Back on May 12 we identified a nascent bounce in stocks. The market may be launching a repeat. Short term traders might profitably buy, but that would equally well depend on astutely timing the exit point; risky business both ways. I’m not playing. Longer term investors who may have already been looking to reduce exposure might find a good opportunity in the days immediately ahead. This rally could extend for a few days to a few weeks. But it’s very unlikely it’s a new bull market; I continue to expect the bear market pattern of lower lows and lower highs.
Bonds in general and treasuries in particular are bouncing nicely as well. This bounce likely has more legs. As discussed more fully in Weekly Outlook, I think Treasuries are or soon will be in a new bull market … higher lows and higher highs. I am playing this.
nice to see you posting more often,
“I think Treasuries are or soon will be in a new bull market … higher lows and higher highs. I am playing this.”, I assume by ‘playing’, you mean trading, given the context, correct?
Also, what etf are you using to ‘play’? SHV?
And, hiw nimble does one need to be to ‘play’? Does it make sense to ‘play’ from Australia, assuming I sleep during US market hours? I suspect not, but thought it worth asking the question.
I’m more than happy to invest for a short duration if it’s a high probability trade, as it appears to be.
I’m fairly certain that if a bull market occurs in Treasuries that it would be something that you could participate in without having to worry about watching the trade 24×7. I’m anticipating that there will be a one or two week period near the top–wherever it may occur–where you can sell Treasuries at a good profit from current prices.
David Rosenberg is recommending that people buy Treasuries at the moment (see the Consuelo Mack interview with him this week on Wealth Track’s YouTube channel) and he’s been reasonably good at spotting good entry points into Treasuries.
If we believe that a recession is imminent, the only risk to this trade (outside of any foreign exchange risks that an Australian incurs) is that Treasury prices do not rise (Treasury interest rates do not fall) as all other asset prices fall. I think that risk is visibly higher than in 1999 or 2006 and there is a risk that the inverse relationship between Treasury prices and equity prices breaks. However, not yet, I don’t think.
But it’s something you would have to keep an eye out for.
Hi Milton,
Thanks for your reply. I already have a Schwab account with USD, so I’m already exposed to AUD currency risk. I’ll look at the interview and see if I can make sense of it.
If one needs to buy actual Treasuries, does one need to be a US citizen? I thought I read that somewhere.
>If one needs to buy actual Treasuries, does one need to be a US citizen? I thought I read that somewhere.
I very seriously doubt that the U.S. would not allow a foreigner to buy U.S. Treasury debt even if that person were a confirmed terrorist. (In the case of a terrorist, the U.S. would happily accept his money and then seize the Treasuries he bought). The only thing I can think of that might require that you be a U.S. citizen is purchasing Treasuries using the TreasuryDirect.gov web site.
However, you should easily be able to purchase Treasuries through an ETF (such as TLH or TLT) or through the secondary market.
Here’s the URL to the Consuelo Mack interview with David Rosenberg:
https://www.youtube.com/watch?v=44_kSXbuJYc
“The only thing I can think of that might require that you be a U.S. citizen is purchasing Treasuries using the TreasuryDirect.gov web site.”
I believe this is where I read you need to be a US citizen.
Upon further looking, I’ve discovered how to purchase Treasuries through an ETF, but I’ll also look at TLH or TLT, as well.
And, thanks for the direct link to the Consuelo Mack interview with David Rosenberg. I found it without any trouble and watched it late last night. What he had to say seemed to be fairly consistent with the viewpoints expressed here, which I was pleased about. However, I will need to watch it again when I’m more fully awake, and take some notes in order to fully digest what he was saying.
Now, of course, I appreciate one doesn’t want to get in an echo chamber, either, but at the same time, it is good, especially for me to have a general consensus of opinion, even if only between a small group.
Once again Milton, thanks for following up and your feedback. It’s good for me to have people I can bounce ideas off, even if I’ve never met them. Since you were a fairly regular poster on iTulip, and one whose comments I was always keen to read, I’m pleased to see you posting here, since iTulip is now well and truly dead.
Peter, I think of “trading” as a daily or weekly activity and this is expected to be a more substantial trend, which is why I didn’t opt for that term. I use several vehicles for UST … GOVT covers everything from 1-30 years at market weight. VGSH, VGIT & VGLT for 1-3, 3-10 & 10-30 years respectively, EDV for even more duration and cash USD … in the limit effectively UST of zero duration. I’m overweight in all of them.
SHV would fit in as well but it’s limited to less than one year maturity so not by itself. That bull market SS is projecting is for long term UST.
Little in the way of ‘nimbality’ is needed. I just have more than my usual allocation to UST and expect it to remain that way for several months. As I’ve mentioned on a few occasions, I deeply underweighted UST at the beginning of the year, moved back to neutral several weeks ago, and am now heavily overweight. In practice this means I sold much of my UST around the end of last year and beginning of this year, and then began to buy several weeks ago. So while trades have been fairly frequent, they’re not in-and-out … more like making the increases gradually by buying a little at a time in moving from underweight to neutral to overweight.
BTW far as SS forecasts are concerned there is no need to consider “currency risk”. SS isn’t denominated in any currency. Also relative returns of the asset classes are independent of currency … if Bonds outperform Stocks in one currency, they will do the same in all the others. I’d even go so far as to say that apart from investing in currencies themselves, “currency risk” is almost always an illusion, an artifact of accounting.
Thanks Bill. Your reply is very helpful and has clarified the questions I had.
However, your statement:
“I’d even go so far as to say that apart from investing in currencies themselves, “currency risk” is almost always an illusion, an artifact of accounting.”
although I understand where you’re coming from, primarily because I’ve spent enough time being educated in the “Finister” way of thinking. However, I still struggle with it from a practical perspective, because when I opened my Schwab account, the AUD exchange rate was in the 0.68 – 0.69 range. It was not a good time to be buying USD with AUD.
Fortunately, I made some money in the Schwab account, and began transferring some of my profit back to AUD. Fortunately, I only transferred a little, as I soon realised that because the exchange rate was now in the 0.72-0.73 range, it was not an appropriate time to convert my profit back to AUD.
And, I know that you can refute that example. and also know that your refutation will be technically correct. Of course, now that AUD is back in the 0.68-69 range, I could tranfer it back. But, for other reasons, I want to leave it there.
Just to be absolutely clear, as I know the written word can easily be misunderstood, and I know I’m not the best of communicators, I do appreciate your posts here.
And when I used the term “educated” above, that was a very deliberate choice of terminology, and was meant to convery a sense of both respect and thanks.
Good, Peter … challenging each other helps us get to the root of the issue. In this case, recall my caveat “apart from investing in currencies themselves” … isn’t that what’s happening when you “buy USD with AUD”?
Maybe I’m not getting the mechanics of what you’re referring to, but what I have in mind is the context where an investor in one country buys securities in the market of another. Say you in Oz buy the S&P 500. Once you’ve done that, you are invested in stocks, not currency. Your return is the same no matter what your coin of the realm is. When you measure it in different currencies it may appear different, but the difference is due not to your stocks having different returns, but using different units to measure them. Like the temperature outside being 10°C or 50°F … you have a different reading but the actual temperature is the same.
A yet better example might be, say, a US (or Aussie) investor buying Japanese stocks. You buy the Nikkei index. You find that the return you get is different than what’s reported for the Nikkei. But that’s because of the convention of reporting the Nikkei itself in Japanese yen. If you were to calculate the Nikkei in dollars, the Nikkei would be reported differently. You may be told you must “hedge” the currency to “protect” your returns. That’s a fallacy.
The “hedging” argument is based on the assumption that the yen-based calculation is the “real” performance of the Japanese stock market. And that your performance in another currency is somehow deficient. It’s not … it’s just measured using a different unit. The real performance of your collection of Japanese stocks is the same either way.
So suppose you “hedge” by an offsetting position in the dollar/yen. You can now match the yen-based performance of Japanese stocks in dollars. But this is not the same actual, real, return … what you’ve actually done is changed the return on your Japanese stocks by adding a currency trade.
In reality, you haven’t “hedged” anything … you’ve added a currency position to your stock position in order to make your dollar-based return look the same as the one reported in yen!
It’s as if you heated the temperature up to 50°C to make it look like the same as 50°F.
Now the result may (or may not) be better than if you hadn’t “hedged”. But if so, it’s because you added a profitable currency trade, not because your hedge has protected you against currency losses and allowed you to capture the “real” performance of Japanese stocks.
‘In this case, recall my caveat “apart from investing in currencies themselves” … isn’t that what’s happening when you “buy USD with AUD”?’
Thanks for the clarification… Now, I’m 100% on the same page. As you state, this is precisely what I’m doing. It’s not something I want to do, in order to invest in treasuries, but there is no treasury market in Australia for retail investors.
I’m not sure we’re on the same page, Peter … I was just focusing on the part about USD and AUD. If that’s merely a step in buying UST, then ultimately you’re invested only in UST. Then my following remarks apply. In the stocks examples, just replace stocks with bonds. The logic remains the same.
Note we’re not overlooking the fact that UST are “dollar denominated” securities. But SS is not dollar denominated either, and as pointed out earlier the relative returns of the asset classes are unaffected by choice of unit anyway.
And ultimately relative return is all that matters. Before you can even state an “absolute” return, you have to find an absolute unit.
A few typos above, but I think easy enough to understand what I meant.