Bonds For Dough *

Don't Be Daft: Bond-eleros Run The Show

Stocks Get The News

I will be Live tomorrow, Aug 5 at 11AM ET on YouTube, vacation on hold (boo). Here’s the link.

Y’all know better. “Stocks For Show, Bonds For Dough” is my pithy, snarky way of saying this long list of things. This is part of that list.

• The bond market is far bigger than the stock market.

• The bond market is far more important than the stock market.¹

• The bond market participants are the professional crowd that interacts with policymakers, sovereign wealth funds, and the largest money managers in the world. In other words, not the single stock analyst who publishes target prices for Crowdstrike.

• Foreign exchange and interest rates are conjoined twins.

• Anytime there is a financial crisis, borrowing/lending/foreign exchange are involved. There is some dysfunction, or excess that is related to borrowing and lending.

• Bonds play multiple functions in any investment strategy. In 2022, one of those functions failed, people didn’t ‘get it,’ and got crushed as a result (it revealed who was the Emporer without clothes, they were left scratching their heads).

Now What

Nasdaq is down more than 10% from the time that the headlines read “all time highs.” In Japan, the stock market is down by 10% in TWO DAYS. We live in an interconnected world, not an isolated one.²

I sent out this video about this on July 28:

It took until yesterday for this to appear in the WSJ.

The issue is not that this has occurred, it is that the possible collapse of the Yen carry trade lit an already-existing tinder box. The extra information (earnings, employment, Fed): these were already largely known by the bond market. Interest rates have been declining slowly and steadily since the Fed meeting. Stocks too high, too concentrated. YAYA, we already knew all of this. It sat in a pile, like wood, except the borrowing and lending issues of the Yen lit the fire, and then on Friday, the people who had no idea of what was going on when you were sleeping? They received a wake-up call. This is all standard stuff.

The speed of the decline in interest rates has informed the world that now, and only now, is the numerator at risk. Why? People are not going back to work as quickly, inflation persists (the rate has slowed, the level is still higher, green onions are still over $1 a bunch). That said, the interest rate levels, at this point, suggest that the Fed will cut interest rates by a lot, and soon. We will see about that.³

This Isn’t 2022: Why?

The reason is very easy. In 2021-2022 there was a decoupling of bond and stock markets. Interest rates were artificially low, they increased. The “base case” might be that stocks would increase as well, but they did not. Bonds ceased to be a source of protection for stocks. It is why the Fidelity/Vanguards of the world reported that IRAs lost somewhere around 20% in 2022. This occurred even for diversified portfolios. The solution was not difficult to locate, if you understood how portfolios are built, i.e. you can then spot the weakness when it appears.

The notable difference this year is that your bond holdings have appreciated to cushion stock market losses. This is why people build disciplined portfolios, and not simply speculate around individual names.

The point of Jae’s Corner is to help you understand that the narratives you see, read, and hear are not the complete story. Without a better idea of the complete story, you are left flailing around, searching for answers, under duress, that could’ve been avoided.

See You Tomorrow on YouTube

Here is the link.