When They Talk About Bonds

Here we go again.  Usually on CNBC Fast Money, they hardly ever mention bonds.  Its basically a stock show.  No one really cares about bonds, because they don't move much, and because people put money in bonds for capital preservation, not big gains.  And capital preservation doesn't sell on Wall Street.  Its always about the big gains, so they promote stocks.  Or the fantasy that investing in stocks will make a person rich. 

This week, you've had the "bond kings" Bill Gross and Jeff Gundlach, talk bearishly about bonds, which has filtered to stock people on CNBC.  There has been an underlying bearish tone to the price action and investor sentiment for a couple of months now, and from a longer term perspective, ever since Trump got elected.  So just like this relentlessly rising stock market, with almost no corrections, which I have not witnessed ever before, there has been a corresponding steady drip drip lower move in bonds, which is rare.  Nothing spectacular, but enough to get the attention of the stock guys who usually could care less.  From my experience, those are usually inflection points for bonds. 

If the media was silent about this move lower in bonds this week, I would have been more worried that it could really turn into a big rout and take 10 year yields up to 2.80%, or possibly even test the often mention 3%.  But all this media noise when we barely broke out above 2.50% tells me a top in yields is coming soon, probably below 2.65%. 

I have a hard time imagining the Fed hiking more than 3 times over the next 3 years, much less in 2018.  So if the final rate hike takes Fed funds to 2-2.25%, then the 5 year yield probably can't get above 2.50% (its trading 2.33% now), which means the 10 year probably can't get above 2.70%. 

The reason I don't think the Fed can hike more than 3 times is because stocks are at such a high level, that once short term interest rates get above 2%, that is going to put pressure on stocks, which will feedback to the Fed, who rarely if ever hikes when the stock market is going down.  And with Jerome Powell as Fed chair, a Trump yes man, you can be assured he won't be the one hiking the economy into a recession. 

Back to what CNBC is promoting with its countless mention of this hot stock and that hot stock, and now with bitcoin.  In reality, most investors end up losing, and the big winners in the investing space are those that use other people's money to collect fees and have a free call option for the privilege of gambling their money.  The stock market is basically a glorified online casino.  The HFTs, brokers, and exchanges take their cut of the action and everyone else is left fighting each other in a negative sum game. 

They say stocks go up in the long run, so everyone can be a winner.  Yes, if you just buy and hold an index.  But most people aren't doing that.  Things are slowly changing, and many people have finally figured out that active investing just means subpar performance and higher fees compared to passive investing.  Yet you have the fund managers warning about the dangers of passive investing, when they themselves are a much bigger danger to an investor than the market itself.  Most fund managers trade too much, charge too much, and most importantly, have no edge.  There is a small minority of fund managers with a definite edge in the markets, but most of them are not accepting new money or charge such exorbitant fees that their edge over the S&P 500 over the long run is questionable, especially if they are managing multi billions. 

It is one thing to beat the S&P when a fund manager is trading $100M, its a totally different ballgame when they are trading $10B.  Most of the big edges in the stock market reside in small cap stocks, and in particular, actively traded day trader stocks that have "limited time" liquidity.  "Limited time" liquidity is when a normally very low volume small cap stock suddenly has a price and volume spike on a news release.  These days, most of them are bitcoin related, but they can be various flavors of the month, depending on what theme is hot at the moment.  Anyway, once the excitement of these stocks die down, the volume plummets, so you can really only trade meaningful size is when the stock is in play, or right afterwards.  It eliminates whales from participating in these markets, because they just can't put on any meaningful positions to affect their performance. 

In general, an efficiency of a market runs along a spectrum correlating with its liquidity.  Small cap stocks are less efficient than mid cap stocks which are less efficient than large cap stocks which are less efficient than the S&P 500 index. 

I am still short here, and in some pain, but kept my short reasonably small, so I can weather this out with just a few scratches.  But there will be hell to pay later this year once this pig tops out.  Until then, play it conservatively.  There will be plenty of opportunities to make money on the short side in a few months.  If you are a bear like me, just don't get buried before then.