September 22, 2023
By Steve Blumenthal
“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.”
– Thomas A. Edison
The days are growing shorter. Tomorrow marks the official start of fall. For me, it began last evening, walking the golf course and seeing the leaves just beginning to color. Fall is such a beautiful time of the year.
There was nothing beautiful in the yield markets yesterday. The 10-year Treasury yield is the essential story. To give you a sense of the magnitude of the moves, I share a 20-year chart with you below. As has been the case for most of the time over the last two years, the technical signals remain bearish on bonds. But do keep watch.
Where are yields heading? Bill Gross was in the press yesterday. Yahoo News reported,
In an investment outlook published Thursday, Gross said bond markets are headed for an unprecedented third year of losses, because of sticky inflation and widening deficits, a result of government fiscal spending he equates with throwing “money out of a helicopter.”
The one-time bond king, who retired from asset management in 2019, urged investors to own less Treasuries and corporate bonds. Instead, he recommends holding more pipeline Master Limited Partnerships. MLPs trade on exchanges, focus on natural resources like oil and gas, and offer higher yields and tax advantages.
Gross reiterated arguments he made in a recent episode of Bloomberg’s Odd Lots podcast on why 10-year yields may not drop below 4%, even if the Fed cut rates next year.
- A ballooning government deficit — amounting to about $1.5 trillion in the first 11 months of the fiscal year – is propelling consumer spending and making it difficult to tame inflation.
- About 30% of the more than $30 trillion Treasuries outstanding will mature in the next 16 months, he said. On top of that, he said, the Fed is selling about $1 trillion of its bond holdings. “Who’s going to buy them at existing yield levels?” he asked.
- In his view, “the 10 year Treasury is already priced for a 2% inflationary world.”
- Historically, he said, 10-year notes yield 1.35 percentage points more than the fed funds rate. Even if the policy rate drops to 2.5%, that puts 10-year yields close to 4% “under the best of possible scenarios.”
Today, let’s closely examine the 10-year Treasury yield and what the movement means in terms of potential gain and loss. You may be surprised at the magnitude of the move.
Also, I had the great fortune to speak with a good friend and real estate expert Barry Habib this week. We discussed the Fed, housing, and the direction of mortgage and interest rates.
Here is some quick color on Barry: Habib is CEO of MBS Highway and is an American entrepreneur and frequent media resource for his mortgage and housing expertise. He is an Amazon #1 bestselling author for his book “Money in the Streets.” He is widely credited with saving the Mortgage Industry in 2020 from Margin Calls due to Fed Actions. His presentation to the Fed created stability at a critical time. He is a three-time Crystal Ball Award Winner by Zillow and Pulsenomics for the most accurate Real Estate forecasts out of 150 of the top economists in the US. Was the 2019 Mortgage Professional of the Year and Finalist for the Ernst & Young Entrepreneur of the Year. Named to the list of 100 People to Watch in 2023. And how about this, he was the lead Producer and Managing Partner for “Rock of Ages” – the 27th longest-running show in Broadway history. Most importantly, he is a genuine and nice human being.
Grab your coffee and find your favorite chair. I found The State of the Trust in the System poll conducted by Ray Dalio concerning though the outcome was much as you might have expected. You’ll find the results and comments from Dalio below.
“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.” Channel your inner Thomas Edison and hold a bright light… and always try just one more time.
Here are the sections in this week’s On My Radar:
- Real Estate, Mortgage Rates, and Treasury Yields
- Technical Look at the 1o-year Treasury Yield
- The State of Trust in the System, Ray Dalio
- Personal Note: Autumn – The Best Time of Year
- Trade Signals: Fed Says Higher for Longer
(Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.)
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Real Estate, Mortgage Rates, and Treasury Yields
Barry Habib has a wonderful way of explaining the complicated in a way most people can better understand. We discussed the Fed, employment, inflation, mortgage, and interest rates. You’ll see he remains bullish on the housing market. To see what the Zillow three-time Crystal Ball Award Winner has to say, simply click on the next photo to watch (discussion with charts).
Also, you can listen in via audio recording on Spotify. Click on the next photo to listen. And please follow me on Spotify.
I hope you find Barry’s presentation as helpful as I did.
Not a recommendation to buy or sell any securities. Opinions expressed may change at any time.
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Technical Look at the 1o-year Treasury Yield
I wrote last week that the 10-year Treasury yield chart is one of the most important to keep on our radar’s.
It showed the yield nearing an important threshold. It broke above that “red line” this week (reflected in the following chart). We’ll take another look, but first, I wanted to shape this out in terms of what the movement in yields means in terms of making money and losing money: reward and risk.
Next is an updated look at the 10-year Treasury yield chart I shared with you last week. This time I took the data back 20 years. Note the important break above 4.33% (yellow circle upper right in the chart).
This is a concerning move for all risk assets.
- For equities, higher interest rates mean higher costs. Higher costs mean lower earnings unless those costs can be pushed onto consumers.
- For consumers, higher borrowing costs bite into their budgets, leaving them less money to spend.
- Less spending means companies earn less. Lower earnings mean stocks can’t justify current way too high valuations.
- Bear markets follow. We are near this point in the current cycle.
Here’s how to view the chart:
- Note the break above the solid red line (yellow circle upper right in the chart). The 4.49% is the closing yield on the 10-year Tsy at yesterday’s close. It’s at 4.44% at the time of this writing.
- Get a feel for how volatile yields are. I’ve highlighted a number of highs and lows. Yields are now higher than at any other point since the Great Financial Crisis in 2008/09 and look to be approaching the 2007 yield high of 5.32%. The yellow dotted line. Seems like that is the next near-term target.
- Finally, take a look at the MACD Weekly 12 vs. 26-day trend signal indicator in the bottom section of the chart.
- Signals occur when the lines cross. Green arrows show the start of down-trending signals (lower yields). Red arrows signal rising yields. Green is good, red is bad for asset prices.
- Google MACD technical signals if you’d like to learn more. The weekly MACD is good indicator, but please know there is no perfect indicator. Not every trade is a winner.
- As a quick aside, I post the 10-year Treasury yield weekly MACD each week in Trade Signals. Free for clients. If you are a CMG client, please email your rep for the passcode you can use when you subscribe. If you are not a client and would like a sample of a recent letter, please email me at Blumenthal@cmgwealth.com. There is a subscription link in the Trade Signals section below.
The Gain and Loss Math (Reward – Risk)
The idea with these next few charts is to show you how much is gained or lost depending on whether rates rise or fall. This can help you better assess the risk vs. reward you are taking.
Here is how this works:
- The current 10-year Treasury yield, as of the close on 9-21-23, is 4.49%. The 30-year yield is 4.56%. If you hold each of them to maturity, those are the yields you are going to earn each year for 10 years or 30 years, depending on what you bought. If you bought a 1.75% 10-year Treasury in March 2020, you have a little less than eight years to maturity. If you sell it, who would want to buy it when they can get 4.49% now? No one, so you’d have to sell it to them at a price discount. A 1.75% yield is not as good as a 4.49% yield. If you decide to keep clipping the 1.75% yields, you are still in bad shape with inflation north of 3%. You get the idea.
- If the yield on the 10-year moves 1% higher from here, the approximate loss is 7.62%. If rates move 2% higher from here, the approximate loss is 14.55%. The red arrow points to rising rates, and the red circles show the approximate loss. Losses are even bigger on the 30-year at -14.51% and -26.09%.
- But there is an opportunity if you believe rates will move lower and you are proven correct. If yields decline by 1%, the price of your 10-year or 30-year bond investment will go up. Par is 100 per bond, and the gains are circled in green.
- Rising yields are bad for bond investors, and declining yields are good.
- Again, the data in the chart is from today’s current yield starting point of 4.49% for the 10-year and 4.561% for the 30-year.
I shared the following with readers back in January 2020. Then, the yield on the 10-year Treasury was 1.75%, and the yield on the 30-year was 2.375%. The point was you can lose a lot of money, and there isn’t much you can gain if rates move lower.
- Since then, yields have risen nearly 3%.
- While this analysis looks at just the change in price, you can get a feel for what the actual loss looks like.
- If you thought back then that yields would move 1% lower, your gain in price would have been 9.62%. However, the decline in price for the 10-year is nearing -23.66%, and the 30-year is nearing -44.45%. Not an investment for the “faint of heart” (as my father always liked to say)
- Note how the risk-reward made little sense unless you felt yields would drop a percent or more. The fact is they weren’t too far away from 0%.
- We advised not owning high-quality bonds because yields were too low and the risk of loss was too high.
- Red is bad, green is good. Since 1-24-2020 we got “bad.”
With all that said, I continue to believe a nice trade is setting up. The risk-reward is better. Compare the green and red circles in the two charts (Sept 21, 2023 vs. Jan 24, 2022).
Yesterday, I saw a report saying some economists believe the 10-year Treasury will rise to 6%. And, of course, Bill Gross, the former “bond king,” has a good feel for how things work.
The need for the government to fund itself is getting worse, and to attract investors’ capital, they may likely need to offer a higher rate. More likely, the market will force their hand.
Think about this: It took 246 years for the U.S. to print $10 trillion dollars. In the last two years, the U.S. printed another $10 trillion. Half of all dollars ever created were created in the last two years.
Economic common sense – Higher rates are squeezing borrowers, consumers, and corporations. Inflation, while improved, is squeezing consumers. We are in the pickle we are in because of insane fiscal and monetary policy—too much debt.
The Fed is the tiger, and inflation has the tiger by its tail. So we are in a tough spot.
What to watch for?
- Keep your eye on the 10-year Treasury yield weekly MACD.
- If you are a Trade Signals subscriber, also keep an eye on the Zweig Bond Model trend signal.
My two cents: I’m getting excited about a potential trade (not yet there). You can see how much can be made should yields decline from here. However, while I’m looking for a short-term bullish bond trade, my long-term outlook sees a period of low growth with persistently high inflation or “stagflation.” There are better things to do than invest in low-yielding bonds and bond funds. Trade them, yes. Buy-and-hold, no.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
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The State of Trust in the System, by Ray Dalio
In my recent article, in which I explored the declines in truth, trust, and the rule of law in the United States, I asked five questions to see what readers thought. I received more than 43,000 responses. The results are as follows:
Q1: Do you trust most politicians in government to render fair judgements of other politicians and non-politicians?
Too close to call: 8%
Q2. Do you believe that most Americans trust most politicians to render fair judgments of other politicians and non-political people?
Too close to call: 10%
Q3: What do you think about those in the media? Do you think that most of those in the media are painting accurate pictures?
Too close to call: 8%
Q4: Do you think that most Americans think that most of those in the media are painting accurate pictures?
Too close to call: 9%
Q5: How do you think the legal system is working? Do you think that it’s fair?
Too close to call: 20%
These survey results, and most other survey results, paint a clear picture of dangerously low confidence in truthfulness and trustworthiness of political-government representatives, the media, and the rule of law. While I don’t like the picture because it is ominous, I am glad that we agree on what it is because that might lead to actions to rectify it.
It is an ominous picture because these conditions are classic symptoms of stage 5 of the internal order-disorder cycle, which is just before stage 6 which is when there are great internal conflicts—typically some form of civil war. That is because most people willingly follow rules and laws rather than fight for what they want only when they believe that the people overseeing the system are good and fair. Without these beliefs, they are inclined to fight for what they want and believe in. When that happens, terrible fighting ensues, and order is lost. Since we recognize how bad the trust in the system has become and the behaviors of certain people are, and we can imagine what that could lead to, perhaps we will take actions to improve things – like demand truthfulness and objectivity from politically elected officials and the media and reaffirm our commitment to the legal system to judge us.
I thank all of you who gave me your assessments. I read many excellent comments and perspectives, the best of which I hope to share at some point. I invite those of you who haven’t read my piece, “Declines of Truth, Trust, and the Rule of Law Have Throughout History Led to, and Are Now Leading to, Disorder,” and/or haven’t shared your perspective on it to do so here.
As you probably know from my study of history and observations of what is now happening, I believe that the five “Big Cycle” evolutionary forces—1) the financial/economic force, 2) the domestic order-disorder force, 3) the international order-disorder force 4) the nature-climate force, and the 5) technology force—have always interacted, and are now interacting, to make very big changes in the world order. I believe that it is critically important to understand and manage these changes well. In my book and YouTube video, I showed how these have worked over the last 500 years of history and in my posts and articles, I try to show how things are transpiring relative to the template explained in the book and the video. This most recent article was about the growing domestic disorder. The one before that was about the financial-economic force. The next one will probably be on the nature-climate force.
I know that my template both is imperfect in many ways and has been invaluably helpful to me in many ways. My main goal is to interact with you to exchange thoughts about how see are and how to deal with them well. Thank you for doing this with me. I hope it is interesting and valuable to you too.
Read the full article and you can sign up to follow Ray Dalio on LinkedIn by clicking here.
“Our greatest weakness lies in giving up….” Let’s not give up.
Personal Note: Autumn – The Best Time of Year
“Fall has always been my favorite season. The time when everything bursts with its last beauty, as if nature had been saving up all year for the grand finale.”
– Lauren DeStefano
The autumn equinox is the halfway point between the summer and winter solstices and marks the precise moment when the sun appears directly over the Earth’s equator. We reach that point in the season tomorrow, September 23. Welcome to fall. The grand finale begins. I’m looking forward to another great show.
In advance of what looks to be rain and low 60s this weekend, I snuck out of the office around 3:30 p.m. yesterday and joined a friend for a quick round of golf at Stonewall. The first feeling of fall was in the air, and I noticed one tree with the slightest hint of orange.
When I find myself in a not-so-good state, I stop what I’m doing, find a comfortable place to sit, breathe deeply, and picture the beauty of fall at its grandest in my mind. It sits at the top of the 16th fairway at Stonewall Old Course in Elverson, Pa. #15 is a tough par three situated at the low point in the valley. From the 15th green begins a steep uphill walk to the 16th tee box. And the climb continues for another hundred yards or so. Upon reaching the highest point in the fairway, the valley opens up, and below sits a panoramic view of the valley—the trees in spectacular red, deep orange, light orange, and some brown—a picture to be shared at a future date.
Now that I’ve got myself all fired up over what awaits the next three to four weeks, there is little beauty in the weekend forecast. Rain and temperatures in the low 60s are in the weekend forecast for much of the northeast. But the last few days have been extra good for us.
Coach Sue’s Friars had a nice come-from-behind win last Sunday. Down by one goal with 25 minutes to play, the boys caught fire, scoring four quick goals. The record sits at two wins, two losses, and one tie. The next game is scheduled for tomorrow morning at 9 a.m. As my former Coach Walter Bahr used to tell us, “it never rains on a soccer field.” Playing on a wet fast field is actually quite fun. But it won’t be good for my iPad. That’s where I write my game notes.
A Grand Finale sits immedately ahead.
Having fun… hope you are too.
Trade Signals: Fed Says Higher for Longer
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
The Federal Reserve held interest rates steady and indicated it expects one more hike before the end of the year. The Fed hopes to make fewer cuts than previously indicated next year. They also revised their 2023 growth expectations, increasing the GDP forecast to 2.1%. The S&P 500 Index fell approximately 1% for the day, and the NASDAQ dropped more than 1.50%.
Notable this week:
- Selling volume has once again exceeded buying volume. Translated into English, this is a measure to determine if there are more sellers than buyers or more buyers than sellers. Historically, return performance is best when there are more buyers than sellers. Happy to share some historical data if you are interested. Please shoot me a note.
- The day’s big news is that the 10-year Treasury yield broke above the 4.33% prior yield high. It closed today at 4.35%. (SB update through Thursday, Sept 22: closed at 4.49%)
- As has been the case for most of 2022 and 2023, both the MACD (below) and the Zweig Bond Model trend models are signaling higher interest rates.
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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
With kind regards,
Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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