Money Patterns You Can Bank On

07.12.2017 • United States

Bill Bonner – Bill Bonner’s Diary (United States) –

BALTIMORE – How ‘bout that bitcoin! It went up another $2,000 last night. Does it go down, too?

We think we know the answer. But let’s look at more familiar ESPs. This week, we’ve been focusing on Extremely Simple Patterns, or ESPs.

What’s an ESP?

When you ask your wife if she’s gained weight, for example, she may not speak to you again for the rest of the week.

And that guy behind you in the unemployment line? He probably called his boss an SOB… and got fired… just like you did.

 

 

Twin Peaks

Taking a long-term view, you can see that stocks move in great waves lasting about 30 years from peak to peak.

Between the two peaks is a trough.

You want a simple investment strategy?

Buy the trough. Sell the peak. Go long; then, go short.

Sounds easy. In practice, it takes a lot more patience than most people are willing to give.

Still, these patterns are so obvious – at least, in retrospect! – and they move so slowly… it is not hard to take advantage of them.

In the last 37 years, for example, you only had to make three important decisions: Get into U.S. stocks in 1980… move to gold (the ultimate cash) in 2000… move back to stocks in 2010. Long, short, long again. Easy peasy.

Ignoring dividends and taxes, and allowing for drift and procrastination, stocks would have multiplied your money 10 times to 2000. Then, gold would have given you a triple again. Finally, from 2010 to 2017, stocks moved up 140%.

So if you began with $10,000 in 1980… and followed this Extremely Simple Pattern as an investment template… you’d have $720,000 today.

Not bad for three easy, low-risk investment decisions. No investment research. No risky gambles. No fees, spreads, commissions, or other charges. No bitcoin!

 

 

Long Bear Market

The bond market follows an ESP, too.

In the 1940s, the yield on the benchmark 10-year U.S. Treasury note – which moves in the opposite direction to prices – hit a record low of about 1%. From there, yields rose… and prices fell, until they hit a peak of more than 15% in the early 1980s.

Then the top in yields was in. Since then, it’s been downhill all the way, as the 10-year Treasury note yield fell all the way back down to just over 1% last year.

With Treasury yields near record lows… and Treasury prices near record highs… one can only expect another long wave of falling bond prices and rising yields to follow.

A long bear market in bond prices is a terrifying thing. Inflation eats away at the regular income payments your bond throws off… along with the value of the principal you get repaid when the bond matures. The market value of the bond goes down, too.

The pain lasts, day after day… year after year… for decades. Generally, it takes a whole generation to forget it.

Which is almost exactly what happened.

It had been more than a quarter-century between the time bond prices bottomed in 1920 and then peaked in the late 1940s. Then, bond prices fell (as yields rose) for the following 37 years.

And now, with the 10-year Treasury note yielding barely above 2%, people can hardly imagine yields above 3%… or maybe 4%.

But even a 4% yield would cut the value of a 2% bond in half. Five or six percentage points is scarcely imaginable.

 

 

Rate Dependent

But that’s an ESP, too: One generation learns and the next forgets.

All investors today have known – at least, most of those who are under 70 years old – is rising bond prices and falling yields.

Investors haven’t noticed yet, but the water is already rushing onto their feet. Bond yields are going up; prices are going down.

We won’t know for sure for many years, but it looks as though they’ve been floating higher since July 6, 2016, when the 10-year U.S. Treasury traded with a yield of 1.37%.

If that is right, we have another big investment decision to make: It’s time to get out of interest-rate-dependent assets.

The trouble is, almost all assets are interest rate dependent. Ultra-low borrowing costs have changed the entire economy. Almost all asset prices now depend on them. And corporate balance sheets. And household finances. And so does the U.S. federal budget.

The feds are in for an especially nasty shock. They’ve got $20 trillion in debt already… and have been recently adding debt at a rate of about $75 billion a month. Rather than drain the swamp… the swamp is filling up… with more debt.

And the Republican “tax bill” is going to add a lot more.

Among the many absurd assumptions of the tax bill is that there will be no recession for the next 10 years… and no significant increase in inflation or borrowing costs.

And yet, as far as we know, the expansion-contraction cycle is still in effect. So is the credit cycle. The next recession will turn the tax bill projections into nonsense. Deficits will soar to $2 trillion per year, as tax receipts fall… and costs (including more stimulus spending!) rise.

Yes, that’s a now-familiar pattern, too: The markets try to correct; the feds try to stop them.

Then, we enter the next stage… with rising bond yields and increasing inflation. Hold onto your hats; it’s going to be exciting.

In the meantime, the sun still rises in the morning and sets in the evening. Bums still ask for quarters on Charles Street. Lovers still kiss. Politicians still lie.

Bubbles still blow up. Trends still reverse.

And it’s still better to sell at a top than a bottom. Sell stocks and bonds. Buy gold… and maybe, just for fun… a little bitcoin.

Regards,

Bill

-Read more at bonnerandpartners.com-

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