthers" and the "inflation truthers" and the trend followers and the Bogleheads following the Church of the Three-Fund Portfolio.

The Fed is a market participant, like it or not. I like Josh Brown's chill stance on this topic. No matter whether you want to bring us back to the Gold Standard, as Preston and Stig from The Investor's Podcast are always harping on, it won't change the current world we live in.

Question, if something bad happened and interest rates shot up to 3-4% or higher, isn't it okay if I'm smart enough to pivot to things that will do okay in that environment like financials? And have places where I exit my positions and go to cash automatically?ReplyLike(1)

Daniel-san17 Mar. 2021, 11:40 PMPremiumComments (188)|+ Follow@peterinjapan - In response to your question, hai! I also appreciate Josh Brown's position on this. Ganbatte!ReplyLike

hjimhoward15 Mar. 2021, 12:29 PMComments (12)|+ FollowExcellent analysis. Like you I’ve been trading bonds for a long time (1971 for me) and I’ve seen this several times.
Getting out in front of the coming mess is key and nerve wracking.
Best of luck

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